Q1 2024 Veris Residential Inc Earnings Call

Participants

Taryn Fielder; General Counsel, Secretary; Veris Residential, Inc.

Mahbod Nia; Analyst; Veris Residential, Inc.

Amanda Lombard; CFO; Veris Residential, Inc.

Steve Sakwa; Analyst; Evercore ISI

Eric Wolfe; Analyst; Citigroup Inc.

Josh Dennerlein; Analyst; Bank of America Corporation

Thomas Catherwood; Analyst; BTIG

Michael Lewis; Analyst; Truist Financial Corporation

Presentation

Operator

Greetings and welcome to the Veris Residential first quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. Is now my pleasure to introduce Taryn Fielder, General Counsel. Thank you, Taryn, you may begin.

Taryn Fielder

Good morning, everyone, and welcome to Veris Residential's first quarter 2024 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. 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 the call over to Mahbod Nia, Veris Residential's Chief Executive Officer; who is joined by Amanda Lombard, Chief Financial Officer. Mahbod?

Mahbod Nia

Thank you, Taryn, and good morning, everyone. We're pleased to report a positive start to the year during which we further advanced our strategic goals while delivering another quarter of solid operational and financial results. Last quarter, we announced the completion of various residential's strategic transformation into a pure-play multifamily read and outlined a three pronged approach to value creation in this next phase comprising accretive capital allocation initiatives, along with the continued optimization of our balance sheet platform and portfolio.
We've begun to implement and progress a number of these initiatives, we took steps to further strengthen our balance sheet, securing a new $500 million credit facility and term loan that provides us with substantial liquidity and financial flexibility going forward as well as potential for enhanced earnings this year. As reflected in our raised earnings guidance through these facilities, we've also effectively eliminated any perceived refinancing risks associated with our debt maturities through the end of 2025.
The high degree of interest and resulting commitments we received from a broad group of lenders for these facilities and what remains a challenging credit environment is a testament to the progress our company has made over the past three years and enables us to enter this next chapter from a position of strength. Amanda will discuss these transformative facilities in further detail.
On the capital allocation front, we continue to unlock idle equity within the company, including incentive Harborside five, our last remaining office property and 107, Morgan Street as well as two land sites, six, Becca and 85 Livingston and suburban New Jersey that are under binding contract for $28 million and expected to close in the next few months. We anticipate recycling net proceeds from these sales to more accretive use at this time. The repayment of debt as we seek to continue generating value for our shareholders.
Before discussing our continued efforts to optimize portfolio performance, I would like to briefly touch on the broader market this quarter. The Northeast saw relatively strong rental growth rates of 2% with New Jersey and Boston outpacing New York, the Jersey City Waterfront market, where nearly half of our properties are located continues to be highly competitive compared to Manhattan and Brooklyn with Class A. rents reflecting an approximately 30% and 12% discount to these markets, respectively. This is underscored by move-ins from Manhattan's well portfolio, which continued to exceed 20% in the first quarter.
Within our portfolio, we continue to evaluate innovative technological solutions as well as our organizational structure and processes to continuously enhance our platform. We're beginning to see early signs of the positive impact on earnings from previously introduced initiatives. In parallel, we upheld our commitment to the creation of exceptional resident experiences, combined with the suite of operational excellence, customer service oriented approach to building management. In March, we ranked as the number one week in the US for online reputation by J. Turner research, reflecting the unwavering dedication of our teams and our residents recognition of their efforts.
Turning to operational results. Our same-store portfolio, which now includes house 25 and the James, was 94.1% occupied as of March 31. While this is slightly below the year end figure, the change can be largely attributed to the concentration of leases rolling at house 25 related to the rapid lease-up of this recently completed properties.
Despite the beginning of the year being a typically slower leasing season, we achieved a 4.6% net blended rental growth rate during the quarter, driven by 7.2% growth in renewals and 2% growth in new leases. We've also begun to see a slight pickup in new lease growth rates during the past few weeks as we entered the typically more active spring leasing season. Despite the continued rental growth across our portfolio, affordability remained healthy with an average rent-to-income ratio of 12% in the first quarter.
Turning to ESG, I'm pleased to share that we've improved our ISS corporate rating, a prime status and the highest rating achieved by real estate company in the United States. Furthermore, we were named a gold Green Lease Leader by the US Department of Energy and the Institute for market transformation. We also secured three awards from the international WELL Building Institute, the well concept Leader Award equity Leadership Award and commitment and engagement award, further validating our dedication to environmental and social initiatives.
A comprehensive summary of our ESG report can be found in our new ESG website at VRE. sustainability.com. With that, I'm going to hand it over to Amanda, who will discuss our financial performance and provide an update on guidance.

Amanda Lombard

Thank you, Mahbod. For the first quarter of 2024 net loss available to common shareholders was $0.04 per fully diluted share versus net loss of $0.27 for the same period in the prior year. Core FFO per share was $0.14 for the first quarter as compared to $0.12 last quarter. And $0.15 for the first quarter of 2023. Core FFO this quarter is up $0.02 relative to the fourth quarter, driven primarily by continued same-store NOI growth of 14.2% year over year.
This is in line with our expectations and 2024 guidance and comprised of 5% growth from house 25 was that property stabilized in the second quarter of 2023 and 1% from a lease termination fees in addition to rental revenue growth of 8% and flat expenses as cost savings initiatives implemented in the fourth quarter offset inflationary price increases. Sequentially, same-store NOI was up 4%, driven primarily by a 5% improvement in expenses.
Our same-store NOI growth will continue to moderate from 2022 highs, and we expect that this will be the last quarter. We report double digit growth for some time in the second quarter. We may potentially see negative same-store NOI growth in line with our original guidance as we lap the recognition of the 2023 tax appeals.
In addition, our insurance and real estate taxes are reset in the second half of the year. That being said, as Mahbod mentioned earlier, supply remains muted in our markets. Our rent-to-income ratios are healthy. Our New Jersey waterfront rents are still at a 30% discount to Manhattan, and we believe this will continue to differentiate our portfolio's performance given the significant value quotient we offer relative to this market.
Turning to G&A after adjustments for non-cash stock compensation and severance payments, core G&A was $9.5 million lower than the fourth quarter, as expected, due to certain expenses, it typically occur at the end of the year.
Now onto our balance sheet. As of March 31, virtually all of our debt is fixed and or hedged with a weighted average maturity of 3.5 years and a weighted average coupon of 4.4%. Our net debt to EBITDA for the trailing 12 months is 12 times. In April, as Mahbod already mentioned, we closed on a new $500 million senior secured, delayed draw term loan and revolver with a three-year tenor and a one-year extension option. We intend to utilize the facilities along with $145 million of cash on hand and $28 million from the land parcels recently announced under contract to refinance $528 million of mortgage debt this year, further improving our overall leverage metrics.
Throughout the course of the year as each mortgage becomes eligible for repayments, we will first draw from cash on hand then the delayed-draw term loan and finally, partially on the revolver to complete the planned refinancings. We expect that upon completion of the refinancing at the end of the third quarter the term loan will be fully drawn at $200 million and the revolver balance will be approximately $160 million, reducing outstanding debt by approximately $170 million by year end.
I'd like to thank the various team for their hard work and closing this new facility from yet another testament to the dedication of our team. We have intentionally designed this facilities to provide strategic flexibility, allowing us to further repay debt over time while retaining availability on the line, providing valuable liquidity to the company as we seek to manage our balance sheet holistically.
We are comfortable carrying a balance on the revolver as there is no cost differential between the term loan and revolver through the four year extended term of these facilities. These new facilities represent a shift in the company's approach to managing its balance sheet, moving away from an asset focused financing strategy through a more flexible corporate focused strategy, a strategy that paves the way for the potential to significantly reduce our cost of capital and enhance optionality over time.
This quarter, we increased our core FFO guidance range to $0.50 to $0.54 per share, reflecting our new corporate credit facilities and higher anticipated debt repayment from sales proceeds. Importantly, we are reaffirming our original operational guidance issued for the year. At this time, there has continued to advance its three-pronged approach to optimization with the continued strong performance of our portfolio and the recently announced facilities representing another step forward as we round out another strong quarter, Veris represents an extremely compelling value proposition.
Highest-quality and newest class-A multifamily properties located in established markets in the Northeast, commanding the highest average rents and growth rate among peers with limited near-term supply and high barriers to entry managed by our vertically integrated best-in-class operating platform.
With that, operator, please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Steve Sakwa, Evercore ISI.

Steve Sakwa

Yes, thanks. Good morning. Maybe more, but just starting off kind of the guidance. I understand it's sort of early in the year and you want to maybe let spring leasing season play out a bit, but it seems like the top line has grown exceptionally well here in the first quarter, realizing that 8%,
9% growth might not be sustainable. But if I recall, your guidance for the year is much lower than that. And so obviously, you're either being very conservative in that forecast on top line or maybe there's some tougher comps and maybe can you just speak to the top-line component first?

Mahbod Nia

So morning, Steve. No, no, the we've obviously started to see blended net rental growth rates come in about at 4.6%. And we are now starting to and lap a tougher period, but it's given that we have had now a sustained period of strong rent increases. So there's an element of that. There's an element of, obviously, just macroeconomic uncertainty as well ahead. And so that's factored in.
But we're also entering what is typically a stronger leasing season in the spring we're seeing for the next couple of months on a blended basis blended rental growth rates that are right in that sort of mid single digit area. And so when you look at our overall guidance for the year, it actually still fits. I wouldn't say it's conservative.
I'd say it's very reflective of where we see revenues for the full year landing up and also where we see expenses landing up where we are in the first quarter. It does also just an element of distortion overall in this first quarter come from a number of things which are and there will be going forward house 25 being added, for example, to the same-store pool, which which drags up both the revenue side of it pretty significantly given that wasn't fully occupied in the first quarter of last year.
And then on the NOI side, some seasonality factors, the tax appeals, the fact that noncontrollable expenses then come in the second half of the year. So looking into a single quarter, particularly with it being the first one, you might look at that and say, well, it looks conservative.
The guidance looks conservative, but it's early and there is some volatility through on just some of these factors like House being added to the equation. The tax appeals. But when you look at on a full year basis, smoothing all that out, we're still very much confident in the guidance range that we've given.

Steve Sakwa

Okay. Thanks. And then just second question, I just wanted to go back to the balance sheet and the financing strategy. Normally, companies were looking the somewhat minimized floating rate debt exposure. And I realize we're kind of at the peak of the of the maybe the Fed's tightening cycle. So taking our floating rate debt price poses less risks risk today than it did 12 to 24 months ago.
But I guess I'm just trying to get a better handle on sort of the strategy here and whether this just prefer preserves more optionality for you to the extent that a monetization event does become available as having the debt floating and on a line of credit slash term loan, just the most advantageous thing for the company versus going in and putting on secured mortgages. Is that kind of the thought process?

Mahbod Nia

Well, it definitely is a more flexible financing strategy that allows us to be able to de-lever over time should we choose to focus on that. And it also allows us to the extent we do that to have a path to accessing not any more flexible but cheaper cost of capital when you consider that probably over the next stage for a company like ours would be tapping unsecured.
And for that, we're now at around 12 times that that EBITDA would need to get to be sub-10. But there's a path between growth in the portfolio and what I've described as either equity that still it tied up in the company. We've got $200 million of land, for example, that could be freed up. That's worth two turns of debt if it was unlocked and used to repay that. So there's a path to getting there.
So I think it's the fact that it affords us a lot more flexibility going forward and the potential to access cheaper debt in terms of managing interest rate exposure, it's floating, but the intention is to to hedge it. And so we'll be hedging.
And now that hedging strategy isn't in place today and we haven't announced that today because we're not looking to speculate on where rates go. This is not a drawn facility, but as and when we come to draw it down, we'll be taking steps to hedge. Certainly the term loan and likely a good portion of the revolving credit facility as well to mitigate any exposure, most likely what.

Steve Sakwa

Great.
That's it for me. Thanks.

Mahbod Nia

Thank you, Steve.

Operator

Eric Wolfe, Citibank.

Eric Wolfe

Hey, good morning. You mentioned that part of your guidance upside was due to the new secured facilities. Can you just talk about what you were assuming in guidance before versus now in terms of timing of debt paydowns, the average rate you're expecting to achieve versus what you actually ended up achieving? And just trying to understand how you got to the upside in that guidance?

Mahbod Nia

Thanks. Good morning, Eric. Good question. So we had we'll have a significant amount of debt that's either maturing this year or facing a rate reset or that we want to now in the case of [Fund three] refinance to simplify and consolidate our debt. And so the original guidance really reflected the considerable uncertainty in the credit markets, which remain challenged and volatile.
And the raise is really a consequence of de-risking that maturity profile for this year, but also actually for next year and the uncertainty that came with these refinancings through securing these facilities and in addition, securing another $28 million of nonstrategic asset sales, which if you think about that from an earnings standpoint, given just the earnings potential of that capital.
That's worth about $0.02 per year and the expectation is that we close of core FFO and the expectation is that we close those sales around midyear. So that equates to about $0.01 of the upside. So you're selling more assets, another $20 million of assets, most likely that will be used to pay down debt to pay down the RCF. That saves you the cost on that. That's worth another center as well.

Eric Wolfe

That's helpful. And then, you know, assuming you were trying to sell the properties underlying the debt facilities, I guess would that debt in any of their associates swaps that you put on it, you assume or is there a process for substituting other properties into the facilities?
I'm just wondering if this limits your ability to monetize those properties because you talked about increasing your optionality. So trying to understand if you'll still be able to say that sell some of those properties or substitute ones in and out and be able to or or alternatively the buyer can assume that that?

Mahbod Nia

Yes, I wouldn't say it's assumable. This is to raise $500 million for a company of our size. This is very much sought easy today and it's very much a relationship-based lending, but it is freely prepayable. And so it doesn't come with the friction costs that would have come with a more rigid financing structure.

Amanda Lombard

I just would add one thing. Airport. We're going to have caps to hedge and not swaps. So there will be some no termination costs with those.

Eric Wolfe

Yes, so some of the buyers, they would just effectively put their own mortgage on it and that would get --

Mahbod Nia

Correct, correct. Correct. And then at a capital standpoint, just on asset type of value from ownership.

Eric Wolfe

Thank you.

Mahbod Nia

Thank you.

Operator

Josh Dennerlein, Bank of America.

Josh Dennerlein

Yes, morning, everyone from automotive and come back to a comment you made in your opening remarks, you mentioned there was a earnings benefit from some company initiatives in 1Q results. I guess can you elaborate further on that? And then is there anything else baked into guidance for the year from initiatives hitting? Or if not, is there anything that can be a potential source of upside?

Mahbod Nia

Yes. The comment was really that we've begun to implement a number of initiatives. I mentioned last quarter that the operational optimization captured broadly three areas, revenue maximization, expense mitigation and capital investment in our in certain properties based on our return on invested capital focused approach.
The most recent initiative that we've announced there is Liberty towers, which is just kicking off. So as I mentioned, we've started to see some of the benefits of those initiatives. I mentioned our new AI based leasing assistant, for example, that is saving us considerable hours it was 1,200 hours or even more than that. Now human capital time freeing up our leasing agents to be able to focus on higher-value tasks.
We're working with it provided to actually extend and the utilization of technology and specifically, I have to also deal with existing resident requests. That's one area we haven't put and I'm not putting any specific numbers around each initiative and how much it can contribute an earnings over a specific timeframe because this is really about gradual optimization of the platform over time.
And so you've seen that and our ability to be able to really mitigate expenses at a time when inflation has been running at particularly elevated levels, that is largely around reflective of the efforts of the team to offset those upward inflationary pressures are ways both processes with technology, with changes in organizational structure, how we go about doing things that then offset those expenses and allow us to be able to control expenses in a more in a more robust way. So it is a holistic approach directly to maximizing revenue, mitigating the expense side and then investing in our properties.

Josh Dennerlein

Got it. Appreciate that. And then sorry if I missed it, but did you mention what leasing spreads are or how leasing spreads are trending in April or where you're sending out renewals for that?

Mahbod Nia

Yes, on a blended basis, it were in the mid single digit ballpark, and we're sending out renewals a touch higher than that. It's early. But as we're entering the spring leasing season, you are seeing new leases climb a little bit a touch above that on. But on a blended basis, I'd say around the mid mid single digit may be a touch higher.

Josh Dennerlein

Got it.
Thanks with that.

Mahbod Nia

Thank you.

Operator

Thomas Catherwood, BTIG.

Thomas Catherwood

Thank you and good morning, everybody. From maybe for a moment, maybe for Amanda, you mentioned paying down I think roughly $170 million of principal as you refinance for mortgages this year and put him on the line and the revolver for sources of this funds, it looks like you'll have roughly that much cash once you close on the $20 million of contracted land sales. But outside of that, how much more capital do you need or have some more to have to sell to execute the rest of your '24 business plan, including spending on asset upgrades.

Amanda Lombard

So I'll answer part of it, and I'll throw it over to Mahbod. So first off, your math is right there to take. We have about $140 million on balance sheet today from the recently completed sales. And then you add the $28 million from the recently announced asset under contract and that's how you get to the debt repayments. But I'll let you take the second part of the question.

Mahbod Nia

So I so I agree with the math. And in terms of where additional cash flow could come from to invest in the properties. First thing I'd point to is that we're now as we've come out the other side of the transformation and built earnings backup. We're generating a not insignificant amount of some free cash flow. And so the business itself is cash flow positive again. And so there's that's not in the equation that you just outlined.
In addition to that, we have liquidity in the form of the line, which is accessible for investing in our properties. And we still have it around [$200 million] of other land, which may or may not be monetized, but is available to us to the extent that we may seek to unlock that equity as well.
So between those sources. I think we're in a good spot, but I think it's important to note that the business itself is also generating and not insignificant amount of free cash flow Got it.

Thomas Catherwood

Got. Appreciate that. And then maybe more of a second with you, you've previously discussed your joint ventures as a potential avenue for capital allocation. Is that a nearer term opportunity or something like that more than likely further down the line?

Mahbod Nia

Well, it's difficult to comment on the timing because I would say it's certainly an area where we may seek to for want of a better word cleanup a little bit more. And I'm what I really mean by that is determine whether for certain joint ventures that may be a higher and better use for our company and whether we can access the equity that's locked in those joint ventures.
But as always, there's always a path. The question is how long does it take to get through that path, which makes it difficult to really put a timeframe around that. But it is another potential area of some optimization on the capital allocation side, of our three-pronged approach that that could be unlocked over time.

Thomas Catherwood

Understood. Thanks for that. And then last one for me is just over on house 25, how much NOI upside is there as you stabilize and the storefront commercial space at the building?

Mahbod Nia

I wouldn't say it's it's material. It's going to be in the region of -- as well, but immaterial either it's in the region of $2 million from it being fully fully leased.

Thomas Catherwood

Okay. And then just any thoughts there is some progress towards some of it or is it again to the timing's going to be enough, are we talking a ['25] event?

Mahbod Nia

I'd say I'd say overall, we're seeing some really positive signs on the retail side and the team is doing a fantastic job. I'm making sure we're in the flow and definitely seeing a little bit of an uptick in inquiries and tours. And so we hope to be able to make some progress there.
Got it.

Thomas Catherwood

Thanks. That answers it for me.

Mahbod Nia

Thank you.

Operator

Michael Lewis, Truist Securities.

Michael Lewis

Great. Thank you. Um, as far as additional non-core dispositions, how much of that is land versus the Palm targeted properties that you you have to sell?

Mahbod Nia

We haven't announced any additional sales at this point. So other than the $20 million that's under binding contract, but what is available? It is $190 million of land. And then it's really the multifamily properties. So those decisions will be can keep using the word. But capital allocation decisions is the equity that's tied in those assets being put to its highest and best use within the company.
Is there a higher and better use for it? And can it be unlocked and over what timeframe? So we're constantly evaluating that said in the past, every dollar of equity that's tied up in the business. And I'm making those decisions working closely with the Board. But no, no decisions have been made at this point with regard to the remainder of the assets.

Michael Lewis

I guess I'm thinking not just the yield on this kind of source of capital from sales, but also should we expect that most of this land is eventually going to be sold? Or do you think here of a material developer going forward when that makes sense?

Mahbod Nia

Well, there's clearly a long-standing DNA at various developing very high quality. But I'd say in terms of Class A. multifamily assets and that stands, but as I said, no decision has been made yet with regard to the bank.

Michael Lewis

Okay. Understood. And then you talked a lot about this, but as far as the debt repayment from the specific pieces here, right, so I see thing that took place and Liberty towers have maturities and this year one from much larger than the other should should I expect that you'll use some of these proceeds and then put the bond on the line that you're not going to refi either these?

Amanda Lombard

So this is Amanda here. Yes, that's correct. So I see the way we're looking at it is it will tackle each maturity flash refinancing at the date that is required to be done and on the order of operations is first of all, repaid down with cash on hand. Once we do that then we'll draw on the term loan and then after that, we'll draw on the revolver.

Michael Lewis

Okay. Is there any other debt that you're going to get at this year? Right, because you don't have another maturity, it looks like until '26. So are those kind of the two main pieces are absent asset sales, I suppose ready seller secured on property is that those are kind of the two big pieces, I assume.

Amanda Lombard

So those are the two that have maturities this year. That's correct. But there's also in July, so roll-off, which is $158 million mortgage, the rate resets to above market until that one, we're going to repay with the facility's last cash on hand. And then there's one other loan 145 Buck Street, which will repay and add to the pool in May.

Mahbod Nia

And so the way I would think about it is between loans maturing. So we lost one loan, which has a rate reset and one other and Front Street that we would like to just consolidate into this financing and because effectively cost neutral and clean things up, that's $528 million of debt that we'll be repaying with the system with a combination of the facilities and proceeds from asset sales. And the net effect of that as you go from $528 million of debt to around $360 million of part drawn balance under the term loan and RCF.

Michael Lewis

Perfect. Thank you very much.

Operator

Thank you. We have reached we have reached the end of our question and answer session. I would now like to turn the floor back to management for closing remarks.

Mahbod Nia

Thank you, everyone. We're pleased to report another extremely positive quarter, and I look forward to updating you again next quarter.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation and you may disconnect at this time and enjoy the rest of your day.