Veris Residential, Inc.

Good day, everyone, and welcome to Veris Residential's first quarter 2022 earnings conference call. Today's call is being recorded. 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, annual and quarterly reports filed with the FSEC for risk factors that impact the company. With that, I would like to hand you over to Mahbad Nia, Ferris Residential Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to our first quarter 2022 earnings call.

Before we begin, I want to congratulate our CFO, Amanda Lombard, on the new addition to her family. The first quarter of 2022 was another positive period for us as we continue to advance our transition to a pure-play multifamily REIT. We achieved strong operational performance across our multifamily portfolio, commenced leasing of House 25, our newest multifamily development in Jersey City, entered into an off-market transaction to expand our multifamily portfolio through the acquisition of the James, a recently built Class A 240-unit property in Park Ridge, New Jersey, and closed on the sales of four land parcels. The operating fundamentals across our 6,691-unit multifamily portfolio continue to improve during the quarter, with occupancy at 97.5% and a blended net rental growth rate of 16% as of March 31st, up from 13% in the previous quarter. We've seen demand begin to accelerate ahead of the peak leasing season. However, consistent with the wider industry, we anticipate occupancy may be at or close to peak levels, and as such, we'll focus on finding the optimal balance between occupancy and rental growth to drive NOI going forward. Our 5,825-unit same-store operating portfolio, which for the first quarter included the Emory in Massachusetts, was 97.2% occupied as of March 31st. up from 89.8% in March 2021 and 3.6% above pre-pandemic levels, driving year-over-year same-store revenue and NRI growth of 14% and 20% respectively. Our Class A multifamily portfolio offers a distinctive living environment that aligns with our residents' sustainable lifestyle preferences and increased focus on health and well-being. The success of this strategy is evidenced by the strong initial demand we've experienced at House 25, which commenced lease up on April 6th and is already over 28% leased. As we continue to enhance our multifamily platform, I'm pleased to share that our new website will be launching at the end of next week. The new website offers prospective residents, employees, and investors a wide range of market-leading features, including the ability to search for availability across our properties, conduct virtual viewings, and communicate with the on-site teams all on one user-friendly platform. During the quarter, we continued to monetize non-strategic assets, completing the disposal of 111 River Street in Hoboken in January for $210 million, and repaying the associated $150 million loan. We used net proceeds from this sale, as well as from the sales of two land parcels in West Windsor that also closed during the first quarter to pay down our revolving credit facility balance by $70 million. In April, we completed the disposal of the Irby land parcel in Jersey City and a land parcel in Port Imperial for a total of $100 million and expect to close on the remaining two previously announced land sales for $25.5 million in the coming months. A portion of the proceeds from our land sales is being reinvested utilizing a 1031 exchange to acquire the James. A newly built 99.5% leased Class A 240-unit apartment building located in Park Ridge for $130 million or a 4% cap rate and an off-market transaction that is expected to close during the second quarter. The James is a great fit with our existing portfolio, given its 2021 vintage, which is consistent with the comparatively low six-year average age of our portfolio relative to peers, its extensive amenity offering, and its sustainability credentials as evidenced by the property being awarded the National Green Building Standard Silver Certification. Park Ridge is in one of New Jersey's most populous and affluent areas, just 25 miles northwest of Midtown Manhattan. The property is also just steps away from the train station, offering great accessibility to New York City. Upon closing, the James is anticipated to contribute approximately $0.05 to annual core FFO per share based on in-place NOI. The transaction demonstrates our ability to source attractive risk-adjusted opportunities as we seek to create long-term shareholder value. As we look to our office portfolio, the waterfront assets were 70.9% leased as of the end of the first quarter. In January, as previously disclosed, we executed a new 15-year, 130,400 square foot lease with Collectors Universe at Harbourside 3. During the first quarter, we also executed an additional 11,800 square feet of leases. Turning to the financials, the company reported a net loss per diluted share of 13 cents in the first quarter of 2022 versus net income of 6 cents per diluted share in the first quarter of 2021. On a GAAP basis, the net loss includes $23 million of revenue related to the termination of a portion of MUFG space, which has been excluded from core FFO. Core FFO for the quarter was $0.09 per diluted share versus $0.17 in the fourth quarter of 2021. Last quarter's core FFO benefited from $0.04 related to one-time true-up adjustments and expense recoveries for the office portfolio, including sold assets. Excluding these one-time items, the first quarter of 2022 was lower than the fourth quarter by $0.03 as a result of the sale of our Hoboken asset, $0.01 due to the loss of revenue on the space vacated by MUFG, which we expect Collectors Universe to take possession of in June, and a $0.02 reduction in hotel NOI, partially due to reduced bookings related to Omicron, as well as the normal first quarter seasonal variation. These reductions are offset by a $0.02 increase from interest savings related to a lower average credit line balance and higher multifamily NOI, driven by lower concessions and higher rents. We also recorded the first full quarter of income from the three most recently stabilized assets, the Upton, Capstone, and Riverhouse Mine, and anticipate further revenue growth across these properties as concessions continue to burn off in the coming months. During the quarter, we spent $10.4 million on tenant improvements and leasing commissions related to the Collector's Universe lease and continue to work on our Jersey City Whole Foods build-out, resulting in AFFO negative $700,000 compared to $13.7 million in the prior quarter. We expect tenant improvements and commissions next quarter to be at similar levels as we look to turn over the space to Collector's Universe. It should be noted, however, that these costs will be fully funded by the $25 million cash termination fee that we received from MUFG. Looking to our same-store results, same-store NOI was up 20% year-over-year and almost 7% quarter-over-quarter, driven by a combination of higher occupancy and rents and lower concessions. We continue to see strong pricing momentum going into the high leasing season. However, consistent with the industry, we're also seeing pressure on controllable property operating expenses. in particular personnel costs and repair and maintenance expenses, as the tight labor markets, general inflationary pressures, and supply chain issues continue to bear weight. Our waterfront multifamily properties, which represent roughly two-thirds of our current multifamily portfolio, granted concessions through the third quarter of 2021, from which we'll continue to benefit in the coming months as they burn off. Over the last 12 months, we've taken a number of steps to strengthen our balance sheet by repaying debt. With approximately three-quarters of our debt exposure hedged or fixed at a weighted average interest expense of 3.78% and a maturity of 5.2 years, we believe that we're in a strong financial position relative to the current market environment and potential Fed rate hikes. With that, I think we're ready for questions. Operator, can you please open the line for Q&A?

Certainly. If you would like to ask a question, you can do so now by pressing star 1. That's star one if you'd like to ask a question. We will now take our first question from Tom Ketterwood from TIG. Please go ahead. The line is open.

All right. Thank you very much, and good morning, everyone. On the apartment rent growth trends, I wanted to focus on that a bit. You talked about 13% to 16%. I think The SUP even mentioned that April was 17%. How do you see that trending? I'm wondering, do those comps get tougher as you go throughout the year, or is 2022 going to be pretty consistent as far as what you expect from those rent growth trends?

Good morning, Tom. Thanks for the question. It's a good one. It's hard to tell, but I'd say that certainly leverage when it comes to pricing is very much in the landlord's court at the moment with occupancy being where it is and demand being extremely resilient and actually growing in momentum with the return of constituents such as foreign students. So I would expect to see that number still be pretty strong for the remainder of the year.

Got it. And then in terms of concessionary trends, I know you've talked in past quarters about how you were able to pull back on those. I know it can differ between new construction deliveries and your existing assets, but how are you seeing the trends in concession use and specifically as it relates as well to House 25? Were you able to kind of pull back on those compared to previous underwriting, or is that pretty much at market where it's been the past few years?

Again, a very good question, because on the whole, we've been – the trend has been really to pull back almost entirely with the exception of limited concessions. We really have paced those right in.

House 25 is a great example, and if you think about, that's been, third of the building, now it's a huge building, so, property, but even there it's been so strong, the demand thread that we've now... Hi, can you hear me, Tom?

Yeah, so we've actually been reducing concessions already a month into leasing at House 25 as well. So again, all real testament to the quality of that product, but also a feature that we're seeing across the market as well.

Got it. I'd appreciate that, that color mob. And then thinking of the, of the land sales and the purchase of the James, and I might be confusing this, but some of those land sales seem like they came out of the, the, the various side of the portfolio, probably maybe the assets in Windsor, West Windsor. And then some of them seem to come out of the, the VRT J V. When you, first off, is that kind of like the Irby land, for example, or the Port Imperial Park parcel? First off, is that correct? And then second, with the 1031 into the James, does that then, if that came out of the VRT JV, does that mean the James sits within that JB structure or is that within the kind of Verus Holyone structure? How does that work?

So that's absolutely accurate. So it can be a little bit confusing, but you've got to. So the proceeds from that we mentioned were. I'm getting feedback that you can't hear me. Can you hear me, Tom?

Sorry about that. Poor sell reception. Can you hear me better now?

Yeah, no, no. I was just saying that you're absolutely correct, that the proceeds from West Windsor, which sat on the corporate side, those were used to repay debt, and the proceeds within the what was Roseland side of the business, the joint venture with Rockpoint, were used to acquire the James and the 1031 exchange. You're absolutely right.

Got it. I appreciate it. Last question for me, specifically on the James. Since that delivered in 2021, I'd imagine those rents were pretty impacted by the pandemic still. What are your expectations for stabilized yields on that asset as you're able to roll those leases to market?

You're absolutely right. And that was very much part of the equation when we were analyzing that property. They are definitely, I'd say, COVID rents and have pretty significant room, we think, for growth. What we're seeing already, and we haven't closed the transaction, but what we're seeing in units that are turning over or renewing there is as much as 20% growth in the rents. So you also have to factor in, so I think it stabilizes somewhere well north of, of the four. And then you also have to factor in that we recycled land that was sitting within the joint venture and had a not insignificant carry cost associated with it of, you know, touch over a million dollars a year. And so when you factor that in from an earnings accretion perspective, it's actually even better than that.

I hadn't figured that in any spot of sense. That's it for me. Thanks, everyone. Thank you, Tom.

Thank you. We will now take our next question from Brian Spann from Evercore ISI. Please go ahead.

Hey, good morning. So you sold 111 River in the quarter. According to the supplemental, there's still one other office asset under contract. So is there anything you can share there as it relates to timing of that asset sale and any others that might be in the hopper?

Good morning, Brian. Yeah, so 101 Hudson is the other asset that is under contract and still in the process of closing. So I think we'd always said we expected it to close sometime in the first half of this year, and my expectation is that it will still be there or thereabouts and will close. In terms of any further... updates on future dispositions, nothing to report at this time.

Got it. Okay. And could you maybe just talk more broadly about what the buyer pool looks like today for office product? And have you seen a shift in interest the past few months, just given the macro backdrop and increased financing costs?

Yeah.

I mean, I think increased financing costs will factor into, you know, particularly levered buyers with shorter-term return horizons, it will certainly be a factor. But what we're seeing still today is for good quality product and particularly product that offers a decent return proposition, there is still good demand out there from a pretty varied group of capital as well.

Okay, and just the last one from me. Can you just talk about the demand you're seeing on the waterfront, what that pipeline looks today, how you're trying to entice tenants to sign leases over there?

Well, so maybe speaking a little bit more generally about both sides of the river, we Manhattan closed out the year last year, very strong, four consecutive months of very strong leasing. The start of the year was a little bit weaker, most likely related to Omicron and a further postponement of the return to office. We're seeing some signs now, March, April, where that may be to some extent rebounding. On this side of the river, on the waterfront, we saw A very strong first quarter. So just over 500,000 square foot of leasing done, which is almost as much as the total volume of leasing that was concluded on the waterfront last year, which is around 600,000 square foot. But leasing here is extremely lumpy and unpredictable. And so within that 500,000 or 510,000 square foot of leasing that was done in the first quarter, there are some large transactions, including our own collector's universe, but also Lord Abbott. So I'd say there is activity. I wouldn't necessarily say that 500,000 square foot in the first quarter is likely to be a run rate for the remainder of the year, but there are some positive signs of life on both sides of the river.

All right. Thanks very much. Thank you, Brian.

Thank you. We will now take our next question from Nick Joseph from Citi. Please go ahead.

Hey, it's Michael Billerman here. Robert, can you just, you know, if you think about recycling capital, and I recognize you sold the land and you bought an asset and it was part of a 1031 project. But if you step back from it, your leverage is still pretty high. You have the waterfront assets that you are trying to eventually get out of, and you have a stock price that trades at a significant discount to asset value. So why even do a transaction where you're putting out capital? Why aren't you trying to sort of achieve NAV value and continue to reduce debt and sell assets?

Well, we have actually done that as well, Michael. So as we've been recycling, the two use of proceeds have been debt repayment. We've repaid about, aside from the corporate bonds that we repaid last year, we've repaid about $220 million of debt. When it comes to capital recycling, looking at the highest and best use of the capital, it's partly driven by the opportunities that are available to you and partly driven by the constraints that you have too. And for the proceeds that we use towards this acquisition, which has tremendous merit on a standalone basis and is a great fit with our portfolio, and so I would classify as a great opportunity for us. But we also have to take into consideration the limitations that we are bound by under the joint venture agreement with Rockpoint that would really, and it's complicated, as I'm sure you know, but ultimately, mean that we're restricted to a 1031 exchange where there is a taxable gain that would be triggered through a sale. So from a leverage perspective, I think this is actually also helpful because if you're looking at net debt to total capitalization, it's neutral. We've taken land that had a carry cost associated, unlevered land that had a carry cost associated with it, and put it into a yielding investment opportunity. And from a net debt to EBITDA perspective, we've now taken land that was unlevered and had a carry cost associated with it and turned it into an EBITDA yielding investment that will contribute in an accretive way to those metrics. That gives you some insight into the rationale behind that decision, but that was partly the opportunity and partly the constraints that were under.

Yeah, and I get that there's elements in turning land into a yielding asset, helpstety, but duh. you know, uh, paying down debt and reducing interest expenses is also an element of raising that EBITDA as well. Um, and, and arguably, arguably given your capital commitments in the future, you're going to need, uh, additional, uh, proceeds to be able to fund, um, what you want to do from a development, redevelopment, uh, perspective. Um, I guess, was there any talk about, I guess, you know, uh, restructuring the RockPoint joint venture so that, you know, it's the next step in sort of the cleanup of Matt Calley. Sorry, we're embarrassed. I still call it Matt Calley. Sorry.

Yeah, so look, I think, as you know, the RockPoint joint venture has a make-hole component to it that, you know, comes to an end in March next year. So I think the focus when it comes to cleanup is probably more likely to be along the lines of finding a path to ultimately repaying that on a negotiated basis as opposed to restructuring it. We'll need to have the capital available for that.

Right. And then just finally, you didn't touch on the stock price, which obviously is below $16. I guess what are you trying to do and is there anything else that you're focused on to try to narrow the gap between what's left in this portfolio and where the public market is valuing it at? I can't imagine you or the board is happy with where the stock price is, given the steps that you've taken over the last 12 to 18 months. So what is going to be the focus from here to generate value for shareholders?

So, Michael, I'm not going to comment on short-term share price movements, particularly when they're driven also by wider macro events that we're seeing around us as well. What I would say is we have been and we remain very focused on creating and ultimately unlocking value for shareholders. So all the steps we've taken, whether it's been to simplify the business, if you think about the transformation over the course of the last 12, 15 months, December 2020, so right before I took over, we were a company that had two near-term debt maturities, recourse debt. We were much more complicated, much more complex as a business. Around 38% of our NOI came from multifamily. We closed out the year with that number being 56%, and we repaid all of that recourse debt through a billion dollars of non-strategic asset sales. Now pro forma for the state of 101 Hudson and James, that number rises to around 80%. So we're doing, as a management team, we're taking steps to ultimately make this a more focused, more efficient, more effective, and more valuable entity. And either that gets recognized in the public markets or it doesn't. And if it doesn't, I can tell you that we have a board and strategic review committee that is highly focused on making sure that the value that's created by the management team is unlocked for shareholders.

Is there anything on the waterfront office assets that, I mean, do you have a process going on now to sell that? Or are you still trying to lease it before you sell it?

No, we've been, I'd say we're at an early stage of, exploring our options with regard to the sale of those assets and other non-strategic assets. But for the time being, for as long as we own any asset, including the harborside, we are the owner and we'll continue to focus on enhancing the value of those properties in any way that we can, including leasing.

Just last question, Maba. You know, prior... you know, you did have some approaches from different companies and you've talked about in your filings different party A and party B. Is there anything corporately that you've been able to re-engage with some of these parties that the company had previously been in discussions with?

So, like I would say, as I mentioned earlier, the board and the strategic review committee are highly focused and have been on creation and unlocking a value for shareholders. And to the extent that there ever is or was interest from any party in relation to inbound, in relation to assets or something more strategic, it is the duty of the board and the SRC to evaluate those opportunities. And that's something that they take very seriously, consistent with their fiduciary obligations.

Thank you.

Thank you.

Thank you. We will now take our next question from John Polosky from Green Street. Please go ahead.

Hey, thank you for the time. Can you just provide a little bit more details and help us think through the trajectory of expenses from the 6.5% and kind of which line-in do you expect to accelerate here? Which line-in should we expect some relief coming in the next few years?

Sure. So I think on the whole, John, we've been pretty good at managing our control of expenses. But I would say that on the whole, we're a company that's in transformation and will continue to be in transformation for the near term. And so you'll see some volatility or some distortion movement in those numbers. in both directions. But the general trajectory has been, for us at least, as we've reconfigured the organizational architecture and thought to just make it more efficient, both in terms of people, processes, technology, we've been able to manage them and contain them fairly well. Where we have seen some uplift, obviously, has been on the personnel front. But that's been, again, a pretty industry-wide phenomenon as well.

Okay. Should we expect additional acquisitions, multifamily acquisitions this year? And if so, what kind of size of volume should we expect?

Well, it's hard to say. I think to the extent that we free up further capital through the sale of non-strategic assets this year, then... we will, working with the board and the strategic review committee, determine the highest and best use for that capital at that point in time. And as I mentioned earlier, based on the opportunities and any constraints that we may be under as well in terms of what we can direct that capital towards. So I would say we are always evaluating opportunities on the acquisition front, but the bar is pretty high and has been pretty high And there's no set target to say we must acquire and we must acquire this much. Not at all. It is one of a number of potential uses of capital that is recycled. But any determination with regard to that, the highest and best use would be made much closer to the time of actually being a receipt of that capital.

Last one for me. Could you remind us if AmTrust and Vonage America are known move-outs for next year?

Yes, AmTrust is. What I would say in terms of the move-outs, and I saw the report that you put out, I would just point out that there is a number in there, or two things. The 18% includes 101 Hudson, which is under contract to be sold. But it also includes 23 Main, which is significant in terms of square footage. So this is a small last remaining suburban office asset that we've got that is really a development project once Felice expires. It's significant in terms of square footage. It's insignificant in terms of rent contribution or value contribution. When you strip those out and you just look at expiries for Harborside next year, it's more like 7%. So I thought just pointing that out.

I appreciate it. Thank you for the question. Makes sense. Thank you.

Thank you. There are no further questions. I will turn the call back to your host.

Thank you very much for your time today. It's been another productive quarter for us and we look forward to updating you again next quarter.

Ladies and gentlemen, that will conclude today's conference. You may now all disconnect.