Veris Residential, Inc.

Greetings and welcome to the Veris Residential First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the former presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Karen Fielder, General Counsel. Thank you. You may begin.

Good morning, everyone, and welcome to Veris Residential's first quarter 2025 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 Mahbub Nia, Veris Residential's Chief Executive Officer, who is joined by Amanda Lombard, Chief Financial Officer, and Anna Malhari, Chief Operating Officer. Mahbub?

Thank you, Taryn, and good morning, everyone.

We're pleased to report a positive start to 2025, during which we began to make progress on the corporate plan announced earlier this year while delivering another quarter of strong operational and financial results. Over the past few months, we have closed on $45 million of non-strategic asset sales and entered binding contracts for an additional $34 million of land sales, making progress toward our goal of selling $300 to $500 million of non-strategic assets over the next 12 to 24 months, despite the elevated levels of market volatility and uncertainty that we are witnessing. Earlier this week, we completed the consolidation of our partner's 15% stake in the Jersey City Irby, previously our largest unconsolidated joint venture for $38 million, including consideration for their share of the remaining tax credit and termination of their management contract. Since closing, we've assumed management of the asset, which we rebranded to Sable, and expect to achieve meaningful operational synergies as we integrate the asset into the various platforms. While these recent transactions are expected to be accretive to earnings and were not contemplated in our original guidance, and we've not seen any disruption to our business, we've decided to leave guidance unchanged at this time, given the high degree of market volatility and economic uncertainty that persists as a result of the recently implemented tariffs and changes to trade policy. These changes have created the potential for a weakened economic outlook, elevating the risk of a recession, while increasing inflationary pressures. Nevertheless, most multifamily markets have seen a positive start to 2025, and the Northeast has continued to exhibit particularly strong fundamentals, underpinned by robust demand and constrained supply across most of our markets. Our Jersey City assets continue to outperform, benefiting from their proximity to New York City, one of the strongest markets nationwide. In addition to the compelling relative value proposition of our apartments, which offer generally newer, larger units and a wider range of amenities, our assets have seen a positive impact from the ongoing increase in back-to-office mandates as residents return to New York City metropolitan area, which is reflected in our portfolio's out-of-state move-ins, exceeding 50% of all new units for the second consecutive quarter. As I mentioned last quarter, demand in Jersey City remains strong, with population projected to grow by 8% to 15% over the next seven years, resulting in a potential housing shortage of 27,000 to 36,000 units in the market. Currently, there are 10,000 units under construction in Jersey City, with the majority of supply concentrated in the Journal Square area, a distinct sub-market from and not a direct competitor of the Jersey City waterfront. Fundamentals on the Jersey City waterfront where our assets are located remain robust, with only 40 units being delivered in 2025 and 2,800 units expected to deliver between 2026 and 2028. Continued robust demand, coupled with a limited supply pipeline, drove a 4.2% new lease rental growth rate across our assets in the sub-market in March, compared to 3.6% in the broader Jersey City waterfront market and 5.5% in New York City. Given the potential impact of the announced tariffs on the construction sector, there's reason to believe projects scheduled to come online in the next few years may face increased costs and or delays, providing a positive foundation for continued rental growth across our properties. Turning back to our capital allocation initiatives, the $45 million of non-strategic sales closed year-to-date comprise our exit from two joint ventures, including our stake in a Port Imperial land parcel and the Metropolitan at Forty Park, 130-unit multifamily asset in Morristown, New Jersey, generating net proceeds of $7 million across both transactions. It also includes two previously announced transactions, the Livingston land parcel that sold in January and the Wall land parcel, which sold in April. Currently, we have two land parcels under binding contract. The previously announced One Water and our interest in Port Imperial Two South, our last remaining land parcel in Port Imperial. As I previously mentioned, we have consolidated our interest in our largest unconsolidated non-managed joint venture, the Jersey City Irby, utilizing funds from recent asset sales. In a negotiated transaction, we purchased our partner's 15% stake for $38 million including consideration for their share of the remaining tax credit and termination of their management contract, reflecting a cap rate of 6.1%, including immediately realizable synergies associated with the internalization of management into our platform. In conjunction with this transaction, we've rebranded the property to Sable and consolidated the $182 million in-place mortgage maturing in 2029. Sable has already been fully incorporated into our website, now benefiting from a virtual leasing assistant and virtual tours of select departments. We're also providing residents access to the recently enhanced MyVeris app, which I'll touch on briefly later, and built to earn rewards on rent payments. Leveraging the proximity of this asset to other Veris properties, we've implemented our area management model at Sable, creating an area-focused staffing model with House 25, allowing us to reduce annual payroll expense across the two properties by 10%, or approximately $400,000. In addition to this, we expect to realize over $1 million of savings on a runway basis related to the internalization of management and are working on a number of other initiatives that we believe will further enhance the assets NOI over time. Overall, this transaction is accretive to earnings by approximately $0.03 or 5% above our 2024 core FFO and a cent higher than was assumed in our original guidance which did not contemplate the disabled transaction and assumed the proceeds from sales would be used to repay debt. The transaction also supports our efforts to further simplify and optimize the business and allows us greater flexibility and optionality with respect to the asset going forward. Turning to our operating results, we had a solid start to the year as the portfolio emerged from the slower leasing season, recording 3.2% same-store NOI growth and blended net rental growth of 2.4%. Excluding Liberty Towers, where we are undergoing unit renovations, occupancy was 95.3% as of March 31st, up from 94.1% a year ago. Including Liberty Towers, the portfolio was 94% occupied, with retention increasing to around 60%. As the leasing season picks up, we've observed a gradual increase in rental growth, with the blended net rental growth rate increasing to 2.4% for the quarter, reflecting renewals of 3.7% and new leases turning positive to 0.6%. Notably, the blended net rental growth rate exceeded 4% in March and 4.8% through April 21st. In January, we started leasing renovated units at Liberty Towers. While the initial pace of leasing was slower than anticipated due to delays in certain essential infrastructure repairs, to date, we have renovated and leased over 40 units and a gross rental uplift exceeding 20%. We anticipate $0.06 of accretion to core FFO once the renovations are complete and the property is fully stabilized, and a meaningful uplift in the value of the property. During the quarter, we continue to enhance the various platforms through operational improvements and the adoption of new technologies. Leveraging PRISM, our overarching approach to strategic technology implementation, we introduced a reimagined resident mobile app to our portfolio earlier this month. The new platform built on the functionalities of our previous app, not only offering refined versions of all previous solutions, but also providing our teams with a simplified end-to-end property management platform, encompassing comprehensive operational functionalities from move-ins to renewals. The app, which has already been adopted by over 65% of units, despite launching only last week, provides our residents with a convenient, user-friendly single platform for all their needs. including initial requirements such as utility setup, renter's insurance, and move-in inspections. Functional features like rent payments, maintenance requests, and immediate reservations, and social features like direct messaging and interest groups, which increase resident engagement and encourage retention. Additionally, the new mobile app offers comprehensive insights and stronger analytics into our overall resident engagement, allowing us to better understand our residents and their needs. Last but not least, I'd like to thank the team whose focus and unwavering commitment has enabled us to achieve yet another quarter of strong operational results and strategic results despite the challenging market backdrop. With that, I'm going to hand it over to Amanda, who will discuss our financial performance and provide an update on guidance.

Thank you, Mahbad. For the first quarter of 2025, net loss available to common shareholders was $0.12 per fully diluted share versus a net loss of $0.04 for the prior year. CORE proposed share was $0.16 for the first quarter, $0.03 higher than expected due to the early recognition of the IRB tax credit, which was accelerated as a result of the transaction. This compares to $0.11 in the fourth quarter of 2024 and $0.14 in the first quarter of 2024. CORE proposed higher than fourth quarter by $0.05, with $0.02 due to non-recurring taxes related to sold land parcels and 3 cents due to our annual sale of the IRB tax credit. Core portfolio in the first quarter is up 2 cents from the same quarter a year ago due to several one-time revenue items last year offset by the IRB tax credit impact this year. Same-store NOI growth was 3.2%, broadly in line with our expectations. Rental revenue was up 2.4%, driven by an increase in occupancy and rental revenue growth. largely offset by a reduction in occupancy at Liberty Towers due to the ongoing renovations Mahbub mentioned. Excluding the drop in Liberty Towers occupancy and the $1 million of one-time items last year, revenue growth would have exceeded 5% in the first quarter, demonstrating strong performance. On the expense side, expenses were relatively flat overall, up just 80 basis points from the same period last year. and down 2.7% from the fourth quarter. Year over year, we have lower non-controllable costs, mostly from insurance, offset by an increase in controllable expenses of 3.5%, primarily due to higher utility costs, as a result of the relatively colder winter in the Northeast. Expenses in the first quarter versus the fourth quarter are down due to seasonal factors from the slower leasing period and year-end activities. Turning to overhead. Core G&A, after adjustments for non-cash stock compensation and severance payments, was $9.9 million, broadly in line with the last quarter. As expected, the quarterly core G&A is higher than our run rate for the year due to seasonal increases in compensation, which will not recur next quarter. Our balance sheet remains the focus of the company as we seek to continue monetizing negative yielding land and non-strategic multifamily assets. with the aim of improving our leverage and cost of debt capital. As of April 21st, after factoring in the impact of transactions closed in April, we had $161 million outstanding on the revolver and liquidity of $146 million, including the available balance of the revolver. Net debt to EBITDA on a trailing 12-month basis was 11.4 times, and virtually all of our debt was fixed or hedged with a weighted average maturity of 2.8 years and a weighted average effective interest rate of 4.96%. We believe that we remain on track to meet our stated goal of reducing net debt to EBITDA below nine times by the end of 2026, selling $300 to $500 million of assets and utilizing up to $100 million of those proceeds for share repurchases with the remainder to debt repayments. Turning to guidance, We are reaffirming our core FFO guidance of 61 cents to 63 cents per share, provided earlier in the year. While there are several positive factors underpinning our portfolio's results, including strong blended leasing spreads of 4.8% in April, and several newly announced accretive transactions, the IRB consolidation, the sale of the Metropolitan Joint Venture, and two Port Imperial Land Joint Ventures, we are maintaining guidance due to uncertainty regarding the impact of the recently announced policy changes. Nevertheless, we feel confident that our initial core FO guidance, which represents growth of 2% to 5% over 2024, is achievable. We are also reaffirming our same-store NOI guidance, including our revenue and expense guidance. We expect to reset the Jersey City taxes and property insurance in the third quarter, both of which may have material impacts. As of right now, given the overall positive resolution on insurance and the Jersey City taxes last year. We expect the third quarter same-store NOI to be weaker than prior quarters when it lapsed those adjustments. We still expect G&A to be flat over the course of the year with a U-shaped expense pattern given the timing of various expenses. And on interest expense, as all of our debt is fixed and or hedged with no consolidated maturities in 2025, We expect that any changes to interest expense will come in the form of debt repayments from future sales proceeds. Bringing this all together, despite heightened levels of market volatility, 2025 is progressing as expected for Barris. While we believe it's prudent to maintain guidance at this time, our portfolio continues to perform well, and we remain confident in our ability to make further progress in our strategic goals. With that, operator, please open the line for questions.

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 at this time. One moment while we pull for our first question. Our first question comes from Steve Sakwa with Evercore. Please proceed.

Yes, thanks. Good morning. Mahbud, I guess you and Amanda both threw out a lot of stats on kind of the blended spreads. And I just was hoping maybe you could give us a little bit of progression, kind of January, February, March. And I think March was four and April was four, eight. I wanted to make sure I had those stats right. And then, you know, so maybe help us think about the cadence in the quarter and Obviously, the April acceleration is nice. And maybe add on to that, like where are you sending out renewal notices to existing customers, you know, for kind of the May, June, July timeframe?

Hi, Steve. It's Anna here. I'm actually going to take this one. Thank you for the question. So as we messaged last quarter, we've really seen new leases trade positive in February. And that's where the blend accelerated to two and a half. And then it started exceeding four in March and was the 4.8% through April 21st, as Mahbub mentioned in his script. In terms of sending out the renewals now through the end of the second quarter, it's around the mid-single digits where we're settling.

Okay.

Thank you on that. Ma, but maybe just on the demand side, I think you mentioned that maybe over half the folks coming in are coming in from maybe out of town. Just maybe any color you could share on that. And is there any, I guess, draw from Manhattan, given the rent differential that has clearly been wide for a while? Are you seeing any unusual patterns of folks maybe pulling away from the New York City market and coming back into the Jersey waterfront?

Good morning, Steve. Thank you for the question. It's a good one. I would say we've seen consistently around 20% to 25% of the move-ins every quarter come from Manhattan, and that makes a lot of sense given the rent differential and then the quality of the The offering over here generally, as I said, larger, newer units, very well amenitized. What we've seen more recently is more out-of-state move-ins, and we believe that that is linked to something of a return-to-office mandate more broadly, and really off the back of New York and Manhattan really seeing the positive economic trends that we've seen over there and hiring and return to office, we think it's probably fueled by that. But actually, the out-of-state movements are also people moving here to work in New Jersey as well. So it's a little bit of a mix, but I'd say our assets do still carry significant appeal for people working in Manhattan and choosing to live over here, given the benefits of the rent differential, but also the fact that Living here, you don't pay New York City tax, which itself is another 3%, 4%. And that adds up when you consider the affluence of the resident base in general that we have.

Great. Thanks. Last question for me. Just on the capital market side, it was nice to see you get some of the land sales done. You got the Irby deal done. Just how are you thinking about that balance of that $300 million to $500 million and how, I guess, challenging in this capital markets environment do you think it'll be to get additional income producing and or land sales completed?

It's a great question again. I would say this team has a proven track record of navigating challenging market conditions. If you think about starting off selling assets during COVID and then dealing with return to office and then the inflation environment changing and rates moving the way they did. And then now we'll see the most recent changes that we've seen off the back of policy changes through the new administration. And so I think the team's been pretty good at navigating choppy markets, being resourceful and tenacious and delivering on our stated objectives generally ahead of expectations. So I wouldn't say we're not naive or complacent. We recognize that there's a lot of volatility and uncertainty, and those things are not good for transactions. But as of today, we remain confident in our ability to continue making progress with our stated plan.

Great. Thanks. That's it for me. Thank you, Steve.

Thank you. The next question comes from Yana Galan with Bank of America. Please proceed. Thank you. Good morning.

You know, maybe following up on that last question, congrats on the Sable transaction, and your team has been very successful in simplifying the story and the structure. I guess just at this point in the company's transformation, where is your strategic focus as you think about the next chapter?

Good morning, and thank you for the question. I think at this point the strategic focus is really the plan that we laid out last quarter, which is the sale of $300 to $500 million of non-strategic assets, generally smaller assets, and ones that may be less efficient for us to operate or more fringe in location. and land and recycling that capital, putting it to a higher and better use, which we've identified broadly as being four-fifths debt repayment and a fifth towards repurchasing our shares, which we believe are trading at a significant discounted intrinsic value. So I think that's really the stated plan at this time and the focus for the management team.

Thank you. And then just, you know, in the guidance year to date, you're running ahead and I understand there's a lot of macro uncertainty, but are you specifically seeing anything in your markets or in the portfolio in terms of kind of layoff announcements or pick up in bad debt or lease breaks or even just like more roommate applications that have you concerned?

It's a good question. No, at this point, as I mentioned my scripture remarks, we don't really see any impact on the operational side of things, but these things tend to lag and it's really what you mentioned that there's a lot of uncertainty in the economic outlook. There's a lot of uncertainty in the inflation outlook. And while we believe that our assets are well positioned to weather potential storms ahead, given the quality of the assets, the relative value proposition, compared to Manhattan, given the affordability ratio of our residents, which is around about 12%. We're not immune, and holding guidance at this point really is just reflective of the fact that we're only four months into the year with a considerable amount of uncertainty ahead of us, And the accretion from these transactions that we announced, which would amount to around about two cents relative to guidance, is a couple of million dollars. And for a company of our size, it's not inconceivable that given all that uncertainty between the income side, given the economic outlook, and the expense side, given the inflation outlook, potentially you could erode that away in the next eight months. And so we think it's prudent at this time just to hold guidance and monitor the situation, despite the fact that these are very accretive transactions that we've announced today.

And Yana, one thing I would just add on top of what Mahbub said is, in terms of our same-store NOI guidance, our revenue we expect will follow the typical seasonal patterns, peaking in the third quarter. But on the expense side, if you recall last year in the third quarter, we had a really favorable result with our insurance renewals as well as our Jersey City taxes, which reset in the third quarter. And so when we lap those favorable adjustments, we will have lower same-store NOI in the third quarter. And so that does help to bring the numbers in line with our guidance ranges.

Yeah, so operationally still very much in track with the original guidance. It's really just the transactions that would, in a more normal environment or more stable environment, would have probably led us to consider raising guidance. And we just think holding back at this point is the more prudent thing to do.

Thank you. Appreciate the detail. Thank you. Thank you.

The next question comes from Eric Wilk with Citibank. Please proceed.

Hey, thanks. For the IRB acquisition, I think at one point you might have been considering selling the asset or other options there. So could you just talk about the process you went through with your partner and how you ended up deciding to acquire it?

Good morning. Thanks for the question, Eric.

I think it's fair to say that we assumed a range of options working with our joint venture partner. And it's no secret that today for larger assets there's a pretty limited universe of buyers and those buyers tend to have more of a value add opportunistic cost of capital and so that's implications for pricing of any assets that are on the larger size but also there's a limited by universe generally for illiquid minority stakes in assets and so it was really looking at a range of alternatives and we felt that the opportunity for us to acquire a partner stake at this valuation, given the accretion, the immediately realizable synergies and the additional benefits of further simplifying and allowing us more operational flexibility and optionality with regards to the asset really represented the best path for us at this time and for our shareholders.

That makes sense. And then I think you said the cap rate is 6.1%. I guess first question is, is that a year one cap rate? And then I think that implies like 27 million of NOI versus about 23 million last year or maybe 27 million of total income versus 23 million last year. Can you talk about the specifics of what's driving that increase?

Well, it's the Q1 annualized. NOI plus the synergies that gets you to that 6.1. And so we mentioned the million dollars of immediately realizable synergies, but there's another $400,000 value in payroll savings. On top of that, that's what gets you to the 6.1.

Got it. So when I look at the first quarter, it looks like it was up a little over 10% year over year. That's like a sustainable number. I mean, sometimes there can be you know, in any quarter, right, there are going to be things that drive expenses down in a given quarter, but you would view that sort of 10% increase year over year as sustainable.

Yeah, Eric, hi. This is Amanda here. So in the fourth quarter, there was some straight line rent adjustments that slightly pushed down the fourth quarter NOI for Irby.

So it's not as exaggerated as that Q4 was? was lower than it should have been given those straight line adjustments. Got it. Makes sense. Thank you. Thank you.

The next question comes from Tom Catherwood with BTIG. Please proceed.

Thanks, and good morning, everybody. Morning, Tom. So maybe on the Metropolitan at 40 Park, kind of following up on the prior question on IRBI and cap rates, I do a quick back of the envelope. I'm getting to like an 8.1% cap rate based on $600,000 for your 25% equity stake, which seems high. Am I off there? And what was the valuation on that transaction?

Yeah, Tom. I think the way we thought about that was it was part of a package transaction that And just given the illiquid nature of that and the other assets, we kind of thought of it more holistically. But I can see how you'd get to that math. We can come back to you on how you could think about it on a cap rate basis. But we really thought of it as a package deal and valued it as such with the other assets.

Got it. Understood. And then the last one for me is for the wall land. So it was $31 million, and for its development entitlements, I think it was 228 units. Do you know if the final use for that is multifamily, or was the intended use something else? Because again, that valuation seems rich for that level of entitlements.

No, the final use, as we understand it, is multifamily.

And is it 228 units, or is there more development potential on that site as well?

I would need to come back to you on that. I'm not sure. Okay. That's it for me. Thank you, guys. Thanks, Tom.

Thank you. The next question comes from John Polowski with Green Street. Please proceed.

Hey, thanks for the time. First question is on Liberty Tower. Is the downward pressure on occupancy more pronounced than you would have expected at this point in the construction cycle? And where do you expect occupancy to drop?

Morning, John. Possibly slightly lower given, as we mentioned, we had to spend a bit more time on some of the structural work that needed to be done. And that slowed us down a little in terms of completing the renovated units and releasing them. But that's been offset by stronger occupancy actually across the other assets. And so not really concerning. And we're now through the worst of it with regard to the structural renovations that needed to be made at Dixie Towers and feel good about to go forward from here.

So is 80.5%, is that the bottom occupancy or we should expect it to trend lower over the next year?

It's hard to say, but I think I would expect an improvement from here.

Okay. And then the final topic I want to talk about is just to better understand the properties that you don't have full operating control over. So I have a few quick hits on that. So can you just give me a sense for what percentage of the portfolio is excluded from these blended lease statistics? Is it just the six properties, unconsolidated JV properties you list on page 21, or are there other assets excluded from the blended lease spreads?

So it's just two assets that we don't manage, Station House and the asset in Harrison, which are really a material to the overall portfolio.

Yeah, substantially all of the portfolio is in.

Okay. And so I guess I'm a little surprised you didn't have full operating control over a property that you own 85% of. So I guess what specifically is the low – where is the low-hanging fruit that you can get to a million dollars of synergies that you weren't able to pluck before?

Yeah, this is one of a number of joint ventures obviously that we, you know, that we inherited and probably the rationale was that at the time that this was put in place, this was an office company and on a, an office company with a small multifamily developer and so wasn't really well positioned to manage multifamily assets and so outsource the management. to Iron State at that time. Obviously, that didn't make any sense for us at this point. The joint venture agreement didn't have clear exit rights for either party, and so really had to be negotiated, but really benefited us in the sense that it meant that we could internalize management. And that million dollars is really a saving of the fee that we used to pay annually for this asset to be managed by our partner. There's no incremental cost to us of internalizing the management of that property. If anything, there are further synergies, and we've announced another $400,000 in annualized payroll savings. We think there's actually more than that to come in terms of incremental benefit and synergies from there as well.

Okay. Thank you. Thanks, John.

Thank you. At this time, I would like to turn the call back to management for closing comments.

Thank you, everyone, for joining us. We're pleased to report another strong quarter for Veris and look forward to updating you again next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.