Veris Residential, Inc. (NYSE:VRE) Q3 2023 Earnings Call Transcript

Veris Residential, Inc. (NYSE:VRE) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Greetings and welcome to the Veris Residential Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Taryn Fielder, General Counsel. Thank you, Ms Fielder, you may begin.

Taryn Fielder: Good morning, everyone, and welcome to Veris Residential's Third Quarter 2023 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 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. In the third quarter, we continue to build upon the strong results we delivered during the first half of the year. Since redeeming Rockpoint’s preferred interest in July, we’ve closed on the sales of four non-strategic asset releasing a $122 million of net proceeds which were used to repay the balance of the term loan and revolving credit facility and refinance approximately $350 million of debt proactively addressing near term debt maturities and enhancing our overall debt maturity profile. Operationally, we continue to outperform during the third quarter achieving a blended same-store net rental growth rate of 9.3% and same-store NOI growth of 17.1% despite wide spread suffering of rents across the multifamily sector.

The $122 million of non-strategic assets closed since the end of the second quarter versus the total value of transactions closed this year worth $0.5 billion, specifically the most recent transactions completed include two further office buildings, Harborside 6 and 23 Main Street and two Land plots Harborside 4 and 3 Campus. The net proceeds realised from these sales combined with the excess cash flow from our now positive cash flowing operations and activities from the refinancing of Haus25 enabled us to fully repay the balance of our term loan and revolving credit facility in just three months resulting a substantial interest expense saving in the process. 107 Morgan and 2 Campus remain on the binding contract and are anticipated to provide the company with additional liquidity upon closing.

[Indiscernible] operations during the quarter same-store occupancy and our retention rates remain stable at 95.5% and 55% respectively. The blended same-store net rental growth rate remains strong at 9.3%, despite the end of the third quarter typically marking the start of a slower leasing season across the multifamily sector, and rent increases being based on high growth periods from 2022. While we anticipate further cooling of rents consistent with peers, we believe our highly amenitized Class A portfolio continues to be well positioned for the less active winter leasing season. Our continued outperformance relative to the broader market which saw rents rise by only 1% nationally year-over-year, and by 5% in New Jersey, reflects the resilient demand for our high quality Class A portfolio, and the strength of our operational platform in capturing that demand, approximately 30% of which was comprised of move-ins from New York City.

Furthermore, new supply in the Jersey City waterfront market continues to be muted, with very few new deliveries expected in the next 18 to 24 months. The sustained revenue growth we achieved during the quarter coupled with our continued focus on expense management contributed to a 17.1% growth in same-store NOI compared to the third quarter of 2022, representing an additional $17.9 million of NOI generated in the nine months ended September 30th, excluding the significant contribution from Haus25. This continued outperformance is reflected in our decision to once again raise NOI guidance to 14% to 15%. Amanda will discuss this in further detail. As one of our industry leaders in ESG, we were proud to be named global listed and regional sector leaders by the 2023 Global Real Estate Sustainability Benchmark, or GRESB, earlier this month.

Despite 2023 being only the second year in which we participated in the benchmark, we once again earned a five-star rating for our performance, a testament to our ongoing commitment to sustainable operations, diversity, and the advancement of ESG action in supporting the wellbeing of our residents, employees, suppliers, and communities. With that, I'm going to hand it over to Amanda, who will provide an update on our financial performance during the quarter.

Aerial view of a large REIT building complex, its facade reflecting the city skyline.

Amanda Lombard: Thanks, Mahbod. For the third quarter of 2023, net loss available to common shareholders was $0.60 per fully diluted share versus a net loss of $1.10 per fully diluted share in the third quarter of last year. The third quarter of 2023 includes interest costs of mandatorily redeemable non-controlling interest of $35 million, or approximately $0.35 per share, related to the buyout of Rockpoint as we detailed last quarter. Core FFO per share was $0.12 for the third quarter as compared to $0.16 last quarter. The second quarter was positively impacted by two non-recurring items, $0.02 from the settlement of two real estate tax appeals and $0.03 from the IRBY [Ph] tax credit, which we typically receive in the second quarter.

AFFO per share was $0.15 as compared to $0.18 last quarter for the same reason. Same-store NOI was up over 17% compared to the same quarter last year, reflecting 10.5% revenue growth and our continued efforts to mitigate property-level expense inflation. Controllable expenses were up 6.4% quarter-over-quarter due to higher costs related to the peak leasing season. However, year-over-year, controllable expenses ticked up only slightly, from 2.6% to 3.9%. Our non-controllable expenses continue to be variable period to period. This quarter, we renewed our property insurance, and while our insurance premiums increased by approximately 30% from the prior year, a reduction in our self-insurance based upon our annual review of that program offset the increase.

In addition, real estate taxes, as compared to the prior quarter, are up significantly as a result of the $2.7 million favorable adjustment in Q2 related to the resolution of tax appeals, which was slightly offset this quarter by an increase of $0.5 million related to the finalization of Jersey City 2023 taxes. Next quarter, we expect that non-controllable expenses will be approximately half a penny higher than this quarter on a run rate basis. In regards to our general and administrative costs, after adjustments for non-cash stock compensation along with severance payments, G&A was down to 8.7 million for the quarter. The fourth quarter may be slightly higher than the third quarter due to various costs that occur regularly in that quarter.

However, overall, we remain on track to record the lowest level of G&A in nominal terms in over a decade, and the lowest when adjusted for inflation since the 90s. On to our balance sheet. During the quarter, we entered into a transitional term loan and credit facility to complete the negotiated redemption of Rockpoint's preferred interest in Veris Residential Trust. The balance of these facilities was repaid in just three months using net proceeds from $122 million of recently closed non-strategic asset sales. Excess proceeds from the refinancing of Haus25 surplus cash flow from our now cash generative operations. We proactively refinanced Haus25, a fourth quarter 2024 maturity at an interest rate of 5.46%, reducing the cost on this loan by 124 basis points.

As a result of this, we were able to increase the weighted average maturity of our total debt portfolio from 2.6 to four years while improving our maturity ladder with no more than 23% of our portfolio due in any given year, and an average of 15% maturing per annum over the next five years. As of October 24th, effectively all of our debt is fixed and or hedged with the latest refinancing’s, which constituted 14% of our overall debt stack, increasing our weighted average interest rate marginally from 4.4% to 4.5%. While our net debt to EBITDA remains sensitive to earnings and prone to fluctuation, it is gradually trending down to 12.4 times pro forma for the recent repayment of the transitional loan. As we have prioritized that repayment, having reduced net debt by approximately $1 billion in addition to the redemption of Rockpoint's $520 million preferred interest since the end of 2020.

Looking ahead at our upcoming consolidated maturities, Veris has $308 million of mortgages we expect to be refinanced as we move into 2024. While the commercial real estate debt markets are constrained there remains demand to lend for high quality multifamily assets like ours as evidenced by the recent financing. Accordingly, we anticipate utilizing cash flow from operations and proceeds from continued non-strategic asset sales to reduce our leverage on these loans as we refinance them to the extent required or as otherwise determined by the board and management. Turning to our outlook, as Mahbod mentioned, our portfolio's performance has provided us with the flexibility to raise our same-store NOI guidance range to 14 to 15% from 10% to 12%.

This is largely driven by higher than expected market rent growth, which we expect to be in the range of 9% to 10% and better than expected outcomes on insurance and real estate tax renewals. We project expenses will end the year in the range of 2% to 3%. This concludes another strong quarter for Veris Residential during which we continue to demonstrate multifamily outperformance and advance the completion of non-strategic asset sales while further strengthening our balance sheet. With that, we are ready to open the line for questions.

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