Veris Residential, Inc. (NYSE:VRE) Q1 2024 Earnings Call Transcript

Veris Residential, Inc. (NYSE:VRE) Q1 2024 Earnings Call Transcript April 25, 2024

Veris Residential, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Veris Residential First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. The 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 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 are 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 Veris Residential’s strategic transformation into a pure-play multifamily REIT and outlined the 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 risk 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 in 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 the sale of Harborside 5, our last remaining office property, and 107 Morgan Street, as well as two land sites, 6 Becker and 85 Livingston, in suburban New Jersey that are under binding contract for $28 million and expected to close in the next few months.

We anticipate recycling the 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 to our portfolio, which continued to exceed 20% in the first quarter.

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Q&A Session

Within our portfolio, we continue to evaluate innovative technological solutions, as well as our organizational structure and processes to continuously enhance our platform. We are 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, combining the pursuit of operational excellence with our customer service-oriented approach to building management. In March, we ranked as the #1 REIT in the U.S. for Online Reputation by J Turner Research, reflecting the unwavering dedication of our teams and our residents’ recognition of their efforts. Turning to our operational results. Our same-store portfolio, which now includes Haus25 and The James, was 94.1% occupied as of March 31st.

While this is slightly below the year-end figure, the change can be largely attributed to the concentration of leases rolling at Haus25 related to the rapid lease-up of this recently completed property. 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 have improved our ISS Corporate rating, adding us a Prime status and the highest rating achieved by a real estate company in the United States.

Furthermore, we were named a Gold Green Lease Leader by the U.S. 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 on our new ESG website at vresustainability.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 Haus25, with that property stabilized in the second quarter of 2023, and 1% from a lease termination fee 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 that typically occur at the end of the year. Now, on to our balance sheet. As of March 31st, 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 refinancing. 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 Veris team for their hard work in closing this new facility and yet another testament to the dedication of our team. We have intentionally designed this facility 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 to 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.