Veris Residential - Q1 2024
April 25, 2024
Transcript
Operator (participant)
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.
Amanda Lombard (CFO)
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. 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 (CEO)
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 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, 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 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.
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, combining the pursuit of operational excellence with our customer service-oriented approach to building management.
In March, we ranked as the number one 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 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've improved our ISS corporate rating, earning 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 (CFO)
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%.
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 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 twelve months is 12x.
In April, as Mahbod already mentioned, we closed on a new $500 million senior secured delayed draw term loan and revolver, with a 3-year tenor and a 1-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 repayment, 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 refinancings 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 as 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-$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.
Veris continues 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.
The highest quality and newest Class A multifamily properties located in established markets in the Northeast, commanding the highest average rent 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.
Operator (participant)
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. One moment, please, while we poll for your question. Our first question has come from the line of Steve Sakwa with Evercore ISI. Please proceed with your questions.
Stephen Sakwa (Senior Managing Director and Senior Equity Research Analyst)
Yeah, thanks. Good morning. Maybe, Mahbod, just starting on kind of the guidance. I understand it's sort of early in the year and you know, you want to maybe let spring leasing season play out a bit.
It seems like the top line, has grown exceptionally well here in the first quarter, realizing that, you know, 8-9% growth might not be sustainable. If I recall, your guidance for the year is much lower than that. Obviously, you're either being very conservative in that forecast on top line, or maybe there are some tougher comps. Can you just speak to the top-line component first?
Mahbod Nia (CEO)
Sure. Morning, Steve. No, look, we've obviously started to see blended net rental growth rates come in a bit at 4.6%, and we are now starting to lap a tougher period relative given that we have had now a sustained period of strong rent increases.There's an element of that. There's an element of, obviously, just macroeconomic uncertainty as well ahead.
That's factored in, 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 net rental growth rates that are right in that sort of mid-single digit area. 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 lining up, and also where we see expenses lining up, where we're in the first quarter. There's also just an element of distortion overall in this first quarter from a number of things which... they will be going forward, you know, Haus25 being added, for example, to the same store portfolio, which drags up both the revenue side of it pretty significantly, given that wasn't fully occupied in the first quarter of last year.
On the NOI side, some seasonality factors, the tax appeals, the fact that non-controllable expenses don't come in till the second half of the year.
Looking into a single quarter, particularly with it being the first one, you might look at that and say, "Well, the guidance looks conservative," but it's early and there is some volatility through, just some of these factors, like Haus being added to the equation, the tax appeals. When you look at it on a full year basis, smoothing all that out, we're still very much confident in the guidance range that we've given.
Stephen Sakwa (Senior Managing Director and Senior Equity Research Analyst)
Okay, thanks. second question, I just wanted to go back to the balance sheet and the financing strategy. You know, normally, you know, companies are looking to somewhat minimize floating rate debt exposure, and I realize we're kind of at the peak of the, maybe the Fed's tightening cycle. taking on floating rate debt probably poses less risk today than it did, you know, 12-24 months ago.
I guess I'm just trying to get a better handle on sort of the strategy here and whether this just preserves more optionality for you to the extent that a monetization event does become available. Is having the debt floating and on a line of credit/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 (CEO)
Well, it definitely is a more flexible financing strategy that allows us to be able to delever over time, should we choose to focus on that. It also allows us, to the extent we do that, to have a path to accessing not only more flexible but cheaper cost of capital, when you consider that probably the next stage for a company like ours would be tapping unsecured.
You know, we're now at around 12x net debt to EBITDA. We'd need to get to probably sub-10. There's a path between growth in the portfolio and what I've described as idle equity that's still 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 debt. There's a path to getting there. 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 hedge it. And so we'll be hedging... And now that hedging strategy isn't in place today, and we haven't announced it 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 with caps.
Stephen Sakwa (Senior Managing Director and Senior Equity Research Analyst)
Great. That's it for me. Thanks.
Mahbod Nia (CEO)
Thank you, Steve.
Operator (participant)
Thank you. Our next question has come from the line of Eric Wolfe with Citibank. Please proceed with your questions.
Eric Wolfe (Vice President and Equity Research Analyst)
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 pay downs, the average rate you were expecting to achieve versus what you actually ended up achieving? Just trying to understand how you got to the upside in that guidance. Thanks.
Mahbod Nia (CEO)
Good morning, Eric. Good question. We had or 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 Front Street, refinance to simplify and consolidate our debt. The original guidance really reflected the considerable uncertainty in the credit markets, which remain challenged and volatile. 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.
In addition, securing another $28 million of non-strategic asset sales, which if you think about that from an earnings standpoint, given just the earnings potential from that capital, that's worth about $0.02 a year.
The expectation is that we close out of Core FFO, and the expectation is that we close those sales around mid-year, so that equates to about $0.01 of the upside. 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 $0.01 as well.
Eric Wolfe (Vice President and Equity Research Analyst)
Yeah, that's helpful. Assuming you were trying to sell the properties underlying the, the debt facilities, I guess, would that debt and any of the associated swaps that you put on it, be assumable, or is there a process for substituting other properties into the facilities?
I'm just wondering if, if, you know, this limits your ability to monetize those properties, because you talked about, you know, increasing your optionality. Trying to understand if you'll still be able to say, you know, sell some of those properties or substitute ones in and out and, and be able to... or, or alternatively, you know, the buyer can assume that debt.
Mahbod Nia (CEO)
Yeah. I wouldn't say it's assumable. This is, to raise $500 million for a company of our size, this is very much, it's not easy today, and it's, it's very much, relationship-based lending, but it is fully payable, and so it doesn't come with the friction costs that would have come with, a more rigid financing structure.
Amanda Lombard (CFO)
I just would add one thing here. We're gonna use caps to hedge and not swaps, so there'll be no termination costs with those.
Eric Wolfe (Vice President and Equity Research Analyst)
Got it. So if someone wanted to buy, they would just effectively put their own mortgage on it, and then that debt would get-
Mahbod Nia (CEO)
Correct. Correct, correct.
Eric Wolfe (Vice President and Equity Research Analyst)
Okay.
Mahbod Nia (CEO)
And then the caps at that point-
Eric Wolfe (Vice President and Equity Research Analyst)
Thank you.
Mahbod Nia (CEO)
Are just an asset and just top of value on all.
Eric Wolfe (Vice President and Equity Research Analyst)
Understood. Thank you.
Mahbod Nia (CEO)
Thank you.
Operator (participant)
Thank you. Our next question has come from the line of Josh Dennerline with Bank of America. Please proceed with your questions.
Josh Dennerline (Director and Senior Research Analyst)
Yeah, good morning, everyone. Amanda, I wondered if I'd come back to a comment you made in your opening remarks. You mentioned there was a earnings benefit from some company initiatives in, in 1Q results. I guess, could you elaborate further on that? is there anything else baked into guidance for the year from initiatives hitting, or if not, is there anything that could be a potential source of upside?
Mahbod Nia (CEO)
Yeah, 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 certain properties based on a return on invested capital-focused approach.
The most recent initiative that we've announced there is Liberty Towers, which is just kicking off. 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, it's even more than that now, of human capital time, freeing up our leasing agents to be able to focus on higher value tasks.
We're working with a provider to actually extend the utilization of technology and specifically AI, 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 in earnings over a specific time frame, because this is really about gradual optimization of the platform over time. You've seen that in our ability to be able to really mitigate expenses at a time when inflation has been, you know, running at particularly elevated levels.
That is largely reflective of the efforts of the team to offset those upward inflationary pressures with both processes, with technology, with changes in organizational structure, how we go about doing things that offset those expenses and allow us to be able to control expenses in a more robust way. It is a holistic approach to maximizing revenue, mitigating the expense side, and then investing in our properties.
Josh Dennerline (Director and Senior Research Analyst)
Got it. Appreciate that. Sorry if I missed it, but did you mention what leasing spreads or how leasing spreads are trending in April, or where you're sending out renewals today?
Mahbod Nia (CEO)
Yes. On a blended basis, we're 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 a blended basis, I'd say around the mid-single digit, maybe a touch higher.
Josh Dennerline (Director and Senior Research Analyst)
Got it. Thanks for the time.
Mahbod Nia (CEO)
Thank you.
Operator (participant)
Thank you. Our next question has come from the line of Tom Catherwood with BTIG. Please proceed with your questions.
Tom Catherwood (Analyst)
Thank you, and good morning, everybody. Maybe for-
Mahbod Nia (CEO)
Hi, Tom.
Tom Catherwood (Analyst)
Amanda, maybe for Amanda. You mentioned paying down, I think, roughly $170 million of principal as you refinance four mortgages this year and put them on the line in the revolver. For sources of those funds, it looks like you'll have roughly that much cash once you close on the $28 million of contracted land sales. Outside of that, how much more capital do you need, or how much more do you have to sell to execute the rest of your 2024 business plan, you know, including spending on asset upgrades?
Amanda Lombard (CFO)
I'll answer part of it, and then I'll throw it over to Mahbod. So first off, your math is right there. If you 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 repayment. Mahbod, I'll let you take the second part of the question.
Mahbod Nia (CEO)
Sure. I agree with the math. In terms of where additional cash flow could come from to invest in the properties, the 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 back up, we're generating a not insignificant amount of free cash flow.
The business itself is cash flow positive again, and so there's that. 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 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.
Between those sources, I think we're in a good spot. But I think it's important to remember the business itself is also generating a not insignificant amount of free cash flow.
Tom Catherwood (Analyst)
Got it. Got it. Appreciate that. Then maybe, Mahbod, sticking with you, you've previously discussed your joint ventures as a potential avenue for capital allocation. Is that a nearer term opportunity, or is something like that more than likely further down the line?
Mahbod Nia (CEO)
Well, 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, clean up a little bit more. What I really mean by that is determine whether for certain joint ventures, there may be a higher and better use for our company and whether we can access the equity that's locked in those joint ventures. There's always, there's always a path.
The question is, how long does it take to get through that path? Which makes it difficult to, you know, really put a timeframe around it, but it is another potential area of optimization on the capital allocation side of our three-pronged approach that could be unlocked over time.
Tom Catherwood (Analyst)
Understood. Thanks for that. Last one for me, just over on Haus25, how much NOI upside is there as you stabilize the storefront commercial space at the building?
Mahbod Nia (CEO)
I wouldn't say it's material. It's gonna be in the region of two Well, it's not immaterial either. It's in the region of $2 million from it being fully, fully leased.
Tom Catherwood (Analyst)
Okay. Any thoughts, you know, is some progress towards some of it, or is it, again, the timing's gonna be, you know... Are we talking a 25 event?
Mahbod Nia (CEO)
I'd say overall, we're seeing some really positive signs on the retail side. The team here is doing a fantastic job of 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.
Tom Catherwood (Analyst)
Got it. Thanks for the answers. That's it for me.
Mahbod Nia (CEO)
Thank you. Thanks, Tom.
Operator (participant)
Thank you. Our next question has come from the line of Michael Lewis with Truist Securities. Please proceed with your questions.
Michael Lewis (Cyber Security Group Manager, Head of AI Security, Automation, and Response Engineering)
Great. Thank you. As far as additional non-core dispositions, how much of that is land versus targeted properties that you have to sell?
Mahbod Nia (CEO)
We haven't announced any additional sales at this point, so other than the $28 million, that's under binding contract. What is available is $190 million of land, and then it's really the multifamily properties.Those decisions will be, again, 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? Can it be unlocked, and over what timeframe?
We're constantly evaluating, let's set the past, every dollar of equity that's tied up in the business, and making those decisions, working closely with the board. But no decisions have been made at this point with regard to the remainder of the assets.
Michael Lewis (Cyber Security Group Manager, Head of AI Security, Automation, and Response Engineering)
Okay. I guess I'm thinking, you know, not just the yield on this kind of source of capital from sales, but also, you know, should we expect that most of this land is eventually gonna be sold, or do you think you're a, you know, a material developer, you know, going forward when that makes sense?
Mahbod Nia (CEO)
Well, there's clearly a long-standing DNA at Veris for developing very high quality products here in terms of Class A multifamily assets. And that stands. As I said, no decision has been made yet with regard to the land bank.
Michael Lewis (Cyber Security Group Manager, Head of AI Security, Automation, and Response Engineering)
Okay, understood. And then, you know, you talked a lot about this, but as far as the debt repayment, the specific pieces here, right? I see Signature Place and Liberty Towers have maturities this year, one much larger than the other. Should I expect that, you know, you'll use some of these proceeds and then put the balance on the line that you're not gonna refi either of these?
Amanda Lombard (CFO)
This is Amanda here. Yeah, that's correct. So the-
Michael Lewis (Cyber Security Group Manager, Head of AI Security, Automation, and Response Engineering)
Okay.
Amanda Lombard (CFO)
The way we're looking at it is, we'll tackle each maturity/refinancing at the date that it's required to be done. And the order of operations is, first we'll repay 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 (Cyber Security Group Manager, Head of AI Security, Automation, and Response Engineering)
Okay. Is there any other debt that you're gonna get at this year, right? Because you don't have another maturity, it looks like, until 2026. So, are those kind of the two main pieces or, you know, absent asset sales, I suppose, right? You sell a secured property. Is that—those are kind of the two big pieces, I assume?
Amanda Lombard (CFO)
Those are the two that have maturities this year. That's correct. But there's also, in July, Soho Lofts, which is a $158 million mortgage, the rate resets to above market, and so that one we're going to repay with the facility or cash on hand. Then there's one other loan, 145 Front Street, which we'll repay and add to the pool in May.
Mahbod Nia (CEO)
The way I would think about it is, between loans maturing, the Soho Lofts loan which has a rate reset and one other in Front Street that we would like to just consolidate into this financing, because it's effectively cost neutral and clean things up, that's $528 million of debt that we'll be repaying with a combination of the facilities and proceeds from asset sales. The net effect of that is you go from $528 million of debt to around $360 million of drawn balance under the term loan and RCF.
Michael Lewis (Cyber Security Group Manager, Head of AI Security, Automation, and Response Engineering)
Perfect. Thank you very much.
Operator (participant)
Thank you. 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 (CEO)
Thank you, everyone. We're pleased to report another extremely positive quarter and look forward to updating you again next quarter.
Operator (participant)
Thank you. This does conclude today's teleconference. We appreciate.