Veris Residential Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 9 speakers on the call.

Operator

Greetings, and welcome to Verus 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. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Taryn Fielder, General Counsel. Thank you, Ms. Feeler. You may begin.

Speaker 1

Good morning, everyone, and welcome to Verus Residential's Q3 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 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, Verus Residential's Chief Executive Officer, who is joined by Amanda Lombard, Chief Financial Officer.

Speaker 1

Mahbod?

Speaker 2

Thank you, Soren, and good morning, everyone.

Speaker 3

In the

Speaker 2

Q3, 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 4 non strategic assets, leasing $122,000,000 of net proceeds, which we'll use to repay the balance of the term loan and revolving credit facility and refinance approximately $350,000,000 of debt, Proactively addressing near term debt maturities and enhancing our overall debt maturity profile. Operationally, we continue to outperform during the Q3, Achieving a blended same store net rental growth rate of 9.3% and same store NOI growth of 17.1% Despite widespread softening of rents across the multifamily sector. The $122,000,000 of non strategic assets closed since the end of the second quarter That's the total value of transactions closed this year at over $500,000,000 Specifically, the most recent transactions completed include 2 further office buildings, Harborside 6 and 23 Main Street and 2 land plots, Harborside 4 and 3 Campus. The net proceeds realized from these sales combined with the excess cash flow from our now positive cash flowing operations and equity release from the refinancing of House 25 enabled us to fully repay the balance of our term loan and revolving credit facility in just 3 months, resulting in a substantial interest expense saving in the process.

Speaker 2

107 Morgan and 2 Campus remain under binding contract and are anticipated to provide the company with additional liquidity upon closing. Turning to operations. During the quarter, same store occupancy and our retention rates remained 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 3rd quarter typically marking the start of a slower leasing season The multifamily sector and rent increases being based on high growth periods from 2022. While we anticipate further quoting 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.

Speaker 2

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 and capturing that demand approximately 30% of which was comprised of move ins from New York 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 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 Q3 of 2022, representing an additional $17,900,000 of NOI generated in the 9 months ended September 30, excluding the significant contribution from House 25. 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 Despite 2023 being only the 2nd year in which we participated in the benchmark, we once again earned a 5 star rating for our performance, A testament to our ongoing commitment to sustainable operations, diversity and the advancement of ESG actions supporting the well-being of our residents, employees, suppliers and communities.

Speaker 2

With that, I'm going to hand it over to Amanda, who will provide an update on our financial performance during the quarter.

Speaker 4

Thanks, Mahbod. For the Q3 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 Q3 of last year. The Q3 of 2023 includes interest costs mandatorily redeemable non controlling interest of $35,000,000 or approximately $0.35 per share related to the buyout of Rock Point as we detailed last quarter. Core FFO per share was $0.12 for the 3rd quarter as compared to $0.16 last quarter. The Q2 was positively impacted by 2 nonrecurring items, dollars 0.02 from the settlement of 2 real estate tax appeals and $0.03 from the Urby tax credit, which we typically receive in the Q2.

Speaker 4

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.

Speaker 4

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 $2,700,000 favorable adjustment in Q2 related to the resolution of tax appeal, which was slightly offset this quarter by an increase of $500,000 related to the finalization of Jersey City 2023 taxes. Next quarter, we expect that non controllable expenses will be approximately $0.005 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 and A was down to $8,700,000 for the quarter.

Speaker 4

The 4th quarter may be slightly higher than the 3rd quarter due to various costs that occur regularly in that quarter. However, overall, we remain on track to record the lowest level of G and 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 Rock Point's The balance of these facilities was repaid in just 3 months using net proceeds from $122,000,000 a recently closed non strategic asset sales, excess proceeds from the refinancing of House 25 and surplus cash flow from our now cash generative operations. We proactively refinanced House 25 4th quarter 2024 maturity at an interest rate of 5.46 percent, reducing the cost on this loan by 124 basis points.

Speaker 4

As a result of this, we were able to increase the weighted average maturity of our total debt portfolio from 3.6 to 4 years, while improving our maturity ladder with no more than 23% of our portfolio due in any given year at an average of 15% maturing per annum over the next 5 years. As of October 24, effectively all of our debt is fixed and or hedged With the latest refinancings, 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 has gradually trended down to 12.4 times, Pro form a for the recent repayment of the transitional loan, as we have prioritized that repayment, having reduced net debt by approximately $1,000,000,000 in addition to the redemption of RockPoint's $520,000,000 preferred interest since the end of 2020. Looking ahead at our upcoming consolidated maturities. Verus has $308,000,000 Mortgages we expect to be refinanced as we move into 2024.

Speaker 4

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 of 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.

Speaker 4

We project expenses will end the year in the range of 2% to 3%. This concludes another strong quarter for Verus 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.

Operator

Thank you. We will now be conducting a question and answer Our confirmation The first question comes from the line of Eric Wolf from Citi Research. Please go ahead.

Speaker 5

Thanks. It's actually Nick Joseph here with Eric. Maybe just starting on the operating portfolio, can you touch on where you are seeing new lease rate growth today in over and then where renewals kind of are trending for October then sent out for November December?

Speaker 2

Good morning, Nick. Thank you for the question. So we said last quarter that we expected Rents to moderate now, we've had very strong rental growth, double digit rental growth. That's not sustainable in perpetuity. We indicated that we'd be in the mid to high single digits range going forward.

Speaker 2

You've seen us coming at the high end of that. I do think that will further moderate to somewhere in the mid single digits, which is much more, let's say, Indicative of longer term growth rates. Thanks.

Speaker 5

Is there anything you're seeing in terms of rent to income or any other affordability Metrics that are impacting it or is it just more normal seasonality and just such coming off of such high rent growth?

Speaker 2

Yes, it's actually it's the 2 latter points that you made. So it's from an affordability standpoint, we We remain in very good shape. We've seen good income growth. There was also some commentary about that slowing down more generally, but we've seen that Sustained at around 15% or even actually slightly below 15% now in terms of rent to net disposable income. It's more a function of you're now lapping Periods of extremely high rent growth and that is just not sustainable and we've also entered now The seasonally tougher period when it comes to the multifamily sector on the whole.

Speaker 5

Great. Thanks. And then just on the insurance renewal, can you quantify the reduction in the self insurance?

Speaker 4

Sure. This is Amanda. I think as I said earlier, it's about 0.5p that you'll see our non controllable expenses go up next quarter. So I think that's what you can expect.

Operator

Okay. Thank you. Thanks, Matt. Thank you. Next question comes from the line of Steve Sakwa with Evercore ISI.

Operator

Please go ahead.

Speaker 3

Yes. Thanks. Good morning. Mahbod, now that you've, I guess, essentially completed kind of the cleanup of all the non core assets, It's Rockpoint. You're really down to just one office property.

Speaker 3

I guess how are you sort of looking at the organization as you think about moving forward As a standalone enterprise, realizing that a monetization event is kind of out of your control, but how are you thinking about the organization, The people in place and what else do you need to do to make this a best in class apartment company?

Speaker 2

Good morning, Steve. Thank you. That's a great question and something that we've been giving a lot of thought to ourselves as well. The last 3 years I would describe as the transformation phase where we've sold Over $2,000,000,000 of non strategic assets, but on the office and really tried to get ahead of that exiting an asset class that It was not strategic to us and pivoting to an asset class whereby we continue to believe in the long term fundamentals and is very much Call to our business. There's a little bit more to do as you highlighted in Harborside 5 and that's not insignificant given it's unlevered office Building and has substantial equity trapped in it.

Speaker 2

But the transformation phase is effectively over. What I would describe this next phase as is the optimization phase. And there we do have a number of levers available to us, number of initiatives to allow us to now be able to really optimize what we have in this pure play multifamily Platform and organically seek to continue enhancing its value. A number of different prongs to that And we're evaluating those at this time working with the board. Some of it will involve some further simplification that could Touch on corporate structure, capital structure and other areas.

Speaker 2

A large part of it is capital allocation. If you think about The capital within the business today, there is still significant amounts of equity that is either idle or generating A suboptimal return for us. And so reallocating that capital to a higher and more accretive use really has the potential to The top line and hence flow down to the bottom line for us Going forward, given the size of the business, there are other areas potentially, we're looking at a couple of on the whole, we have a very Young portfolio, as you know, but there are 1 or 2 areas where we think there could be potential value add opportunities And continued operational efficiencies, all of which together really do have the potential to continue driving Enhancing value of the platform in this next optimization phase.

Speaker 3

But I guess as just maybe a quick follow-up, do you feel like you have kind of the right people in place to Sort of make all these changes in steps or do you feel like you still need to add to the organization?

Speaker 2

No, absolutely not. We've got A lean but very effective team as you've seen to date we've gone a long way towards Rebuilding the operational side of things as well. So now I'm very comfortable with the team that we've got that we can execute on this next optimization phase.

Speaker 3

Okay. And then there's been some articles about kind of rent control coming up in Jersey City and maybe some of the surrounding Can you maybe just sort of speak to I know it's a very complicated and long winded answer, longer than conference call. But just maybe high level, how are you sort of thinking about the rent control within kind of the market in your portfolio? And are there things that you need to do to Make sure that you follow kind of all the rules and regulations? Or is there any risk about rent control being imposed on any part of the portfolio?

Speaker 2

Sure. Look, we believe that we've taken all the necessary and appropriate steps to preserve the available exemptions from Rent control ordinances, which may be applicable to the properties in our portfolio. We're, I'd say in a fortunate position that we have a younger vintage portfolio, that helps in that respect and that we've developed Most of those assets, and so feel comfortable with the position we're in.

Speaker 3

Great. Thanks. That's it for me.

Operator

Thanks, Steve. Thank you. Next question comes from the line of Anthony Paolone with JPMorgan, please go ahead.

Speaker 6

Thank you. I guess first question is around non Core, beyond Harborside V, it does sound like you still have some things that you might consider getting rid of. Can you maybe just talk a bit more about what those Might be and where there might even be liquidity that's acceptable to pursue other sales right now in the market?

Speaker 2

Sure. Good morning. Yes, Halverside V is the obvious non strategic one. The question really beyond that is, Do we seek to potentially further rationalize the land bank, which to the extent Not developed, really it's just idle equity again in the business that isn't really generating a return. So that's really what I was primarily referencing With that comment, but there are further potential pockets of capital as well.

Speaker 2

If you look at The joint ventures, the remaining joint ventures where we may seek to reallocate some of that capital over time to put it to a higher and better Use and a more accretive use.

Speaker 6

Okay. And then on the core, I appreciate just the strength in the rent growth in your market and what you've done operationally. I mean the numbers are just outsized. Like can you maybe just give us a sense you look back over the last few quarters, how much of that's really just been the market versus just efforts you've made to hunker down either and change how you price or be more aggressive there or Just on the operations side and just trying to understand maybe how much more runway might exist there if that was a big part of this?

Speaker 2

It's a great question. Look, if you look at the New Jersey Overall rental growth during this period was around 5%, and we've come in at 9%. I do think The quality of the assets is second to none. And I do believe we have Gone a long way towards rebuilding the operational platform with new people, new processes, new technology, and that's an ongoing effort. So it's difficult to say how much of that is property, how much of it is people, how much of it is market.

Speaker 2

But the combination on the whole is what's delivering the results that you're seeing and we do feel there's still some room to go down the operational side to continue Improving. It's an ever evolving initiative and so We're fortunate that we have great assets in great markets with supply demand dynamics that Put us in a very favorable position for the foreseeable future and we have a team that is highly focused and capable and Extracting the value from those assets.

Speaker 6

Okay. And just one follow-up, I think, maybe it It's perhaps mixed in with Nick's question earlier, but where are you sending renewal notices out today?

Speaker 2

I think you should assume for the next couple of months, we'll land up in the Mid single digit, maybe a touch above that level.

Speaker 6

Okay. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Next question comes from the line of Josh Dennerlein with Bank of America. Please go ahead.

Speaker 2

Yes. Hey, guys. Thanks for the time. Just wanted to follow-up on that Operating platform initiatives that you mentioned, I guess what's the main focus that you want to improve over the next 12 months and maybe what kind of benefit might we see from our perspective? Well, good morning.

Speaker 2

You've seen already Some of the benefits come through and the way we go about revenue management and the way we go about expense management. So you've seen that in How we price things and driving the top line, but you've also seen an improvement in our margins year over year. And that was really what I was alluding to is that there is I do believe there's still some further room to go and we will Update in due course what some of those steps are that we've taken or plan to take, but they're really centered around continuing to drive the top line, Optimize and seek to mitigate the expense side of things, doing things differently, more efficiently And utilizing technology where warranted to help us in achieving our goals there.

Operator

Okay. And then I see there

Speaker 2

is some debt coming due in 2024. I guess just what's the plan with that That refi or just pay down or just how are you thinking about it? And maybe if it's a refi, what kind of rate you can actually see? Well, you've seen with the 2 refinancings that we just announced that despite the Real Estate Commercial Real Estate Debt Markets being challenging at the moment. There is Still liquidity available and there's appetite to lend on high quality assets such as ours.

Speaker 2

And so the two assets you're referring to for next year, those are High quality, very well performing properties that we also anticipate getting attractive It's on. And so consistent with our approach this past quarter, you should assume that we'll be proactive and at the appropriate time, Look at options available to us to refinance those. To the extent that we choose to or require to Somewhat pay down those loans. We're also in a position of strength now and having Liquidity available to us today, liquidity that we anticipate coming through the closing of remaining non strategic assets that are under contract and potentially So other assets beyond that and the business itself is now cash flow generative and so that gives us another source as well to the extent we Choose to or require to do something of a pay down on this.

Operator

Thank you. Next question comes from the line of Tom Catherwood with BTIG. Please go ahead.

Speaker 7

Maybe starting with Amanda, you had mentioned Using the remaining or at least some of the remaining proceeds for the asset sales that are still under contract as you go To refinance the $300 plus 1,000,000 that are maturing. When you finish those roughly $71,000,000 of sales that will put you roughly at $90,000,000 of cash. Do you have all of that earmarked for debt reductions? Or do you think you'll have some remaining for other sources and uses?

Speaker 2

Hi, Tom. I'll take that if that's okay and then Amanda can chime in. So Today, from a liquidity standpoint, we also have the lines, so there's about $90,000,000 of liquidity, seventy $1,000,000 of assets on the binding contract today. Let's say, there's also cash flow coming off of the operations, surplus cash flow coming off of the operations that's Adding to that and potentially further non strategic assets that could be sold between now and next year that could further add to that. So there are Plenty of sources available in the part.

Speaker 2

And I think over these coming Months, we'll be working with the Board to determine the highest and best use for that capital. Rates being where they are today, One would rightly assume that debt repayment would be a very accretive and appropriate use of Any capital that's freed up, but that's something that we'll work with the board to ultimately determine and it could be a combination of things or could be or it could go towards that repayment.

Speaker 7

Got it. And then, Mahbod, you'd mentioned moving from in the response to Steve's question moving from this Transformation period to this optimization period. When we think of the rebranding and severance costs that Cycle that you've gone through during the transformation period. Now that you're in that optimization phase, do you think we're closer to that clean G and A run rate? Or is there still Some remaining rebranding expense that you think is going to run through that line over the coming year?

Speaker 2

It's going to take a little while to settle and not necessarily In relation to the rebranding, but more generally, just to give you an example, so repayment of Rockpoint, We've talked about how that will result in anticipated cost savings related to obligations we had with regard That partnership that will cease to exist going to next year. Some of those things it just takes time to work through and actually We won't really come through into the numbers until back end of next year or second half of next year. And then between now and then, we also have That's outside of our control such as inflation, which seems to be moderating at this point, but it still has an impact. So It's difficult to give you guidance on a run rate G and A, but what I would say is, it has come down a lot. We've now brought it down to the lowest level in a decade and actually in real terms Since the '90s, if you look at us, which is the only appropriate way to look at us given scale is the most significant factor Looking at the various metrics when assessing G and A, if you look at us relative to the mid cap as a percentage of gross asset value, which is really

Speaker 7

Yes, that

Speaker 2

base that we have to manage, we're right at the median there. And so I think Gone a long way, potentially have some more to go, but also combating inflation and factors that are outside of our control, to give you a run rate at this stage. And the other thing is just the business is not as we go through this optimization phase, there'll be pushes Paul is there as well. The reality is that we just haven't reached a mature stage as a pure play multifamily company where you could say, right, that is A mature cost structure, capital allocation side of it has been addressed. So the revenue side of it is Predominantly going to be driven by rents and rates.

Speaker 2

There are still things even that on the capital allocation side, if you just only think about the land, which is over $200,000,000 and Harborside V and $700,000,000 as I mentioned in joint ventures that isn't all necessarily generating an appropriate return for us, but even between Harborside 5 and the land that's $300,000,000 that really isn't generating a return and for a company of our size, That's meaningful, having that much idle capital. And so I think the primary driver is going to be capital allocation, but other things we can do As well on the expense side before it reaches a mature state, as a business and until then it's difficult to give that kind of guidance.

Speaker 7

Understood. I appreciate that. And then last one for me. You've obviously Ben, at the forefront, when it comes to ESG and integrating that, into the company and platform, what's next On the sustainability front, you obviously have a modern portfolio, but do you have any near term CapEx plans when it comes to either reducing energy consumption Carbon emissions or anything else along that front?

Speaker 2

Yes. Everything I would Today, the approach remains the same and it's an ever evolving initiative. And so everything we've done and everything we continue to do, We evaluate based on a number of different factors, but ultimately it comes down to return on invested capital. And so either there's a direct return on invested capital, whereby we know by, for example, seeking an alternative To traditional heating systems, it may be that there's a that we have energy savings that result in a payoff of 5 years or Maybe we'll evaluate whether it makes sense to look at alternatives based on that return on invested capital and payoff periods Or to a lesser degree, it would have an intangible but real benefit to the business when it comes to Brand or retention rates and really differentiates us from the peers. So the approach is Actually largely similar to any other CapEx that we spend.

Speaker 2

Every dollar of CapEx that we spend, The team presents based on a return on invested capital approach and we evaluate whether that's a sufficient return on that capital or not and we make decisions accordingly.

Speaker 7

Understood. Appreciate the answers, Bob. Thanks, everyone.

Speaker 2

Thanks, Tom.

Operator

Thank you. Next question comes from the line of Robin Lu with Green Street. Please go ahead.

Speaker 8

Hi, good morning. Just want to get back on the question on rent control. Are you sensing local municipalities are Cranking down on landlords and their adherence to rent control rules. Are you hearing the policymakers are maybe perhaps looking at

Speaker 2

Difficult for me to comment on that. The only thing I can state is what I mentioned earlier, which is that we believe we've taken the necessary steps, Necessary and appropriate steps to preserve the available exemptions from rent control ordinances across our portfolio. And so it's a very that's a very property specific and jurisdiction specific thing, townships within New Jersey. So I can only comment on what we've done across our portfolio. I don't really know.

Speaker 2

It's hard for me to comment on where that goes More broadly.

Speaker 8

Okay. Thank you for that. And then Do you mind providing color on the preferred interest redemption in October? What drove the LP to redeem at a time when I guess Operating fundamentals are still pretty healthy across the portfolio?

Speaker 2

Again, hard for me to comment on that, Robin. It's their decision. You need to ask them. They've had The ability to redeem and chose to redeem it at this time, so it's hard for me to comment what that related to. It would be some sort of, I guess a requirement for the capital from their side, but I'm not sure.

Operator

Hello? Hello? Yes. Are you done with your questions?

Speaker 8

Yes. Thank you.

Operator

Thank you. Thank you. This concludes today's question and answer session. I would like to turn the floor back over to Mahbod Nia for closing comments.

Speaker 2

Thank you everyone for joining us today. We're pleased to report another very strong quarter for Verus Residential and look forward to updating you again in due course.

Operator

Thank you. This concludes today's teleconference.

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