Good morning, and welcome to Veris Residential in Q1 2023 earnings call, conference call. All participants will be in a listen-only mode. Should you need assistance, please signal our conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would like to turn the conference over to Taryn Fielder. Please go ahead.
Good morning, everyone, and welcome to the Veris Residential Q1 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 the 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. Mahbod?
Good morning and welcome to our Q1 2023 earnings call. I'm joined today by our CFO, Amanda Lombard. We had a positive start to 2023, underpinned by continued strength in the performance of our multifamily portfolio and momentum in our strategic transformation. We closed on the sale of Harborside 1, 2, 3, despite an extremely challenging transaction market, particularly for office. Closing the Harborside 1, 2, 3 transaction represents a significant milestone in the company's continued evolution and concludes over $2 billion of non-strategic asset sales since the beginning of 2021, which, combined with the successful development and stabilization of four new multifamily buildings and one acquisition during this period, have transformed Veris Residential from primarily an office company to a pure-play multifamily company, with 99% of our NOI being derived from Class A multifamily properties.
As of March 31st, our 7,681 unit multifamily portfolio, which now includes House 25 and same store 6,691 units multifamily portfolio, were 95.9% and 96% occupied respectively. Following a seasonally slower start to the year, we have seen demand accelerating ahead of what we anticipate will be another busy leasing season. The same store portfolio achieved a blended net rental growth rate of almost 11% during the Q1. Moderating is expected, but remaining extremely robust. In particular, our Jersey City and Port Imperial assets, which represents approximately 72% of the portfolio, continued to outperform with a 13% blended net rental growth rate achieved in the Q1 . Despite the strong rental growth, Class A rents in these submarkets remain approximately 40% below average comparable Manhattan rents.
The broader North Jersey region has become one of the best performing multifamily markets in the country over the last year, driven by robust demand combined with extremely limited new supply, which only accounted for 0.3% of total inventory at the beginning of the year. This sustained revenue growth, coupled with stable controllable expenses compared to the Q1 of 2022, contributed to a 16% growth in Same store NOI. Since the beginning of the year, we've closed on over $500 million of non-strategic asset sales, releasing approximately $380 million of net proceeds and providing substantial liquidity as we enter the final phase of the company's transformation. In February, we completed our previously announced sale of the Port Imperial Hotel for $97 million, marking our exit from the hotel segment.
As previously referenced, earlier this month, we completed the sale of Harborside 1, 2, 3 for $420 million. Navigating these complex dispositions amidst ongoing market volatility is a true testament to the strength and unwavering commitment of the Veris Residential team. I'm extremely proud of their hard work and grateful for their tireless efforts in support of our strategic initiatives. Following the sale of Harborside 1, 2, 3, the company exercised its right to call Rockpoint's preferred interest in the multifamily residential portfolio on April 5th. The following day, as anticipated, Rockpoint exercised its right to defer this purchase for one year. At this time, the company anticipates that such purchase is likely to close late in the Q2 of 2024.
Turning to ESG, we continue to execute strategic initiatives at both a corporate and property level, consistent with our ongoing efforts to be a more responsible, sustainable, and inclusive multifamily company. We look forward to sharing this progress in our 2022 ESG report, which will be released later this quarter. As we enter the final phase of our transformation, our focus will be on concluding the few remaining non-strategic asset sales, repaying Rockpoint's preferred equity interest, and continuing to work with our board to maximize and unlock the company's intrinsic value on behalf of our shareholders. With that, I'm going to hand it over to Amanda, who will update you on our financial performance during the quarter.
Thanks, Mahbod. For the Q1 of 2023, net loss available to common shareholders was $0.27 per fully diluted share versus $0.13 per fully diluted share in the Q1 of last year. Before we get into discussing additional details for the quarter, I want to call out that our income statement shows significant variances from the income statement presented in the Q4 . This is the result of an accounting reclassification. Harborside 1, 2 and 3, 101 Hudson, and 111 River, as well as the hotels, have been reclassified into discontinued operations for all periods presented. This reclassification was triggered by the sale of Harborside 1, 2 and 3, further simplifies our financial statement. As Mahbod highlighted, with multifamily now making up 99% of NOI, the reclassification of our historical and current financial statements allows for greater ease of comparability.
In particular, I'd like to call out the year-over-year growth in Q1 GAAP revenue of $19 million, or nearly 50% from just a year ago. This increase has been driven primarily by organic factors such as portfolio rental growth, the stabilization of House25 and other newly developed assets, as well as the acquisition of The Jane. This substantial growth is a testament to our operating platform, the quality of our assets, and the strength and dedication of our team. Core FFO was $0.15 for the Q1 as compared to $0.05 in the Q4 . Core FFO was up quarter-over-quarter due to a variety of factors, including improved multifamily NOI, a reduction in G&A, and an increase in other income.
We also have benefited from a reduction in interest expense due to lower averages balances on the credit facility, plus the benefit of the caps on House 25 and 145 Broad Street. In February, we announced that House 25 reached stabilized occupancy. While we currently expect limited concessions being offered for renewals, concessions granted in the lease up will continue to burn off through straight-line rents during the remainder of 2023. same store NOI was up almost 16% as compared to the Q1 of last year due to increased in place rents across the portfolio. While sequential same store NOI increased by 8%, driven by higher rents and lower real estate taxes as a result of the one-time catch-up we realized in the Q4 . Turning to costs.
Controllable and non-controllable property expenses improved in large part due to seasonal adjustments, as well as, to a lesser extent, the timing of certain activities and our continued efforts to optimize operations. As for our general and administrative costs, after adjustments for one-time severance and certain stock compensation related adjustments, core G&A was $9.2 million for the Q1 . We anticipate full year cost savings through 2023 and beyond as we work to further enhance operations and optimize our cost structure through our ongoing initiatives. On to our balance sheet. The $360 million received from the sale of Harborside One, Two, and Three is held on deposit in anticipation of the repayment of Rockpoint's preferred interest, earning interest at a rate of approximately 4.5%.
This will be reported as interest in other investment income on the income statement in the Q2 . We ended the quarter with net debt to EBITDA of 10.3x, down from 18.8x in Q1 of last year, representing an improvement of approximately 8.5 turns or 45%, demonstrating a dramatic improvement in our leverage profile during a relatively short period of time. Our debt-to-undepreciated assets ratio also remained stable during the quarter. While we anticipate continued variability in earnings as we seek to conclude our transformation, we remain confident that the downward trend in leverage is sustainable. As we look towards the future and our upcoming maturities, we have only one outstanding maturity this year, which is the $59 million mortgage on one of our stabilized Boston properties.
Our debt portfolio remains well positioned with 97% of our total debt fixed and/or hedged with a weighted average maturity of 3.8 years and a weighted average interest rate of 4.4%. Harborside One, Two, and Three contributed approximately $7 million of Core FFO in the Q1 . Due to a number of one-time items, run rate is closer to $6 million a quarter. We've previously noted that one of the benefits of the transition from an office-focused portfolio to a pure-play multifamily portfolio was a smoother, more predictable income profile with less onerous CapEx requirement, in particular, given our young vintage average age of six years high quality portfolio.
You can see this starting to take shape through our Q1 results in which AFFO, which has been historically lower than Core FFO for us, converged with Core FFO at $14.9 million. This compares to the Q1 of 2022, where AFFO was almost $9 million lower than Core FFO. We would like to reaffirm our same store NOI guidance range of 4%-6%. While our Q1 results were exceptional and exceeded this range, we are only one-third of the way into the year, and we believe it is prudent to maintain guidance at the current range given the broader economic uncertainty. We will continue to monitor our portfolio and consider revising guidance should we believe it is warranted.
In conclusion, we are pleased to report another positive quarter in which we saw continued strength in rental growth, further optimization of our property and corporate level expense structure, and a substantial year-over-year reduction in our net debt to EBITDA. With that, we are ready to open the line for questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the star keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Steve Sakwa with Evercore ISI, S-I. Please go ahead.
Hey, good morning. I'm wondering if you can just talk a little bit about the conservatism you guys have baked into that 4%-6% NOI in revenue growth figure. I know you just touched on it, but with such a strong start in the Q1 , I'm just trying to put the pieces together on how to get to that 4%-6% range and just kind of what your assumptions are, especially in the back half of the year for kind of where the economy is, assuming you guys keep that 4%-6% range. Thanks.
Good morning. Thank you for the question. Look, I think the 4%-6% is obviously a full year figure. The fact that we've maintained guidance this quarter comes down to a couple of factors. We're only four months in to the year, and there are considerable potential economic headwinds and certainly uncertainty ahead. It's really acknowledging that. On the expense side, there's a degree of uncertainty as well, particularly on the non-controllable expenses, where we typically see the effects of those come through in the second half of the year. It's been a very strong start to the year. We did seek to somewhat temper expectations, and we expect rental growth to normalize to a more long-term sustainable level.
We still feel that will happen, but the reality is, given the strength in the New York Metro Area, and the very limited supply in our markets, coupled with extremely high demand for our high-quality properties, we're seeing that blended net rental growth still hold up at, you know, very robust levels at this time. Feels a little bit early in the year. We will revisit it again next quarter. Based on Q1 , it is very conceivable that we could be on the upper end of that range, but there's a long, long way to go.
Great. Thanks. That's helpful. Just one other quick one too. I'm curious, I know, you guys sold obviously Harborside four, five, six this quarter, but I'm curious as well, just kinda some of the interest you're getting at Harborside 5 and 6 and then 23 Main Street. Just given Rockpoint exercised their right to defer for one year, does it kinda change your timeline for getting these assets sold? Or just any commentary on that would be great. Thank you.
Well, yeah, look, we continue to explore our options for divesting the remaining non-strategic office assets and potentially some further rationalization of the land as well. I think that is largely independent from the Rockpoint redemption timeline. We'll apply the same approach that we have done historically. We'll seek to divest those in a thoughtful manner, seeking to maximize values, but ultimately with pragmatism in order to conclude this final phase of the transformation.
Great. Thanks. That's all for me.
Thank you.
The next question comes from Tom Catherwood with BTIG. Please go ahead.
Thank you, good morning, everybody. Maybe sticking with Rockpoint here. Kind of a two-part question. First is, what is their kind of total return, kind of holding on for another year? Is it just the 6% dividend, or is it the full kind of 11% with the pick? Are you still in discussions with them? Is there still engagement, or is it the kind of thing where it's like, you know, "Come back to us in a year, and we'll get to closing?
Good morning, Tom. Thanks for the question. It's a very relevant one. First part of that question, the only return that is guaranteed to Rockpoint during this time period is the 6%. The balance, there'll be a revaluation done and a recalculation of the redemption value accordingly as of the end of 12 months time. The 6% is the only guaranteed part of that. As to the second part of your question, your assumption should be that, as any prudent management team would, we will seek ways to see if there is some sort of a negotiated settlement that can happen prior to the timeline that's dictated in the joint venture framework.
There are no guarantees that we'll reach agreement, in which case we're bound by the terms of that joint venture agreement.
Got it. Appreciate that, Mahbod. On the blended net rental growth rates, you know, almost 11% for the quarter, what was the breakdown for that? I. Sorry if you mentioned it earlier, I just didn't hear it, between kind of new leases that went out versus renewal leases.
It was pretty even actually, Tom. They were both right around 11.
Got it. Then, commercial assets, just some cleanup questions on those. Kind of first off, do they sit within that resi JV as well? Then, you know, kind of what is the plan for those longer term? You know, do you end up holding those because they end up being complementary to the surrounding residential assets, or could those be things that you look at as non-core longer term as well?
Yeah. I assume you mean the retail and garage income, which, yes, does fit in there and is complementary to that side of the business. There are no plans to extract that from the joint venture at this time.
Got it. Then just one last quick one for me, if I can. With the kind of gains that I assume are gonna be coming in on the Harborside sale and some of the other sales that you've had, are you getting close to the point in time when you're gonna trigger the need to reinstitute the dividend just to meet REIT requirements?
Based on our projections for this year, we don't anticipate there being a mandatory dividend that would be required at this time.
Got it. That's it for me. Thanks, everyone.
Next question comes from Joshua Dennerlein with Bank of America. Please go ahead.
Yeah. Hey guys. Just kind of wanted to discuss your strategy after Rockpoint. It seemed like it was kind of a big catalyst. I know it's got the late a year, but just kind of what's the focus afterward? Is it pay down the debt, grow the portfolio, maybe clean up some of the land that was formerly in the JV encumbered by that? Just kinda curious where your head's at.
Good morning. Well, look, I think that's really ultimately a question for the board and the strategic review committee to take as and when that event occurs, taking into consideration the value of the publicly traded value of the company at that point. What I would say is we have a board and a strategic review committee that is highly aware of their fiduciary obligations and highly focused on maximization of value on behalf of shareholders.
What we've openly said in the past is that, as we conclude, the transformation of which, the repayment of Rockpoint and simplification of the capital structure is a critical part, the board's current intention is to run a more formal strategic review process in order to better understand all of the potential opportunities to unlock the substantial value that has been created for our shareholders. That hasn't changed. We're certainly making progress and are nearer to that point with the sale of Harborside 123, we have a little bit more work to do. Between now and repayment of Rockpoint, our focus as a management team will remain the maximization of entity value through the completion of the strategic plan.
Okay. Just looking ahead to 2024, if your House 25 debt comes due, just kinda curious what your thoughts are on putting permanent debt on that asset.
Yeah. The current plan is to refinance it. It's obviously an extremely high quality property, very well leased and performing extremely well, on the income side. There's still a good bid for refinancing that asset and your assumption should be that we would seek to refinance it.
Thank you.
Thank you.
Next question comes from Eric Wolfe with Citi. Please go ahead.
Hey, thanks for taking my questions. I guess just to follow up on the Rockpoint redemption. I guess at this point, do you have a sense for what value Rockpoint would accept for them to allow you to redeem early? I guess, you know, before they extended their sort of option to go to May 2024, did they give you a number that would, you know, allowed you to redeem right away?
Good morning. I'm not really in a position to be able to disclose any details of private discussions that may or may not be happening with them. As I said earlier, you should assume that we have and will seek to find some sort of a negotiated settlement that could happen sooner than the framework that is dictated in the joint venture agreement. There are no guarantees that that will happen, in which case we are bound by the timeline that is dictated in that joint venture agreement.
Understood. Then you broke out on your NAV page, Harborside 5 and 6, 23 Main. looks like you put it at book value. I guess, should we take from that, you know, this is a reasonably conservative estimate of where the assets would transact, or is that just sort of a placeholder at book value for now?
I would think of it more as just a placeholder. It's not really intended to be a guide on value. We will obviously, as we have done with the $2 billion of office that we've sold over the last two years, seek to maximize proceeds from the sale of those office buildings. That's really just intended to be, you know, a placeholder of where book value sits, not an indication of value.
Got it. I guess last question. You know, we've heard from some of your peers how strong the New York market has been surprisingly so through the Q1 . Just curious what you're seeing in terms of market rents and, you know, where loss to lease in the portfolio has gone?
Yeah, I think that's absolutely right. you know, we do, as I mentioned in my scripted remarks as well, having younger vintage, very high quality, very well-amenitized properties right across the river from Manhattan at a still 40% average discount to rents on that side of the river, and very limited supply is what's really fueling the rental growth that you're seeing. That is, at this point, you know, still holding up and remains pretty robust.
Got it. I guess, is there a way to quantify how much upside leaves marking rents to market today?
Yeah. The loss to lease in the portfolio, we're capturing it at a pretty rapid rate, as you can see from the blended net rental growth. We're in the kind of 1%-2% loss to lease. Market rents are still continuing to grow from there. At this point, we're reiterating the 4%-6% revenue growth for the year. You know, take from that what you will. That translates also into 4%-6% NOI growth. As I said earlier, based on the Q1 , you'd certainly conclude that we should end the year to the higher end of that range, maybe even exceed that range. There's still... we're only four months into the year, so a long way to go.
Understood. Thanks for your time.
Thank you.
Next question comes from Derek Johnston with Deutsche Bank. Please go ahead.
Hey, everybody. Good morning. You know, I guess attacking that another way, Mahbod, would be, you know, so far in 2Q, has leasing demand remained resilient, for the multifamily portfolio, which is the really only portfolio? Are you seeing really any changes in demand, right now or as the strength in Q1 continued, you know, year to date here in 2Q?
Good morning. It's a good question. The strength has continued. We are still seeing blended net rental growth rates of double digit. The comments I made around the demand for the assets and the extremely limited supply now and then for the foreseeable future is still allowing us to be able to push rents at pretty compelling levels.
Oh, okay. Thanks. I mean, a lot's been asked already. You know, just please remind me, I know it's in the sop, but, you know, Harborside 5, 6 23 Main Street, these are relatively unencumbered assets, correct?
That's correct. There's no leverage on those assets.
Excellent. When I look at the cash position, you know, $393 million, I believe, net debt to EBITDA 10.3 times, I would think the majority of that cash is gonna have to be held in escrow for Rockpoint, if I'm correct. Then you did terminate, you know, your existing credit facilities, which would leave the coffers, you know, probably, you know, pretty bare, you know, come next year. I'm assuming that, you know, you have some pretty high degree of confidence in the disposition of 5, 6 and 23 Main, where you'd be able to perhaps, you know, increase your cash position, you know, of course, outside of generating free cash flow. What, where would you poke holes in that? Where would you agree?
You know, what's your cash outlook? I guess lastly, you know, the net debt to EBITDA 10.3 times, you know, what's the end of year goal on that? I'm sorry for the convoluted question.
Well, I think the first point to make is that the business now having 99% of its NOI generated from multifamily and that business performing extremely well, allows us to be able to actually generate a certain level of recurring cash flow from the business, which, you know, we've had a lot of volatility, understandably given the transformation over the past couple of years, and that hasn't come to an end. I think we are at a point where we have more visibility than we have done for some time on just the cash flow generation from business.
Beyond that, as you correctly said, we still have a substantial amount of equity that is tied in the remaining non-strategic office assets, not to mention still a substantial land bank that could potentially be rationalized to some further degree to unlock valuable equity that could be put to a higher and better use.
Thirdly, we being now, say a much more desirable, from a credit perspective, company to lend to, you should assume I feel confident that beyond the cash flow from operations, beyond cash release from non-strategic asset sales and potentially further rationalization of the bank, we feel confident in our ability to be able to source third party finance, to the extent required as well to plug any potential holes in liquidity needs over the next year or two.
No, thank you. Thank you for that detailed answer. That's it for me.
Thank you very much.
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you everyone for joining us today. We're pleased to report another very positive quarter of operational performance and look forward to continuing to keep you updated next quarter.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.