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

Good morning, everyone, and welcome to Veris Residential's fourth quarter 2023 earnings conference call. I would like to remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the federal securities 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?

Thank you, Taryn, and good morning, everyone. Over the past three years at Veris Residential, we've accomplished a number of key strategic objectives, including $2.5 billion of non-strategic asset sales and the repayment of approximately $1 billion in net debt, delevering, derisking and strengthening our balance sheet. We also negotiated the early redemption of Rockpoint's preferred interest, strategically grew our multifamily portfolio by nearly 2,000 units through the development and stabilization of our four new properties and one acquisition, reinstated the dividend and built a best-in-class vertically integrated platform encompassing new personnel, processes and technologies. As a result, we have successfully transformed the company from what was once a complex, predominantly office REIT to a pure-play multifamily REIT. Our focus now turns to the significant opportunities available to us for continued value creation that I'd broadly categorize into three areas. First, continued operational outperformance through a number of platform and portfolio optimization strategies; second, capital allocation initiatives focused on generating earnings and value accretion to further boost the positive baseline performance from our multifamily portfolio; and third, further strengthening of our balance sheet. While a degree of earnings volatility is inevitable until we reach a mature state as a company, through a combination of these initiatives, we believe we have the potential to deliver continued relative outperformance as we seek to further enhance entity value for our shareholders over time. I'll discuss this in further detail, but first, a few words regarding our markets and the economic outlook. Unlike many national markets that are facing a glut of near-term supply, the Northeast is expected to see a modest 1.5% inventory change in 2024, well below the national average of 3.5%, supporting the case for a continued normalized level of rental growth in our markets. Almost half of our properties are…

Thanks, Mahbod. For the fourth quarter and full year of 2023, net loss available to common shareholders was $0.06 and $1.22, respectively, per fully diluted share versus net income of $0.34 and loss of $0.63 per fully diluted share in the fourth quarter and full year of 2022. Core FFO per share was $0.12 and $0.53 for the fourth quarter and full year as compared to $0.12 last quarter and $0.05 and $0.44 for the fourth quarter and full year of 2022. Year-over-year, core FFO was up 20%, driven by same-store portfolio growth, a full year of operations for The James, stabilization of Haus25 and cost reductions in both overhead and property operating costs. We realized this increase in core FFO despite the loss of $47 million in NOI from offices and the three hotels that we used to own. AFFO per share grew fivefold year-over-year to $0.62 per share, up from $0.12 in 2022, reflecting the impact of shedding CapEx-intensive office assets in addition to the factors noted driving core FFO's 20% growth. Given we are now fully a multifamily company, next quarter, we anticipate modifying our calculation of AFFO to only back out recurring CapEx required to maintain our assets, and we will exclude revenue-generating capital expenditures related to retail leasing in line with our peers. For the fourth quarter, this adjustment would have only been $300,000, so it's not significant and isn't expected to be in the future. Turning to G&A. After adjustments for noncash stock compensation and severance payments. G&A was $36.5 million for the year, representing a 13% reduction as compared to 2022 and a 21% reduction since 2021. As has been the case in the past, fourth quarter G&A was higher than third quarter due to anticipated seasonal items. We've made significant progress in…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Yes. Thanks, good morning, Mahbod and Amanda. Maybe just a couple of things on guidance. Now that you're basically fully transitioned to being an apartment company, could you just discuss what's embedded in the revenue growth as it relates to kind of occupancy, maybe your blended rent spread, and maybe any bad debt trends that you could highlight. Thanks.

Good morning, Steve. It's a good question. On the revenue side, as Amanda said in the scripted remarks, the assumption is that the majority around 3.5% of that is recapture of lost to lease and then 1% related to Haus. In terms of occupancy, it's not really the primary metric that I would say we target, I would say, that we do try to maintain that around the 95%, understanding that it may fluctuate from time to time slightly above or below that. But our strategy very much is focused on the maximization of NOI, and that's what drives us forward. So if you're referring to the slight dip in occupancy, that's not particularly troubling at this point. And we're encouraged to see that the blended net rental spreads are still positive and around the mid-single-digit is where we see them for the next couple of months.

Okay. I guess, what I'm really trying to get at is you guys obviously had a great 2023 and you handily beat your expectations. And as you sit here today, you've got earning on the portfolio that might get you most of the way towards your revenue growth. So does that mean you're really not assuming much in the way of market rent growth this year? Or I guess, how conservative might you have been on setting the top line targets just given the macro uncertainty?

No, we've assumed modest rental growth for this year. That's in that lost the lease recapture figure that I gave you. The reality is that the fundamentals here, as I mentioned, still feel strong. Not as strong as they were, but still strong on a relative basis compared to some of the other markets that we've seen supply challenges primarily beginning to feed in and cause some softening. So that's reflected in our guidance. And we are assuming some modest rental growth this year and that's in the number in the loss to lease.

Okay. And just – I know Amanda touched on it. Just on the FFO and the bridge, I guess. I think if I hear you correctly, you're saying that the positive NOI growth is kind of getting offset by higher interest expense and some one-time items in 2023 that don't recur in 2024. Is that kind of how we're getting from 53 in 2023 down to 51 at the midpoint? Or again, is there anything else that might be dragging FFO down in 2024?

It's not quite correct, but almost, I think the way, I would think about it is you had around, and this was – we communicated this at the time that we had around $5 million of deposit income last year, largely related to the $350 million of cash that we were sitting on once we closed Harborside. So that's $0.05 that we won't get this year. And then you had another, call it, $0.03 also of other one-time positive non-recurring contributions to earnings, the largest of which was payment received in a settlement that, again, we don't see recurring items. So that’s $0.08, $0.09of one-time items last year that were in core FFO that you won't get. And so if you adjust the $0.53 fully annualized, the full year core FFO $0.53 by that you get to kind of $0.44, $0.45 excluding those one-time items. We also had fairly significant loss of NOI from the sale of office, but that was offset by the interest payments on the preferred that we saved by repaying rock points. So that was kind of a wash. And so you're kind of at that $0.44, $0.45 excluding the one-time items and then you look at that relative to the guidance and actually the guidance does tie with the NOI growth that we're projecting even at the midpoint, you're at kind of just over $0.50, $0.51 relative to that $0.44, $0.45 last year once you strip out the one-time items.

Great. Thanks. That’s it for me.

Thank you, Steve.

Our next question comes from the line of Anthony Paolone with JPMorgan. Please proceed with your question.

Thanks. Good morning. Maybe just staying on some of these guidance items, Amanda in that flattish interest expense you noted for 2024 over 2023, what does that assume in terms of that step up in rate you mentioned for the one mortgage and also the refinancing of the couple of maturities later in the year?

Sure. Good morning. So first off, I think if you look at our debt portfolio today, and we did nothing assumed there was no refinancings, we would have lower interest expense this year of about $2 million due to the refinancings we did last year on House and Portside. So right there you have a $0.02 savings. And then when you look at the three refinancings we have this year, we assumed that we would refinance them at the most advantageous market terms. And then you have to put into perspective when they would actually get paid off. The largest of the three loans maturing this year, Liberty Towers, doesn’t mature until October and so the existing rate is going to be in place for basically three quarters of the year. So you put those factors together and that’s roughly how you get it.

Yes. So just to add to that, if I may. We are – like I mentioned in the scripted remarks looking at a range of alternatives to refinance those loans, given the quality of the assets, given the asset class that we’re in, the fortunate thing is that despite tight credit conditions, there is a lot of lender interest to lend on those. And so we’re evaluating a number of options, but generically have assumed that those are refinanced in a similar way to the refinancings that we affected last year with Portside 1 and House 25, with some level of debt pay down and then an interest reset. That combined with the timing of those refinancings results in interest expense being broadly flat this year.

Okay. And then just also on the balance sheet you put in place an ATM program. Can you comment on just how you’re thinking about that, when you might use it, or just how it fits in?

Sure. So this is a program that actually we’ve had since 2021. It’s just a refresh of that program. It’s common and I would say prudent for companies such as us to have one. And you’ll see the other companies do have one. Hasn’t been utilized thus far, but it’s another source of capital available to the company, should it be required. Today we have significant liquidity, $95 million of liquidity between cash and availability under the line, and $140 million of assets under binding contract, as well as a business that is throwing off surplus cash flow, including post dividends. So I think we’re in a healthy position in terms of liquidity, but this is just prudent to have it in place.

Okay. And then just last one for me. Amanda, I think you mentioned recurring CapEx, like $300,000 or something in the fourth quarter. But if we think ahead, if we think about most apartment companies, maybe 10% of NOI or something thereabouts might be a level of CapEx over time. Like is there any way to think about that level for you all going forward? I know you said you wanted to delineate between revenue producing and recurring, but just the $300,000 just strikes me as a bit low. And so just wondering if you could frame that a bit more.

Yes, sure. I think – I’ll start off and then Mahbod can jump in here if you need to. So, I think, yes, the $300,000 is really low because we don’t have a lot of revenue-generating CapEx in our portfolio. That primarily relates to the retail leasing at our multifamily assets. And so, I think I don’t have a target for you. We haven’t given guidance on where we see those figures, but it does represent a small portion of our overall spend. The one thing I would add is, we’re still leasing up Haus and so there will be a little bit of spend next year, but it’s not material as I stated earlier, but that is something that we will be working on next year.

Yes. Look, I think there’s very little vacancy in the portfolio. The change that Amanda mentioned is really more reflective of our transformation from an office [ph] company to a multifamily company, and there could be a vast differential there in the lease-up costs and the revenue one has to – the CapEx one has to invest to be able to generate revenue. So that’s really what that referred to. And today, it’s mostly just the retail on our side, and that’s sort of a huge portion of our portfolio.

Okay, thank you.

Thank you.

Our next question comes from the line of Josh Dennerlein with Bank of America. Please proceed with your question.

Yes, good morning everyone. Just looking through the investor presentation you posted online, I noticed Slide 17 about your ongoing portfolio optimization strategies. Just kind of curious if you’ve kind of – if you could provide any color on the potential margin expansion opportunity from all these initiatives?

Josh, thank you for the question. We haven’t put a number on that at this point, but the reality is that there are a number of initiatives, some targeting revenue, some more the expense side. And then as you mentioned, an element of capital investment as well with very much a disciplined return on invested capital approach to dollars that a spent there. And so really, what we’re saying here is that there is real potential for optimization and growth, both in NOI and in margins through affecting a multipronged strategy over time. But the reality is some of those initiatives are more near-term and have a near-term impact, some of the more medium to long-term. We gave the example of Liberty Towers, for example, which has the potential to increase our earnings our 2023 earnings by 11% from one asset alone, but that’s a four-year initiative. And in the first year, we don’t anticipate seeing any benefit from that through 2024. So, it’s difficult to give you an exact number over an exact period at this point. But we do believe that over time, we can increase both the NOI and the margin through these initiatives.

And speaking of Liberty Towers, I guess have you – is it there a way to quantify the number of projects like this in your portfolio? Or how are you thinking about the opportunity set?

We're looking at that, and there potentially could be some others we're working through. As I said, any investment we make, whether it's within our portfolio or otherwise, there's a very disciplined approach to evaluating returns on that investment. And so this is the largest, most impactful one, given the size of the asset and the age of the asset relative to the rest of the portfolio, which is why it's the primary focus but there could be others as well.

Great. Thanks for the time.

Thank you. Thanks for the question.

Our next question comes from the line of Eric Wolfe with Citi. Please proceed with your question.

Hey, good morning. We've seen a couple headlines recently about peers being subject to rent control at their properties. Was just curious if you're doing anything differently from an operating or compliance perspective to lower that risk?

Good morning. Thanks for the question. Well, 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. And we have the added advantage that we have younger vintage properties and have developed most of them. So it's not a concern for us at this time.

Fair enough. And then I know you've done a lot of work in terms of simplifying structure of the company, simplifying JVs and the structure there. I guess, I was just curious if there's anything left for you to do in terms of cleaning those up. The upside that could potentially come from that. And then just as far as being able to sort of freely sell them if you wanted to, like do you have the ability to do that? And can buyers assume the debt without some type of penalty there?

Your question was in relation to the joint ventures?

Yes.

Yes, it's a good question. We do have a, obviously, the largest joint venture was the Rockpoint joint venture, but there are a number of others, and we do have a not insignificant sum of equity that is embedded within those joint ventures. So as part of our capital allocation component of this optimization, we are looking at those and looking at both the managed and the non managed joint ventures, really understanding what sort of returns we are deriving from the equity that's within those joint ventures, those investments, and what our rights are vis-à-vis a potential exit. And so there potentially could be some further cleanup there to release equity and put it to a higher and better use, but nothing to announce today.

Okay, thank you.

Thank you.

Our next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.

Excellent. Thank you and good morning, everyone. It was great to see Harborside 5 going into contract. Know that was a significant lift. Mahbod, you've previously discussed the inefficiencies of running two disparate platforms at the same time with office going away. What are you figuring for G&A and other cost savings this year?

Good morning, Tom. Well, I think it's fair to say that we have been – if your question is that as we've simplified to one asset class from two, are there further savings to come operationally from that? We have been doing that gradually over time. So, this was our last office asset, but we sold 51 properties, the majority of which over 30, you had 33, which were office over the last three years. And so, as we've gone through this rapid transformation, we've also been seeking out opportunities to generate efficiencies and organizational structure and cost structure as a result. And so, it's not like that cost is all there and now we can suddenly rip the Band-Aid off and reap a huge saving. It's been happening over time gradually. Having said that, there is potential for some further cost savings going forward, not necessarily related to the sale of Harborside 5. More generally, we've mentioned the repayment of Rockpoint and the obligations that we had under that joint venture. Some of those savings don't really kick in until the latter part of this year given some continuing obligations that we have there. So, a long way of saying that there could be some further efficiencies but there is a base cost to running a public company. And we've already reduced G&A pretty significantly over the last three years to what is now the lowest level in real terms in over two decades and very much consistent with the mid-cap peer group. So, I don't think we're of the average when you compare us to the right size peer and scale is obviously the biggest factor in determining the metrics you'll be looking at, but there could be potentially some further room to reduce that from this point. What the offset to that is, we're still faced with inflation, yes, it's a more modest level of inflation, but it's still there. And so, timing plays a part in that as well and forces that go against us could eat into that to some extent.

Got it. Appreciate those thoughts. And then Mahbod, you mentioned that Liberty Towers project is, if I heard you correct, is kind of a four-year probably, I assume, multiphase project. But can you give us some more color maybe on both the scope and cost? And I understand that if it's a four-year project cost maybe isn't fully nailed down, but maybe what you're expecting to spend towards that this year?

Well, it's a pretty comprehensive refurbishment of that property ranging from the units to the communal and amenity space. And so, the idea really is to we own properties in the area. We know where rents are for newer products. We know where the rents are for that property. And so, the return on invested CapEx assessment is a relatively easy one for us to be able to do in an insightful way. And so, it's a range of things we'll be targeting from actually from units to the broader areas. Total cost, we anticipate to be somewhere in the region of $30 million. But obviously, that's over a four-year period that, that will be spent and resulting in very accretive effects to both earnings and value as a result.

Got it. And then I think it might have been Josh before that asked about other kind of value-add projects in the pipeline, and you provided some thoughts on that. But I think you've got – it appears you've got an ongoing one or at least some ongoing work at the Boulevard collection. Is that a refresh there? Or is that kind of more of just a smaller facelift?

Yes. That's, I would say, a smaller refresh rather than a comprehensive project equivalent to the Liberty Towers one.

Got it. And then last one for me. Amanda, you mentioned one of the caps burning off midyear, and I think you have at least one, if not a few more, that burn off towards the end of the year. What are you building into your sources and uses for the year as far as capital to recast those caps?

So, in my – as I said earlier, the one loan that has a rate reset in the middle of the year, it's actually a rate reset, it's not like a cap that burns off. And so, our intention there is to reset that loan to market rates, whether that's with new refinancing or other options. And then as you noted, there are other caps that expire throughout the year. Generally speaking, we assume that we replaced them in our – and it's like – we generally assume that we replace them.

Okay, that's it for me. Thanks, everyone.

Thank you.

Thank you. Our final question will be a follow-up from Steve Sakwa with Evercore ISI. Please proceed with your question.

Yes. Thanks, Mahbod. I just wanted to circle back on the question I had asked about the guidance. And you mentioned that you're going to lose interest income of about $5 million. Presumably, that cash was earning interest. But presumably, you did something with that cash, either debt pay down or you bought an asset, or you helped fund the development. But I guess I would think that there's some economic return on that cash, but that doesn't seem to be in the thought process. So, I guess what are we missing on that bridge there because it wouldn't seem that that $0.05 completely disappears.

Well, it went towards went towards repaying Rockpoint. So, the way I thought to simplistically lay it out is if you look at the saving from repaying Rockpoint, it's about $14 million, if you look at the NOI loss from office, it's about $14 million. So those two things are largely a wash. And then – but you had $5 million of interest income while you were sitting on that cash weighting to repay Rockpoint plus the other $3 million of onetime nonrecurring and those we don't get the benefit from again this year. So, you could present that a number of different ways, but simplistically, that's how I think about it, you ultimately had a level of nonrecurring income to the tune of $0.08, $0.09, last year, which takes you down from that $53 million [ph] to the mid-40s and then you build back up from there. So, earnings-wise, yes, the upper end of the range is flat on last year if you look at it just in absolute terms, but it's higher quality recurring earnings relative to what we have last year.

Got it. Okay. That makes sense. Thanks for the clarification.

Of course. Thanks, Steve.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Well, thank you, everyone, for joining us again this quarter. We're pleased to announce another period of both strategic progress and very strong operational performance and look forward to updating you again next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.