Ladies and gentlemen, greetings, and welcome to the Veris Residential Inc. Second 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 at Veris Residential. Please go ahead.

Good morning, everyone, and welcome to Veris Residential's Second 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 laws. 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. The advancements made during this past quarter cements our strategic transformation to a pure-play multifamily REIT. We continue to build on our tremendous momentum, achieving a number of significant milestones, including a set of five additional nonstrategic assets despite an extremely challenging transaction market, a negotiated early redemption of Rockpoint's preferred interest in Veris Residential Trust, the reinstatement of our dividend and continued operational outperformance, achieving 12% blended net rental growth and 22% same-store NOI growth despite the broader softening of rents across the sector. The $360 million of proceeds released from the sale of Harborside 1, 2 and 3 in April provide us with substantial liquidity, allowing for the core Rockpoint's preferred interest, which they subsequently deferred for 12 months. Since then, we have signed binding agreements for the sale of four additional nonstrategic land plots, 107 Morgan Street, Harborside 4, and 2 and 3 Campus for $142 million as well as Harborside 6 for $46 million, alongside 23 Main Street, which also remains under contract for $17 million. Together, these transactions enabled us to fund an early negotiated redemption of Rockpoint's preferred interest of $520 million, which we closed on earlier this week utilizing a new revolving credit facility and term loan as a bridge, which Amanda will discuss in greater detail. The early negotiated redemption of Rockpoint removes the uncertainty associated with the redemption process under the joint venture agreement, substantially simplifies the company's overall structure while maximizing our strategic and operational flexibility moving forward. It is also accretive, including a saving of $24 million in annual interest while paving the way for additional expense optimization in 2024. With these latest accomplishments, the Board of Directors has made the decision to reinstate the payment of an ordinary quarterly dividend beginning…

Thanks, Mahbod. For the second quarter of 2023, net loss available to common shareholders was $0.30 per fully diluted share versus net income of $0.29 per fully diluted share in the second quarter of last year. After sizing our right to call Rockpoint's preferred interest in Veris Residential Trust has resulted in a reclassification of Rockpoint's interest from the mezzanine equity section of the balance sheet, a section between liabilities and stockholders' equity to liabilities as mandatorily redeemable non-controlling interest. In addition, changes in the value of Rockpoint's interest plus the current portion of their 6% preferred interest are now included on the income statement as interest cost of mandatorily redeemable non-controlling interest. I also wanted to call out that to remain consistent with the prior presentation, we are excluding the change in value of the Rockpoint interest from Core FFO, AFFO and EBITDA. Core FFO per share was $0.16 for the second quarter, an increase of $0.01 per share compared to the first quarter, while core AFFO per share was $0.19 as compared to $0.15 last quarter. Core FFO of $0.16 per share this quarter includes onetime adjusting of $0.02 per share related to real estate taxes and almost $0.03 per share related to the annual early tax credit. Same-store NOI was up almost 22% quarter-over-quarter and almost 19% year-over-year due to increase in-place rents across the portfolio as well as the successful resolution of two ongoing tax appeals in our Jersey City multifamily portfolio. Sequential same-store NOI increased by 13%, driven by higher rents and lower real estate taxes. I'd also like to remind everyone that we have excluded the early tax credit distribution of $2.6 million from our same-store metrics as we have done in prior years. Our controllable expenses were up 2.6% year-to-date as compared to…

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jay Poskitt with Evercore ISI. Please go ahead.

Hey, good morning. I was wondering if you just talk about the timing for closing of those nonstrategic assets and kind of what the buyer pool is like. And just any worries about the buyers getting financing.

Good morning and thank you for the question. [Technical Difficulty] varied group. So those are individual transactions that we've announced. It's a pretty varied group. But I would say all reputable parties that are recognized by us. And in terms of timing, our expectation would be to close those I suspect [Technical Difficulty] next year. And as we've done in the past, it's now over two years, we've been transacting in very challenging transaction markets and the team has been doing a phenomenal job of getting transactions over the line. And so consistent with past practice, we've taken all the steps that we are able to, to mitigate the transaction risk by making contract binding and taking our deposits.

Great. That's helpful. And then just one other one. Clearly, a very strong rent growth through the first half of the year. And you mentioned that you're starting to see some weakness. So I was just curious if you could talk about how you're thinking about rent growth in the next couple of quarters and where you're seeing that weakness specifically?

It was really more of a [Technical Difficulty] obviously, across the apartment sector, we've seen a considerable weakening. Our portfolio has held up given the markets we're in, the quality of the assets and the incredible team we have that's extracting maximum value from them. The comment that we see it moderating at a lower level than the 12% really reflects the fact that we are now entering what is a typically slower leasing season in the apartment sector and we're lapping a period of extremely strong rental growth. So this is now growth over and above that growth. And so our expectation, we see that somewhat moderate.

Great. Thanks. That's all from me.

Thank you.

Thank you. Our next question is from Eric Wolfe with Citi. Please go ahead.

Hi. Good morning. Thanks for taking my questions. For the Rockpoint redemption, can you just talk about how the two sides came up with the value there at $520 million and sort of what it implies for the underlying value of the portfolio?

Sure. Good morning. Well, look, you've -- as you've seen over the last few years, you've got a Board and the management team who are pretty proactive in the way we've approached this transformation, and this is really just the latest step that reflects that. I saw a couple of the notes and the commentary around the valuation. Quite simply that was -- that piece was -- preferred interest piece was marked at $487 million of $630 million. So you've got to take into consideration though that by terminating at least a year earlier than we otherwise would have been able to -- and I just remind everyone that there was -- the redemption process comes with some uncertainty or came with some uncertainty on the partnership agreement, both in terms of value, timing and so you're taking that all off the table. But even if you assumed a redemption 12 months from now, that's $24 million of interest on top of that $487million, which puts you at $511 million. You could piggyback that interest won't make a meaningful difference to where we ended up. So we paid a minor premium of less than 2% in nominal terms over what we would otherwise owe Rockpoint based on the latest redemption values of $630 million. But in doing so, obviously, as I mentioned in the commentary, free the company up to -- both operationally and strategically to operate without the restrictions and encumbrances that came with that partnership agreement.

Understood. And I guess if we just sort of subtract off the saved interest expense because I get your point there, call it, a value of sort of $490 million. I guess, is there just anything you can say about sort of how you value the portfolio. If there's a cap rate that was applied to it? Is it an appraisal that was applied to the overall portfolio? Just trying to understand sort of when you back into that $490 million, what it implies for the rest of the portfolio?

Well, the $487 million the reality is this is really just a negotiated agreement. But the basis, the $487 million is what the redemption value would have been based on best joint estimate of value today, notwithstanding it's difficult to fully gauge where value is given limited transaction volumes in the market, but that is our best estimate of where value -- what the redemption value would have been based on valuation today. And then as I said, you've got the interest component that we would have owed over the next 12 months, assuming it would have been a 12-month redemption process and wouldn't run on longer. And I also remind you there are other directions this could have taken. Rockpoint had the ability to equitize their position. But assuming a redemption in 12 months that have been $24 million and then the balances is really just they negotiated some to de-risk this haul to take all the uncertainty off the table and associated with the redemption process and do a transaction today.

Understood. And then just last question. If I think about your revised same-store NOI growth guidance for the year, just trying to understand what implies for how multifamily NOI will trend for the rest of the year in third quarter, fourth quarter. Effectively, what I'm trying to figure out is if this quarter represents sort of the peak in terms of NOI on for multifamily or if we would expect to see that kind of grow sequentially in the third and fourth quarter as well?

It's difficult to tell, which is really why it's a full year number. We decided [Technical Difficulty] quarter because we're now six months in [Technical Difficulty] the way into the year came out the gates very strong in terms of performance but our expectations were really that we would see rents moderate across the sector, given the economic uncertainty. And then on the expense side, of course, there's still continued uncertainty with inflation. And then on the non-controllable expenses, those typically come in, in the second half of the year and they caught us as a surprise last year. So now that we're [Technical Difficulty] across the sector have largely materialized. You have seen rents slow down considerably and even turn negative. But in our portfolio, they've held up remarkably well and continue to hold up well. We do see that slowing down into the second half of the [Technical Difficulty] uncertainty associated with particularly the non-controllable side of [Technical Difficulty] out of that, that the NOI equation [Technical Difficulty] what we've achieved in the last six months, our best estimate of where we'll land in terms of revenue for the next month, but it's difficult to say if that will be next quarter or the final quarter. It is a slower leasing period for the whole sector, as I mentioned, so we should assume some moderation of the rental side. And our best guess at where we land on expenses.

Thank you very much.

So that was [Technical Difficulty] for 10% to 12% NOI guidance for the full year.

Understood. Thank you.

Thank you.

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

Yeah, hey guys. Maybe just wanted to step back and ask some of the big picture question. You've got the Rockport JV look so much behind you. I guess what are you thinking going forward as far as your main strategic interest? Like what are you going to really focus your time and energy on?

Well, our job as a management team near term is to focus on closing the assets under binding contract, repaying the term loan and the revolving credit facility, continuing to make progress with remaining nonstrategic assets, the largest one being Harborside 5. And really now with the greater operational flexibility that we have as a company without, as I said, the encumbrances and restrictions that came with our joint venture, continuing to focus on the operational side to really fully extract value from the portfolio. And that is a multipronged approach with various initiatives that seek to organically extract value within the portfolio. Some of them may be some further equity reallocation, could be value-add opportunities within the portfolio, but all things that we're looking at now and look forward to updating you on in due course.

Awesome. And then what's the current interest level in Harborside 5 and the remaining nonstrategic land?

Well, nothing really to provide in terms of an update. We're continuing to look at our options with regard to the sale of Harborside 5 and potentially further land, but really nothing further to comment. It's not a -- as you know, it's not an easy transaction market for office and it's not an easy transaction market for office in Jersey City, but it also hasn't been for the last three years. And so it's challenging and the team has done a phenomenal job of navigating a difficult transaction markets over the past two, three years to exit 31 office properties and $2 billion of nonstrategic assets. So we're working on it, but nothing to update today.

Thanks for the time.

Thank you.

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

Thank you. Good morning, everyone. First off, well done on the Rockpoint redemption. Mahbod, the Board has been really transparent in its commitment to a strategic review, the press release that it put out and you put out back in January really spoke to that. It talked about doing a strategic review in due course. Obviously, a big part of that was the Rockpoint redemption. As we move forward from here, are there any other gating events that would kind of trigger or accelerate the start of that strategic review? And what are the thoughts kind of expectations as far as when that could start.

Good morning, Tom, and thank you for the question. Look, what the Board said in the -- I believe it was January 18th press release was that as we conclude the transformation and subject to other relevant factors, including market conditions, the Board will evaluate potentially strategic process. The reality is your question is really one for the Board and the Strategic Review Committee. What I can say we have an Independent Board that are highly focused on their fiduciary obligations and have and will continue to evaluate all options in their pursuit of maximizing long-term shareholder value on behalf of our shareholders. But I don't have any update to provide you on that today.

Understood. Thank you for that. And then on the land sales, you guys had just your land values down a couple of quarters ago at some point in time either last year or the year before. It looks like these sales came in kind of well ahead of maybe what you had internally or at least what it all summed up to. A) is that correct? Were you pleasantly surprised with the land values there? And then what does that mean for the remainder? I see you're carrying about $210 million of value for the resi land still. Have you adjusted that based on these recent sales? Or is that still based on the prior methodology?

Good questions. So in relation to the land parcels on the contract, all we've done is mark them to actual sales price versus the value that we were assuming for those parcels prior to signing those contracts. So that uplift is just -- it just reflects where we ended up in those transactions. We have not used that as a basis to raise the value of the remaining land parcels more expected call it, carrying value, but our internal value of the remaining land parcels. We have not done that. As for what our intention is with the remaining land parcels remains to be seen. I think this has been another tremendous quarter of progress and really transformational for the company with the state of the assets under binding contract, when we repay -- once we repay the term loan and RCF it could be something of a -- should be something of a surplus there. There's also, as you say, equity still tied up in land in Harborside 5. And so we'll be having discussions with the Board around strategy and the highest and best use to reallocate equity that's tied up that we may look to release. With Harborside 5, that's clear that at some point, there will be an exit there. We haven't made a decision with regard to the land.

Appreciate it, Mahbod. Thank you for that. Then last one for me maybe Amanda is you mentioned the tax appeals and that seemed to carry through your property tax expenses this quarter. For the 2Q numbers, did that include a reimbursement? Or is that a good run rate going forward? And if it's not a good run rate, what would that delta look like after it burns off?

Yes. So I think the way to look at it, we put a reconciliation in the supplemental that shows you we had about $0.03 worth of reduction in tax expense this quarter related to the real estate tax appeal and approximately $0.02 worth of that is related to prior periods. So I would think about it as like a $0.01 lower is the actual period impact.

Per quarter?

Yes.

Got it. Really helpful. Thanks, everyone.

Thank you, Tom.

Thank you. Our next question comes from the line of John Pawlowski with Green Street. Please go ahead.

Good morning. Thanks for the time.

Good morning.

Mahbod, just a few follow-up questions to your prior comments. I'm just curious if you could -- how are you viewing the relative attractiveness in terms of the use of the capital at this point between paying down more debt, acquisitions, some future dividend increases?

Well, John, at this point, the priority really is to close on the assets on the binding contract and ultimately repay the term loan and the RCF. So that is the priority. It is repayment of those facilities. Beyond that, that's the decision to be made at the appropriate time when we have access to that capital as the transactions close, based on the opportunities that are available to us and ultimately, the Board, and we're working together determined to be the highest and best use at that point in time.

Okay. But at this point, do you anticipate any type of external growth for the balance of this year, either through acquisitions or new development starts?

We've got six months of this year left, so I'm not going to commit to one or another. No decision has been made. But as I said, the midterm priority is closing these sales, the $205 million of asset on contract, $140 million or so of transitional debt to repay. That's the priority. Beyond that, it's a question of when we release equity and how much and what the highest and best use is determined for that equity at that point in time.

Okay. Last one for me. Could you give us a sense what type of renewal rate increases you're sending out today? And what type of new lease growth you expect in the second half of this year as you lap the really difficult comps?

Yes, it's a good question. So both, I would say, on a blended basis, you're landing in the mid- to high single-digits relative to the 12% that we posted last quarter.

All right. Thanks for the time.

Thank you.

Thank you. Our next question comes from the line of Michael Lewis with Truist Securities. Please go ahead.

Great. Thank you. You were asked and answered most of my questions about Rockpoint, but I just have one more. Could you have just waited to redeem the Rockpoint interest after some of these sales had closed? It might not be a big risk that the deals will close, but you're taking some risk with a relatively expensive bridge loan. I don't see any specific reason to kind of rush it or accelerate it. Why the decision to take a loan and do it rather than just close the assets and do it then?

We could have done that. The reality is, as I said, the -- there is value, significant value in the operational and strategic flexibility that this brings us. And the loan on the face of it is expensive and that's reflective of where rates are today in terms of margin, I don't think it is expensive for a transitional facility. And you have to bear in mind that it's repaying what was 6% current preferred debt or preferred equity, but actually could have been up to 11%. And so depending on where value would have ended up a year from now and who knows, actually, I would argue that the rate -- the all-in rate for the financing could be below what the all-in rate for the preferred interest on the Rockpoint perhaps could have been anyway. So we think this is a great deal for the company. We think that ultimately having this operational flexibility allows us to be able to explore opportunities within the portfolio to continue enhancing entity value and that's another huge consideration. And on the whole, this is a very accretive and positive transaction for the company.

Okay. Thanks. And then on the same-store revenue guide, your guidance for the full year almost doubled. Could you just talk a little bit more about why that was so unpredictable? I guess, we could be -- I don't know if there's a onetime in there, if you were a little bit conservative on the original guidance or if the market is just that much stronger than you originally expected.

Yes, as I mentioned earlier, our expectations for the apartment sector, and we are familiar with our markets and expect it to outperform. But our expectations for the apartment sector on the whole were that it would be challenging this year. And the reality is that we've seen that actually materialize and be the case with rents even turning negative. I don't think anybody notwithstanding the strength of the markets we're in, particularly Jersey City and Port Imperial, I don't think anybody expected, at the beginning of the year, the level of outperformance from the rental side that we've seen relative to other markets. So we've come out of the gate very strong in Q1. And the reality is we felt that Q1 was a little too early to revise guidance given we still had three quarters of the year remaining, considerable economic uncertainty. I mentioned our views on the broader sector and how we anticipate rents may play out through the rest of the year and, of course, the expense side of it. So with nine months of expense uncertainty and revenue uncertainty itself too soon. But now we're six months in. And the reality is the portfolio, particularly on the revenue side, has significantly outperformed and continues to be strong relative to the overall sector. And then if you're looking at it on the NOI side, we've also had this tax adjustment from the appeals that helps on the NOI side of things. So that is the reason for the raised guidance and it reflects really six months of actual performance and our best estimate for the remainder of the year.

Okay. Got it. And then lastly for me, anything more to say on the decision to bring the dividend back at $0.05 a quarter? So we knew eventually, it would come back. I think the amount is pretty similar to what we thought it would come back at, but is there a signal there from the Board that you're kind of moving on or anything else you could say about the decision to do it this quarter? And maybe that has to do with your taxable income as well. I don't know where it stands relative to that.

No, it's not driven by taxable income. I think I would see it as a positive signal. It really reflects the progress made in the transformation largely that we're on the other side of the transformation. But that is the level that the Board has determined appropriate at this time given we still have some wood to chop in closing the remaining -- in closing the assets under contract and repaying the term loan or revolving credit facility. There are restrictions in our ability to pay dividend under that facility, under the term loan facility, which is also a consideration. But clearly, given the AFFO performance so far year-to-date, one would expect that subject to Board approval, there should be time to normalize to a more normal, if you like or more market level AFFO payout ratio over time.

Great. Thank you.

Thank you.

As there are no further questions, I would now hand the conference over to the management for closing comments.

Thank you for joining us today everyone. I'd like to thank the team here at Veris as well. Everyone who has had a part to play in the tremendous progress that we've made in this quarter, which really represents a milestone for the company and we look forward to updating you again next quarter.