Veris Residential(VRE) - 2023 Q4 - Annual Report

Company and Reporting Structure This report combines annual filings for Veris Residential, Inc. (REIT) and Veris Residential, L.P. (Operating Partnership) under an UPREIT structure for a streamlined view - Veris Residential, Inc. (the General Partner) is a REIT that serves as the sole general partner of Veris Residential, L.P. (the Operating Partnership), which conducts all of the company's operations[6][7] - As of December 31, 2023, the General Partner owned an approximate 91.4% common unit interest in the Operating Partnership, with the remaining 8.6% held by limited partners[8] - The company utilizes an UPREIT structure, where common units of the Operating Partnership are substantially economically equivalent to the General Partner's common stock and can be redeemed for shares or cash at the General Partner's discretion[9] - The primary differences between the consolidated financial statements of the General Partner and the Operating Partnership lie in the presentation of shareholders' equity, partners' capital, and noncontrolling interests[12] Business Overview Veris Residential is a fully-integrated REIT that has substantially completed its transformation into a pure-play multifamily entity, focusing on sustainable Class A properties in the U.S. Northeast Company Strategy and Operations The company has nearly completed its strategic transformation into a pure-play multifamily REIT, focusing on a portfolio of young, Class A properties with premium, sustainability-focused amenities - In 2023, the company substantially completed its multi-year transformation to a pure-play multifamily REIT, aiming to simplify its business and strengthen its balance sheet[21] - The portfolio consists of Class A multifamily properties with an average age of seven years, which typically require lower maintenance capital expenditures[23] - The investment strategy focuses on growing the Class A multifamily portfolio through acquisitions, value-add redevelopments, and new developments, recycling capital from non-strategic asset sales to fund these activities[25] Sustainability and Human Capital Veris Residential integrates sustainability into all business aspects, with 80% of its multifamily portfolio green certified, and prioritizes employee and resident well-being - 80% of the company's multifamily portfolio is green certified (LEED®, ENERGY STAR® or equivalent)[28] - The company has met its Science Based Target initiative goal to reduce like-for-like Scope 1 and 2 greenhouse gas emissions by 50% and has reduced energy consumption by 24% over the last three years[31][45] - As of December 31, 2023, the company had approximately 197 employees; 56% of the Board of Directors are female and/or racially diverse, and 52% of employees were persons of color or from minority groups[32][33][34] Recent Developments and 2023 Milestones In 2023, Veris sold over $700 million in non-strategic assets, exited the hotel segment, refinanced debt, and achieved significant ESG milestones - Sold over $700 million of non-strategic assets since the beginning of 2023, including exiting the hotel segment with the sale of the Port Imperial Hotels[43] - Negotiated the early redemption of Rockpoint's interest in VRT for $520 million[44] - Refinanced the Haus25 construction loan at an interest rate of 5.46%, saving 124 basis points compared to the prior loan[44] - As of December 31, 2023, 99.9% of the total debt portfolio was hedged or fixed at a weighted average interest rate of 4.5% with a weighted average maturity of 3.7 years[44] - Enhanced its ESG platform by increasing its wholly-owned multifamily portfolio's Green Certification to over 80% (up from 43% in 2022) and earning a 5-Star GRESB rating for the second year in a row[45][49] Risk Factors The company faces a range of operating, capital, financing, management, investment, and REIT status risks inherent to its business and the real estate industry Operating Risks Operational performance is subject to risks from competition, short-term leases, non-core asset disposition challenges, inadequate insurance, illiquidity, inflation, and regulatory compliance costs - Competition from other multifamily properties, single-family rentals, and for-sale housing could adversely affect the ability to lease units and maintain rental rates[55] - The average multifamily lease term is 13 months, which exposes rental revenues to declines in market rents more quickly than longer-term leases[56] - The company may not be able to dispose of its remaining non-core assets at favorable prices or within the anticipated timeframe, which could impact financing for strategic initiatives[61] - Environmental laws impose liability for hazardous substances, often without regard to fault, which could lead to costly remediation and penalties[71] Capital and Financing Risks The company's financial performance is exposed to risks from market volatility, strategic repositioning execution, debt refinancing, restrictive covenants, rising interest rates, and reliance on external capital as a REIT - As of December 31, 2023, the company had total outstanding indebtedness of $1.9 billion and faces risks associated with refinancing this debt at maturity[84] - As of December 31, 2023, the company had no outstanding borrowings under its revolving credit facility and approximately $304.5 million of its hedged mortgage indebtedness bears interest at variable rates, exposing it to rising interest rates[87] - To qualify as a REIT, the company must distribute at least 90% of its net taxable income, making it reliant on third-party capital sources for future growth, including acquisitions and developments[89] Other Risks (Cybersecurity, Climate Change) The company faces risks from potential cybersecurity breaches compromising sensitive data and from the physical effects of climate change, which could damage properties and increase costs - The business is at risk from cybersecurity attacks that could compromise proprietary information and personally identifiable data, potentially leading to legal claims and reputational damage despite security measures[114][115] - The physical effects of climate change, such as changes in weather patterns and rising sea levels, could have a material adverse effect on properties, operations, and business, potentially increasing insurance and operating costs[116] Cybersecurity Veris Residential has a comprehensive cybersecurity strategy focusing on detection, protection, incident response, and risk management, overseen by a full-time CISO and the Audit Committee - The company's cybersecurity strategy focuses on detection, protection, incident response, security risk management, and resiliency[120] - In 2023, a full-time Chief Information Security Officer (CISO) was added to the team, reporting to the Chief Operating Officer[121] - The company utilizes the National Institute of Standards and Technology (NIST) Cyber Security Framework (CSF) to assess and manage its cybersecurity posture[123] - The Audit Committee holds oversight responsibility for cybersecurity strategy and risk management, receiving quarterly reports and an annual direct report from the CISO[127] - The company is not aware of any cybersecurity threats or past incidents that have materially affected or are reasonably likely to materially affect its business, operations, or financial condition[126] Property Portfolio As of December 31, 2023, Veris Residential's portfolio primarily consists of consolidated and unconsolidated multifamily properties in the U.S. Northeast, with significant concentration in the New Jersey Waterfront Consolidated Properties As of year-end 2023, the consolidated portfolio comprised 17 multifamily properties (5,535 units) with 94.8% occupancy, one office property, and developable land for future units Consolidated Multifamily Properties Overview (as of 12/31/2023) | Region | Total Units | % Occupied | 2023 Avg. Revenue Per Home ($) | | :--- | :--- | :--- | :--- | | New Jersey Waterfront | 3,629 | 95.0% | 4,154 | | Massachusetts | 1,168 | 93.9% | 2,869 | | Other | 738 | 95.0% | 3,631 | | TOTAL | 5,535 | 94.8% | 3,813 | - The sole remaining consolidated office property is Harborside Plaza 5 in Jersey City, NJ, which was 34.6% leased as of December 31, 2023[130] - The company holds consolidated developable land with the potential to build a total of 4,532 units, primarily located in the New Jersey Waterfront and Massachusetts[131] Unconsolidated Joint Venture Properties The company holds interests in unconsolidated joint ventures owning seven multifamily properties with 2,146 units and 93.4% occupancy, one retail property, and land with development potential Unconsolidated JV Multifamily Properties Overview (as of 12/31/2023) | Region | Total Units | % Occupied | 2023 Avg. Revenue Per Home ($) | | :--- | :--- | :--- | :--- | | New Jersey Waterfront | 1,438 | 93.7% | 3,907 | | Other | 708 | 92.9% | 2,853 | | TOTAL | 2,146 | 93.4% | 3,559 | - The company's ownership interests in these unconsolidated joint ventures range from 20% to 85%[132] Occupancy and Market Diversification The consolidated multifamily portfolio's occupancy rate stood at 94.8% at the end of 2023, showing a slight increase from 94.4% in 2022 and a significant recovery from 85.4% in 2020 Consolidated Multifamily Portfolio Year-End Occupancy | Year | Percent Occupied (%) | | :--- | :--- | | 2023 | 94.8 | | 2022 | 94.4 | | 2021 | 96.4 | | 2020 | 85.4 | | 2019 | 92.1 | Consolidated Multifamily Market Diversification (by Annualized Base Rental Revenue) | Market | Percentage Of Annualized Base Rental Revenue (%) | | :--- | :--- | | New Jersey Waterfront | 72.2 | | Massachusetts | 15.6 | | Other | 12.2 | | Total | 100.0 | Stockholder Matters Veris Residential's common stock trades on the NYSE under 'VRE', and the company reinstated a quarterly dividend in Q3 2023, with the single 2023 distribution classified as 100% return of capital - The company's common stock trades on the NYSE under the symbol 'VRE'[146] - A quarterly dividend was reinstated beginning in the third quarter of 2023[150] - On December 18, 2023, a distribution of $0.0525 per common share was declared, payable in January 2024[152] - The $0.05 per common share distribution paid on October 10, 2023, was determined to be a 100% return of capital distribution[153] Management's Discussion and Analysis (MD&A) This section provides management's perspective on the company's financial condition and results, detailing revenue growth, increased net loss due to specific costs, liquidity, debt structure, and FFO reconciliation Results of Operations The company's financial performance shows significant rental revenue growth in 2023, but a wider net loss due to Rockpoint transaction costs and lower gains on asset sales, contrasting with 2022's reduced net loss from land sales and lower debt extinguishment costs Comparison of 2023 vs. 2022 Key financial results for 2023 compared to 2022 show a significant increase in total revenues from rental operations but a substantial widening of the net loss Key Financial Results (2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues from rental operations | $275,991 | $229,867 | $46,124 | 20.1% | | Operating loss | ($30,514) | ($32,215) | $1,701 | (5.3)% | | Loss from continuing operations | ($157,193) | ($39,534) | ($117,659) | 297.6% | | Net loss | ($112,361) | ($34,885) | ($77,476) | 222.1% | - Same-Store lease revenue increased by $18.5 million (9.8%) due to higher market rental rates and reduced concessions at multifamily properties[167] - The company recognized $49.8 million in interest cost related to the redemption of Rockpoint's mandatorily redeemable noncontrolling interests[177] - Gain on disposition of developable land decreased significantly to $7.1 million in 2023 from $57.3 million in 2022[179] Comparison of 2022 vs. 2021 Key financial results for 2022 compared to 2021 show strong revenue growth and a reduced net loss, benefiting from a significant gain on land sales and minimal debt extinguishment costs Key Financial Results (2022 vs. 2021) | Metric (in thousands) | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues from rental operations | $229,867 | $185,049 | $44,818 | 24.2% | | Operating income (loss) | ($32,215) | ($62,208) | $29,993 | (48.2)% | | Loss from continuing operations | ($39,534) | ($157,265) | $117,731 | (74.9)% | | Net loss | ($34,885) | ($109,539) | $74,654 | (68.2)% | - Same-Store lease revenue increased by $17.3 million (11.2%) due to higher occupancy and market rents[185] - A significant gain of $57.3 million was recognized on the disposition of developable land in 2022, compared to a $2.1 million gain in 2021[196] - Loss from extinguishment of debt was minimal in 2022 ($0.1 million) compared to a substantial loss of $47.1 million in 2021[198] Liquidity and Capital Resources The company maintains liquidity through cash, operating cash flow, its credit facility, and asset sales, with 2023 seeing increased cash from investing activities used for deleveraging and interest redemption Summary of Cash Flows for Year Ended Dec 31, 2023 (in millions) | Cash Flow Category | Amount | | :--- | :--- | | Net cash provided by operating activities | $45.5 | | Net cash provided by investing activities | $579.7 | | Net cash used in financing activities | ($618.3) | | Net increase in cash | $6.9 | - Key uses of cash in financing activities included $535.5 million for the redemption of redeemable noncontrolling interests and $442.1 million for repayments of mortgages and other obligations[207] - The Board of Directors reinstated a quarterly dividend in the third quarter of 2023[205] Debt Financing As of December 31, 2023, the company's total debt was approximately $1.9 billion, entirely fixed-rate or hedged, with a weighted average interest rate of 4.34% and maturity of 3.46 years Debt Summary as of December 31, 2023 | Debt Type | Balance ($000's) | % of Total | Weighted Avg. Interest Rate | Weighted Avg. Maturity (Years) | | :--- | :--- | :--- | :--- | :--- | | Fixed Rate & Hedged Secured | $1,868,983 | 100.00% | 4.34% | 3.46 | | Total Debt | $1,868,983 | 100.00% | 4.34% | 3.46 | Scheduled Debt Maturities as of December 31, 2023 ($000's) | Period | Total Principal Payments | | :--- | :--- | | 2024 | $314,076 | | 2025 | $9,487 | | 2026 | $546,138 | | 2027 | $313,478 | | 2028 | $348,392 | | Thereafter | $337,412 | - As of December 31, 2023, the Company had three unencumbered properties with a carrying value of $115.9 million[214] Funds from Operations (FFO) Funds from Operations (FFO) available to common stock and unitholders significantly decreased to $20.8 million in 2023, primarily due to a $49.8 million interest cost from the Rockpoint redemption FFO Reconciliation Summary (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net loss available to common shareholders | $(107,265) | $(52,066) | $(119,042) | | Funds from operations (FFO) | $20,829 | $89,591 | $(22,754) | - FFO is presented as a supplemental performance measure and is not an alternative to net income under GAAP; it excludes items like depreciation and gains/losses from property sales[223][224] - The 2023 FFO calculation includes a $49.8 million interest cost related to the mandatorily redeemable noncontrolling interests[228] Market Risk Disclosures The company's primary market risk is interest rate exposure on its $1.9 billion indebtedness, managed through fixed-rate debt or hedging, with a hypothetical 100 basis point rate change impacting fair value by $47.9 million - The company's main market risk is from changes in interest rates, which it manages by using fixed-rate debt and interest rate derivatives (swaps or caps)[229] - As of December 31, 2023, total indebtedness of $1.9 billion had an estimated aggregate fair value of $1.8 billion[230] - A 100 basis point increase or decrease in market interest rates would change the fair value of the company's fixed-rate debt by approximately $47.9 million[231] - A 100 basis point change in market rates would increase or decrease annual interest costs on variable-rate debt by approximately $3.0 million, assuming interest-rate caps are not in effect[232] Financial Statements and Notes This section contains the audited consolidated financial statements for Veris Residential, Inc. and L.P. for 2023, with an unqualified auditor's opinion and detailed notes on accounting policies, dispositions, debt, and segment reporting Independent Auditor's Report PricewaterhouseCoopers LLP issued an unqualified opinion on Veris Residential's consolidated financial statements and internal controls, identifying "Assessment of Indicators of Impairment for Rental Property Held for Use" as a critical audit matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified (clean) opinion, stating the financial statements present fairly, in all material respects, the financial position of the Company[272][287] - The auditor also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2023[272][287] - A Critical Audit Matter was identified concerning the 'Assessment of Indicators of Impairment for Rental Property Held for Use, Net' due to the significant management judgment and auditor subjectivity required[278][295] Consolidated Financial Statements The consolidated financial statements show total assets decreased to $3.24 billion in 2023 from $3.92 billion in 2022 due to asset dispositions, with a net loss of $112.4 million for 2023 Consolidated Balance Sheet Summary (in thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Net investment in rental property | $3,006,315 | $3,608,145 | | Total assets | $3,241,046 | $3,920,768 | | Mortgages, loans payable and other obligations, net | $1,853,897 | $1,903,977 | | Total liabilities | $1,936,494 | $2,006,200 | | Total equity | $1,279,553 | $1,399,337 | Consolidated Statement of Operations Summary (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total revenues | $279,859 | $233,448 | $194,645 | | Loss from continuing operations | ($157,193) | ($39,534) | ($157,265) | | Net loss | ($112,361) | ($34,885) | ($109,539) | | Net loss available to common shareholders | ($107,265) | ($52,066) | ($119,042) | Selected Notes to Financial Statements The notes detail significant 2023 dispositions, including former office and hotel portfolios, new credit facilities, the $520 million Rockpoint redemption, equity plans, and segment reporting for Multifamily and Commercial operations - Dispositions (Note 3): In 2023, the company sold rental properties for net proceeds of $515.8 million (including the Port Imperial Hotels and Harborside 1, 2, & 3) and developable land for $75.1 million[375][376] - Discontinued Operations (Note 7): The former New Jersey office and hotel portfolio is classified as discontinued operations. This segment generated net income of $44.8 million in 2023, compared to $4.6 million in 2022, primarily due to gains on dispositions[413][414] - Debt (Notes 8 & 9): In July 2023, the company entered a $60 million revolving credit facility and a $115 million term loan, using the proceeds to help fund the Rockpoint redemption. Both facilities were fully repaid by year-end 2023[415] - Redeemable Noncontrolling Interests (Note 14): On July 25, 2023, the company acquired all of Rockpoint's preferred unit interests for approximately $520 million, terminating the investment agreements and simplifying the equity structure[455] - Equity and Stock Plans (Note 15): A new $100 million "at-the-market" (ATM) stock offering program was established in November 2023. No shares were sold under this program as of December 31, 2023[469] Segment Net Operating Income (NOI) (in thousands) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Commercial & Other Real Estate | $4,904 | $4,045 | $11,997 | | Multifamily Real Estate & Services | $158,849 | $111,485 | $58,694 | | Corporate & Other | ($186,487) | ($117,395) | ($91,905) | | Total Company NOI | ($22,734) | ($1,865) | ($21,214) |