Veris Residential(US:VRE)2020-02-26 22:24PART I Business Mack-Cali Realty Corporation is a REIT focused on Class A office and multi-family properties, strategically divesting suburban office assets to concentrate on waterfront and luxury multi-family portfolios - The Company is a fully-integrated, self-administered REIT focused on Class A office and multi-family rental properties primarily in the Northeast1719 Portfolio Overview as of December 31, 2019 | Property Type | Count | Size/Units | | :--- | :--- | :--- | | Office Properties | 42 | ~10.7 million sq. ft. | | Multi-family Rental Properties | 21 | 6,524 residential units | | Parking/Retail Properties | 4 | ~108,000 sq. ft. | | Hotels | 3 | 723 rooms | - A key strategic decision was made in December 2019 to sell the entire suburban New Jersey office portfolio, totaling approximately 6.6 million sq. ft The results of this portfolio are now classified as discontinued operations24 - The company plans to use proceeds from the suburban office portfolio sale to pay down corporate-level, unsecured indebtedness, shifting its focus to waterfront class A office and multi-family rental portfolios27 2019 Transaction Summary | Transaction Type | Value/Proceeds ($) | Details | | :--- | :--- | :--- | | Acquisitions | ~$804.1 million | Acquired one office property, two multi-family properties, and three land parcels | | Dispositions | ~$1.1 billion (net proceeds) | Sold 64 office properties, four multi-family properties, and four land parcels, realizing net gains of ~$390 million | - The company is actively developing four major multi-family projects in New Jersey and Massachusetts, with total estimated costs exceeding $800 million and expected completion dates between 2020 and 2022575960 Risk Factors The company faces significant risks from adverse economic conditions, real estate industry challenges, and financial risks related to debt and REIT qualification, exacerbated by its strategic repositioning - The company's business is highly susceptible to adverse economic conditions, particularly in the Northeast, which could negatively impact rental rates, property values, and access to capital73 - A significant portion of revenue is derived from tenants in the financial, credit, and insurance industries (24.9%, 12.3%, and 11.5% respectively), making the company vulnerable to downturns in these sectors82 - The strategic shift to multi-family rental properties introduces new risks, including shorter-term leases, increased competition from other housing sources, and dependency on financing from entities like Fannie Mae or Freddie Mac8889 - The company is subject to risks associated with its debt financing, including restrictive financial covenants in its credit facilities and indentures As of December 31, 2019, total outstanding indebtedness was $2.8 billion101104 - Failure to maintain REIT qualification under the IRS Code would subject the company to federal income tax at regular corporate rates, significantly impacting financial results and the ability to pay dividends124128 Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None135 Properties As of December 31, 2019, the company's portfolio included 43 commercial properties (10.5 million sq. ft.) and 14 multi-family properties, with commercial properties 80.7% leased and a concentration in New Jersey and financial sector tenants Consolidated Property Portfolio Summary (as of Dec 31, 2019) | Property Type | Count | Size / Units | | :--- | :--- | :--- | | Commercial Properties | 43 | ~10.5 million sq. ft. | | Multi-Family Properties | 14 | 3,913 units | | Hotels | 2 | 372 rooms | - The percentage of leased commercial square feet in stabilized operating consolidated properties has declined over the past five years, from 86.2% at year-end 2015 to 80.7% at year-end 2019143 Top 5 Commercial Tenants by Annualized Base Rent (Consolidated Properties) | Tenant | Annualized Base Rental Revenue ($) | % of Total | | :--- | :--- | :--- | | Merrill Lynch Pierce Fenner | 10,898,022 | 4.0% | | John Wiley & Sons, Inc. | 10,888,237 | 4.0% | | MUFG Bank Ltd. | 10,189,469 | 3.8% | | Dun & Bradstreet Corporation | 7,516,240 | 2.8% | | Daiichi Sankyo, Inc. | 6,909,661 | 2.6% | Lease Expiration Schedule (Consolidated Commercial Properties) | Year of Expiration | Net Rentable Area (Sq. Ft.) | % of Total Leased Sq. Ft. | | :--- | :--- | :--- | | 2020 | 470,324 | 5.8% | | 2021 | 798,400 | 9.8% | | 2022 | 618,005 | 7.6% | | 2023 | 1,467,018 | 18.0% | | 2024 | 809,606 | 10.0% | - The tenant base is heavily concentrated in the financial services sector, with Securities, Commodity Contracts & Other Financial (24.9%), Credit Intermediation (12.3%), and Insurance (11.5%) representing the top three industries by annualized base rent160 Legal Proceedings The company reports no material pending legal proceedings beyond routine litigation incidental to its business - There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company's business168 Mine Safety Disclosures This item is not applicable to the company - Not applicable169 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under 'CLI', with its five-year cumulative total return underperforming both the S&P 500 and NAREIT Equity REIT Index - The General Partner's common stock is traded on the NYSE under the symbol "CLI"171 2019 Quarterly Common Stock Price Range ($) | Quarter | High | Low | Close | | :--- | :--- | :--- | :--- | | First | 22.55 | 18.74 | 22.20 | | Second | 24.88 | 21.68 | 23.29 | | Third | 24.09 | 19.97 | 21.66 | | Fourth | 23.40 | 19.96 | 23.13 | - The company's five-year cumulative total return performance graph shows its stock underperforming both the S&P 500 Index and the NAREIT Equity REIT Index177178 Selected Financial Data The company presents five years of selected financial data, showing 2019 total revenues of $350.9 million, net income of $111.9 million, total assets of $5.3 billion, and total debt of $2.8 billion Selected Financial Data - General Partner (in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenues | $350,935 | $365,714 | $459,030 | | Income from continuing operations | $252,554 | $80,267 | $10,840 | | Net income available to common shareholders | $111,861 | $84,111 | $23,185 | | Net income per share – diluted | $0.95 | $0.80 | $0.06 | | Dividends declared per common share | $0.80 | $0.80 | $0.75 | | Total assets | $5,292,798 | $5,060,644 | $4,957,885 | | Total debt | $2,808,518 | $2,792,651 | $2,809,568 | Selected Financial Data - Operating Partnership (in thousands, except per unit data) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenues | $350,935 | $365,714 | $459,030 | | Income from continuing operations | $252,554 | $80,267 | $10,840 | | Net income available to common unitholders | $125,125 | $93,638 | $25,896 | | Net income per unit – diluted | $0.95 | $0.80 | $0.06 | | Distributions declared per common unit | $0.80 | $0.80 | $0.75 | | Total assets | $5,292,798 | $5,060,644 | $4,957,885 | | Total debt | $2,808,518 | $2,792,651 | $2,809,568 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic shift to waterfront and multi-family assets, noting decreased same-store revenue, increased net income from property dispositions, and a liquidity strategy relying on cash flow, sales, and credit facility for its $2.8 billion debt - The company's strategic shift involves selling its entire suburban New Jersey office portfolio (6.6 million sq. ft.) to focus on waterfront office and multi-family properties, with proceeds intended to reduce unsecured debt192195 - Same-store revenue from leases decreased by $6.3 million (2.0%) in 2019 compared to 2018, primarily due to a 610 basis point drop in average office portfolio occupancy from 82.2% to 76.1%258 - General and administrative expenses increased by $3.7 million (6.8%) in 2019, driven by $4.6 million in strategic planning costs and $4.1 million related to the contested 2019 board election265 - The company recognized a net gain of $345.9 million on the disposition of rental property in 2019, a significant increase from the $99.4 million gain in 2018271 Debt Summary as of December 31, 2019 | Debt Type | Balance ($000s) | % of Total | Weighted Avg. Interest Rate | | :--- | :--- | :--- | :--- | | Fixed Rate Unsecured | 575,000 | 20.3% | 4.09% | | Fixed Rate Secured | 1,737,785 | 61.4% | 3.80% | | Variable Rate Secured | 187,252 | 6.6% | 4.02% | | Variable Rate Unsecured | 329,000 | 11.6% | 3.09% | | Total | 2,829,037 | 100.0% | 3.81% | - Funds from Operations (FFO) available to common stock and unitholders was $116.1 million in 2019, a decrease from $170.4 million in 2018, primarily due to lower gains and higher impairment charges recognized in FFO calculation351 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with $2.3 billion of debt at fixed rates and a 100 basis point rate change impacting variable-rate debt by $5.1 million annually - The company's primary market risk exposure is to changes in interest rates358 - As of December 31, 2019, approximately $2.3 billion of the company's long-term debt is at fixed rates, while approximately $516 million is at variable rates360361 - A hypothetical 100 basis point (1%) increase or decrease in interest rates would change annual interest costs on variable-rate debt by approximately $5.1 million360 Financial Statements and Supplementary Data This section includes consolidated financial statements and PricewaterhouseCoopers LLP's unqualified audit opinion on financial statements and internal controls, highlighting critical audit matters related to real estate valuation - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019392412 - Critical Audit Matters identified by the auditor include the estimation of net sales price for real estate held for sale without an executed sales agreement, and the valuation of the Roseland real estate portfolio to determine the estimated future redemption value of a non-controlling interest398403 Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Net investment in rental property | $4,664,561 | $4,316,997 | | Total Assets | $5,292,798 | $5,060,644 | | Total Liabilities | $3,089,941 | $3,033,004 | | Total Equity | $1,699,475 | $1,697,181 | Consolidated Statement of Operations Summary (in thousands) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total Revenues | $350,935 | $365,714 | $459,030 | | Income from continuing operations | $252,554 | $80,267 | $10,840 | | Net Income | $143,836 | $106,401 | $33,718 | | Net income available to common shareholders | $111,861 | $84,111 | $23,185 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None364 Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes reported - The CEO and CFO concluded that the disclosure controls and procedures for both the General Partner and the Operating Partnership were effective as of December 31, 2019365371 - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework This assessment was audited by PricewaterhouseCoopers LLP367369373 - There were no changes in internal control over financial reporting during the fourth quarter of 2019 that materially affected, or are reasonably likely to materially affect, the company's internal controls370377 Other Information This item is not applicable - Not Applicable378 PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the definitive proxy statement for the annual meeting of shareholders expected to be held on June 10, 2020380 Executive Compensation Information regarding executive compensation is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the definitive proxy statement for the annual meeting of shareholders expected to be held on June 10, 2020381 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and related stockholder matters is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the definitive proxy statement for the annual meeting of shareholders expected to be held on June 10, 2020382 Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the definitive proxy statement for the annual meeting of shareholders expected to be held on June 10, 2020383 Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the definitive proxy statement for the annual meeting of shareholders expected to be held on June 10, 2020384 PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K, including key real estate and mortgage loan schedules, and an extensive exhibit index - This section includes all financial statements, the Report of Independent Registered Public Accounting Firm, and financial statement schedules386 - Key financial statement schedules provided are Schedule III – Real Estate Investments and Accumulated Depreciation, and Schedule IV – Mortgage Loans on Real Estate387 - An extensive list of exhibits is provided, including corporate charters, bylaws, debt indentures, material contracts, employment agreements, and Sarbanes-Oxley certifications388764 Form 10-K Summary This item is not applicable - Not Applicable389