VRE - Veris Residential: Newest Results Show An Improvement Of The Company's Operations (Upgrade)

2023-09-12 11:03:01 ET

Summary

• Veris Residential is a now multifamily REIT which has been implementing a strategy to sell off their office and hotel properties for a few years.
• The company's financial results show a positive growth, however, the balance sheet is something to look out for.
• I present my analysis which leads me to a HOLD rating.

Today, I want to take a look at a residential REIT Veris Residential ( VRE ). The last time I wrote about Veris was in April using their Q4 2022 results and I issued a sell rating because the company was overvalued, the FFO was supposed to drop significantly, and my expectation was that the stock was going to struggle overall in the future. Today, I want to assess the company's Q2 results and see what changed and what did not. The new results led me to change my rating to a hold because even though VRE is still vastly overvalued, the results are looking better and the company seems to have the situation under control now.

Overview

Veris used to own buildings from hotel, residential and office segments in the North-East of the US, mostly in the Greater NYC area. A few years back, they started implementing a strategy to turn to a purely residential portfolio. They fully exited the hotel segment in Q1 and have been trying to exit the office segment as well. In Q4 2022 they still had 3 million sft of office space in New Jersey and made an agreement to sell their largest office space Harborside at an 8.6% cap rate which is obviously really high. While I understand the strategy, the company was so keen to go through with it that they were willing to sell these spaces at extremely low prices which in my opinion was not the best move also because the occupancy of these spaces was so low which obviously did not help the price.

How does the situation look like now? Veris currently has $205 million of non-strategic assets left some of which are commercial and some land. When it comes to Harborside, the company closed the sale of Harborside 1, 2 and 3 in April for $420 million. So they are close to the finish line with their switch to a purely residential portfolio.

Financial results

The same store occupancy on their multifamily portfolio dropped from 96% to 95.7% YoY so it still remains pretty high. The NOI increased by 21.8% YoY because of rent increases and two tax appeals. The property revenue grew by 13.3% YoY, the FFO was $0.16, up from $0.15 over the last year. And finally, the expenses decreased by 1.5% YoY. So while they were selling their office spaces during a really bad time for pretty low prices the results are looking pretty good. Therefore, the strategy they wanted to implement seems like a good idea that they might benefit from after all. This is somewhat confirmed by the guidance for the rest of 2023, which calls for revenue growth between 8-10%, NOI growth of 10-12% and expense growth between 4-6%

However, a big threat to the company are their maturities for the next year as they have to pay $600 million. They only have $55 million in liquidity right now and a weighted average interest rate of 4.4% which is already high as is but considering the payments Veris will face it will very likely increase as they will likely have to refinance at a higher rate.

The dividend currently stands at $0.05 per share per quarter which is a 1.1% yield. The company has not had a dividend since July 2020 though since they wanted to finish their switch to a pure multifamily portfolio first. So while low, it is better than none. Just looking at the guidance and latest results, issuing a dividend would have been a good move, however, seeing the high maturities for next year, the dividend might be at a risk of a cut when Veris looks for options to pay everything off.

Valuation

Now for the valuation of the company. The results are looking pretty good, but I would be careful when it comes to the balance sheet. The maturities will put the company under a lot of pressure and it will probably increase the interest rates which will then continue to take away from VRE's capital. What is even worse though is the P/FFO multiple as they currently trade at 31.51x. To compare this to peers, AvalonBay Communities ( AVB ) trades at 17.37x and Equity Residential ( EQR ) trades at 16.88x.

VRE is therefore extremely overvalued here. To even consider buying VRE I would like to see a discount of around 20% towards AVB and EQR because they have better results and are bigger and better rated companies. Moreover, VRE is riskier because of its balance sheet, so a multiple that I would consider fair would be around 13.7x which is nowhere near the current state.

To sum up, my stance on VRE has somewhat changed since the last time I wrote about it and now rate it is a HOLD. The switch which is now almost finalized could potentially help the company in the future given that they will be able to deal with the higher interest rates that they might have to face. However, I would not buy the stock here since it is extremely overvalued and the near future is looking really foggy right now. I do expect the multiple to fall a little bit next year since the company is likely to struggle with their maturing debt. But if the company is able to deal with that, which I think is probable, the multiple won't be hurt that much in the long term, which is why I would not necessarily sell the stock either. If, however, you are investing for the short run, selling might be something to consider.

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