Veris Residential, Inc.

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 4/5

Veris Residential, Inc. is a US-based real estate company that owns, operates, and develops high-quality multifamily properties in the Northeast, focused primarily on sustainable and transit-oriented locations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Veris Residential, Inc. (VRE), operates as a Real Estate Investment Trust (REIT) which owns, manages, develops, and acquires high-quality multifamily properties. The company is largely focused on markets in the Northeastern United States, with an emphasis on transit-oriented communities.

Business Overview

Veris Residential, Inc. operates in the multifamily real estate sector, meaning it focuses on residential apartments instead of commercial spaces. It has a concentrated presence in the Northeast US, primarily in New Jersey, New York, Massachusetts, and Connecticut. The company’s strategy emphasizes developing or acquiring properties in areas with good public transport links and a focus on sustainability.

Revenue Distribution:

VRE’s primary source of revenue comes from rental income from its multifamily properties. Occupancy rates and rental rates determine the amount of income generated. Other revenue streams include ancillary services like parking and storage, but these are relatively small compared to the rental revenue. The properties are designed to be highly amenitized including workout facilities, pools, dog runs etc.

  • Demand for Multifamily Housing: The US continues to face a housing shortage, making multifamily rentals a particularly in demand segment of real estate. There is a rising trend of people living in rental housing compared to ownership. The trend favors REIT companies as they enjoy regular cash flow.
  • Location, Location, Location: There is an increasing preference for transit-oriented developments and buildings located in well-serviced areas with good connections. As working from home becomes a common practice, this trend might not be as strong as the past.
  • Sustainability: The focus of REITs has shifted to greener buildings. The costs of improving older buildings is a key factor to watch in coming years.
  • Inflation: Rent and property values typically increase in times of inflation, making real estate a hedge against inflation. This benefit can be hampered by high interest rates.

Margins

VRE operates on a negative margin, meaning their expenses are higher than their revenue. However, since REITs need to pay most of their earnings as a dividend, this accounting method does not tell much about their underlying profitability. VRE’s cash flow from operations in Q3 2024 was $32.3 million, 71.5% of its NOI. This number can be improved by increasing revenues or cutting expenses.

Competitive Landscape

The multifamily real estate market is highly competitive. VRE faces competition from large publicly traded REITs, as well as numerous smaller operators. The advantage, however, is that the business is very fragmented and that can also prove an opportunity. However, VRE doesn’t have a moat that other REITs don’t have which is why the competitive landscape is very fierce.

What makes Veris different

While the company claims to have created properties that have some uniqueness to them, it is very hard for any company in a commodified industry like real estate to be unique. It does have a focus on the northeast though which can be a geographical focus. It is also a small cap company compared to other REITs, which might give it some benefits as a first mover into newer locations. They are also trying to build a sustainable business, although the returns on that are yet to be determined.

Financials

Overall Financial Health

The balance sheet looks healthy overall with strong liquidity and relatively low debt. The company seems capable of managing its liabilities comfortably.

Income Statement Analysis

As an REIT, VRE is not required to make profits and instead pay the income in form of dividends. Revenue is consistent between quarters but operating expenses have fluctuated over the recent periods. As an example, VRE posted operating expenses of $50.536 million in Q3 of 2023 which jumped to $66.776 million in Q1 2024.

Balance Sheet Analysis

  • Strong Liquidity: At the end of Q3 2023, VRE reported cash and cash equivalents of $105.7 million. However, at the end of Q3 2024, VRE reported $54.3 million. A decrease of 51.4 million.
  • Moderate Leverage: Total debt as of September 30, 2023, was around $1.2 billion. VRE is attempting to reduce debt to about $800 million which would mean a 2:1 debt to equity. Currently, debt sits at 1.16 billion.
  • Asset Quality: The company’s core holdings consist of multifamily properties in prime locations, many of which are relatively new developments. This means they would be more valuable than older properties.
  • Debt Maturities: The long term debt has an average maturity of around 5 years.

Cash Flow Analysis

VRE’s free cash flow has been highly fluctuating in the recent periods. VRE had a free cash flow of $19.408 million in Q2 2023. That plunged to $3.115 million in Q3 2023. It’s cash flow from operations is positive however which is a positive sign.

It is important to note that a large chunk of a REITs revenue comes from its property investments, and they are not required to post profits. Hence, free cash flow and other financial measures need to be seen in a separate light from conventional companies.

Dividends

VRE pays a reasonable dividend. In Q3 of 2024, they declared a dividend of $0.13 per share. They have reduced their dividend payouts recently, likely to reduce the company debt.

Moat Rating: 1/5

Veris Residential, Inc. has no demonstrable economic moat, leading to the lowest moat rating. The multifamily real estate market is highly competitive and, at best, can only create geographical barriers for new entrants.

  • Lack of Differentiation: VRE’s properties, while high-quality and well-located, are difficult to differentiate meaningfully from other modern apartment complexes in its markets.
  • Absence of Switching Costs: Renters face minimal switching costs and are highly susceptible to attractive offers from competitors.
  • No Network Effect: There is no direct network effect present in VRE’s offering.
  • No Unique Cost Advantages: While VRE can achieve efficient operations, these aren’t proprietary and can be replicated by its competitors.
  • No Unique Intangibles: VRE does not have strong proprietary brands or licenses which would provide a pricing edge.

Risks to Moat

  • Increased Competition: A rise in new entrants, or more aggressive activity from existing players in the Northeast can erode prices and occupancy rates.
  • Economic Downturn: A downturn in the economy may impact the company’s ability to increase its rents and lower occupancy rates.
  • Interest Rate Risk: Rising interest rates may make mortgages more expensive for buyers, thereby reducing the appeal for rentals.
  • Property Development Risk: Rising costs of development and a decline in price of real estate might impact profits from any newer projects.
  • Changing Consumer Preferences: Shifts in consumer preferences to a certain type of real estate, new technologies or new areas of interest could negatively impact VRE’s offerings.

Resilience

VRE seems to have a decent level of resilience, as the demand for quality housing is unlikely to disappear completely. The company’s large emphasis on sustainability may make it a slightly preferable choice for people seeking greener living options. If interest rates are managed well, a REIT like VRE with a consistent cash flow should be able to weather the storms. It is however an area of risk to be observed.

Understandability Rating: 2 / 5

The business model for VRE is somewhat easy to understand; it’s a real estate company with rental properties. But a REIT like that, and its balance sheet is more complicated compared to a normal company, as it has to pay out most of the income. This means more work is required to truly understand the financials and overall underlying profitability, giving it a score of 2/5.

Balance Sheet Health: 4 / 5

VRE’s balance sheet is pretty strong overall. The company is managing debt well and is showing signs of liquidity, but is still quite a heavily leveraged company, hence its score is a 4/5.

Recent Concerns

Veris has recently had a very high leadership turn-over. The CEO, and some executives have left the company in the past few months. The new leadership is committed to the company’s ongoing strategy, but that does not guarantee its success. VRE has reduced its dividend payout and is taking on a strategy of selling more properties in order to reduce the company’s debt. The market reaction will have to be seen, although management seems to be positive on this development. The company is also highly impacted by macroeconomic conditions such as inflation and increasing interest rates which they cannot control. How well they deal with those in coming quarters will be a key indicator of the management performance.

Management’s take on the issues

The management has said in multiple earnings calls that they are focusing on increasing operating income and improving efficiency in operations. They have also committed to reducing debt to about $800 million, and stated that they will review capital allocation to ensure the best risk-adjusted returns for shareholders. Their strategy is to improve underlying operational efficiency and they believe the company is well positioned to weather any economic downturn. They are also working to build better communities where people want to live, such that the occupancy of their properties increases.