Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) for Veris Residential, Inc. (NYSE: VRE, or Veris) and its operating subsidiary Veris Residential, L.P. at 'B'.

The Rating Outlook is Negative. Veris Residential's IDR reflects the company's persistently high leverage, weak liquidity coverage, limited unsecured debt and equity capital access and moderate complexity from joint venture (JV) investments, which also limit the company's strategic and operational control and reduce financial reporting transparency.

The Negative Outlook is based on Fitch's concern about the prospects for backfilling leases in Veris's Jersey City waterfront office portfolio. However, this may become less relevant to the extent that Veris is able to execute a sale of its remaining office portfolio.

The ratings were withdrawn for commercial purposes.

Key Rating Drivers

Speculative Grade Credit Metrics: Fitch expects Veris's leverage will remain elevated at around 14.0x in our one-to-two year forecast horizon. This is caused by projected relative strength in the company's multifamily portfolio offset to some extent by continuing struggles with regard to leasing at the company's New Jersey waterfront office portfolio, where VRE has made minimal progress backfilling vacant space since when the Waterfront office portfolio was over 90% leased, as evidenced by 530bps of lost occupancy in 2021.

Office Leasing Remains Challenged: After occupancy remained at a low but stable level in 2020 for the Jersey City waterfront, 2021 saw office same-store occupancy decline by 530bps due to moveouts that will be a challenge to replace. A further 70bps office occupancy decline in 1Q22 combined with an environment where rents appear to be modestly declining, results in Fitch's expectation of continued SSNOI declines in the office portfolio in 2022 as the company continue to pursue a sale of the portfolio.

Apartment Revenue Becoming Vast Majority: Multifamily comprised approximately 51% of 4Q21 NOI given the sales of the suburban office portfolio and multifamily development projects delivered over the last couple years. The company estimates that pro forma for the sale of the office asset, 101 Hudson and the acquisition of The James apartment asset in 1Q22 that multifamily contribution will be around 80%. The company's growing multifamily portfolio offers better growth and liquidity prospects, albeit elevates development risk.

Suburban Asset Sale Mostly Complete: VRE has almost completed its disposition program of selling its entire NJ suburban office portfolio, aside from one remaining asset, having sold $352 million of office assets in 2020 with an incremental $741 million of sales in 2021. This is the culmination of a seven-year process that began in earnest in 2015. Fitch views the disposition program as executed within initial valuation expectations. The company is now in the process of attempting to sell its Jersey City office portfolio.

Fitch views the de-emphasis of the office portfolio favourably since NJ as a secondary office market, has weaker institutional lender and investor interest than core, 24-hour gateway CBD office markets, such as New York, Washington, D.C., Boston and San Francisco. Positively, VRE's portfolio repositioning towards the Jersey City Waterfront had focused on one of the strongest NJ office submarket, which generally has above average occupancy and rental rates for class A NJ office space and mass transit access. However, leasing activity in 2021 was minimal in comparison to expiring space. The company's growing multifamily portfolio offers better growth and liquidity prospects.

Transition to Exclusive Secured Financing Strategy: In the last few years, VRE had increasingly relied on secured mortgage debt, unsecured bank term loans, JV and redeemable preferred equity and asset sales proceeds to fund refinancing its maturing obligations and new investments, and debt capital. VRE fully transitioned its balance sheet to a secured strategy in 2021. In May 2021, the company replaced its prior $600 million unsecured credit facility with a new $400 million secured credit facility and term loan.

Subsequently, the company drew on the new credit facility, along with cash to pay off its two existing public unsecured bonds outstanding in full. Therefore, VRE no longer has any remaining unsecured borrowings. This results in less financial flexibility and weaker relative capital access for the company, especially in the context of limited access to attractively priced public equity.

Elevated Rental Risk Profile: Challenging NJ market fundamentals, combined with high asset level concentrations and VRE's growing exposure to shorter lease duration multifamily assets are key factors contributing to a higher rental income risk profile for VRE, which will likely result in greater relative cash flow volatility through the cycle. In addition, as of March 31, 2022, the top 10 tenants for the remaining office portfolio represent approximately 64% of commercial property annualized base rent, which is considerably higher than office REIT peers. Positively, only 28% of Waterfront office rents expire through the end of 2025.

Derivation Summary

VRE owns a concentrated portfolio, consisting of metro and remaining suburban New Jersey office assets and multifamily properties. The company's portfolio markets have more challenging office market demand fundamentals and lower supply barriers than higher rated peers SL Green and Vornado. The company's operating strategy also entails elevated development risk exposure, which is partially offset by related residential property portfolio with better growth and liquidity elements.

VRE has not publicly committed to financial policy targets, with current metrics consistent with high-speculative grade REITs. The company has weaker access to unsecured debt and equity capital, notwithstanding its prior long-tenure as a regular public unsecured bond issuer.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Low-to-mid blended single-digit SSNOI growth in 2022-2024 in the combined office/multifamily portfolio;

Development spend of approximately $30 million in 2022 and $200 million per annum from 2023-2024 with anticipated delivery volumes of approximately $470 million in 2022 and $50 million-$200 million per year in 2023-2024 at an average of 6.3% yields;

Dispositions of approximately $275 million to $350 per annum from 2022-2024.

RATING SENSITIVITIES

Rating Sensitivities are not applicable, given the withdrawal of the ratings.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: VRE should have a sufficient liquidity position. The company's sources cover its uses by 0.9x, based on Fitch's base case liquidity analysis for the April 1, 2022 to December 31, 2023 forecast period, which does not include any further asset dispositions beyond what has been announced through 1Q22. In addition, it incorporates VRE's projected development and capital expenditure spend. The company's liquidity improves to 2.0x, if it is assumed that 80% of secured debt is refinanced.

The size of VRE's unencumbered asset pool has decreased considerably during the last few years. Fitch did not calculate the company's unencumbered assets coverage of its net unsecured debt as secured debt is now 100% of total debt.

Issuer Profile

Veris Residential, Inc, (formerly known as Mack-Cali Realty Corporation) is an owner, manager and developer of office and multifamily properties, primarily located in the northeastern United States with a concentration on the Jersey City waterfront. The company is process of a transition to becoming exclusively focused on the multifamily sector.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

RATING ACTIONS

Entity / Debt

Rating

Prior

Veris Residential, Inc.

LT IDR

B

Affirmed

B

LT IDR

WD

Withdrawn

B

Veris Residential, L.P.

LT IDR

B

Affirmed

B

LT IDR

WD

Withdrawn

B

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2022 Electronic News Publishing, source ENP Newswire