Clipper Realty Inc.

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Good afternoon, ladies and gentlemen, and welcome to a Clipper Realty first quarter 20 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Michael Frenz. Sir, the floor is yours.

Good afternoon, and thank you for joining us for the first quarter 2020 Clipper Realty, Inc. earnings conference call. Participating with me on today's call are David Bistresser, co-chairman of the board and chief executive officer, and JJ Bistresser, chief operating officer. Please be aware that statements made during the call that are not historical may be deemed forward-looking statements, and actual results may differ materially from those indicated by such forward-looking statements. These statements are subject to numerous risks and uncertainties, including those disclosed in the company's quarterly report on Form 10-Q posted today and the company's 2019 annual report on Form 10-K, which are both accessible at www.sec.gov and our website. As a reminder, the forward-looking statements speak only as of the date of this call, May 11, 2020, and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures including adjusted funds from operations, or AFFO, adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, and net operating income, or NOI. Please see our press release, supplemental financial information, and Form 10-Q posted today for a reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures. With that, I will now turn the call over to our co-chairman and CEO, David Bistruser.

Thank you, Michael. We are very pleased with our results. Our portfolio performed very well and remained durable during the pandemic. We will continue to take necessary steps to navigate through the current challenges, further strengthened by additional liquidity provided by the Flappage Gardens refinancing. We enthusiastically look forward to capitalizing on a myriad of growth opportunities, including the upcoming office lease rolls, the potential expansion of Flappage Gardens, 1010 Pacific Street redevelopment. We remain well positioned to execute our strategic initiatives and create value. I'd also like to emphasize that the refinancing of the Flatbush Gardens was an enormous liquidity event for the company and that all of our debt stands on its own. None of the mortgages are cross-collateralized. All the debt is standing independently. and the next time we'll have to refinance the property other than for the Clover House will not take place until 2027. Our properties have remained open and operational throughout the pandemic. Our portfolio is 98% leased. We are taking the necessary steps to keep our tenants safe in compliance with state and local shelter-in-place orders, and we continue to provide typical services to our residents under difficult circumstances. our business has remained durable. We expect our properties in the New York City market to remain desirable to a broad range of tenants in our operations to return to a more normal state over time. We are extremely pleased with the operations of the company, and we expect to be able to continue to be able to provide the services that we have provided in the past. We repaid the existing $246 million loan on the property of Flatbush Gardens that was due in March 2028 at an interest rate which was at 3.5%, and it was replaced with an interest rate of 3.8%. Net proceeds of $78 million before reserves increased our cash position. Importantly, we have no debt maturities of any kind, as I said, until 2027. Our company is well-positioned from a liquidity perspective. Turning to a couple of highlights, the company of the past quarter, Clover House Property, brought online last August, is 99% leased, validating our view that the renovation of the property, its amenities, and its location to one of the most desirable neighbors of all in New York City, would drive and maintain exceptional residential demand. We are proceeding with the redevelopment of our recent 1010 Pacific Street acquisition, located in Prospect Heights, Brooklyn, about one mile from the Atlantic Terminal Barclays Center Hub. As previously discussed, we estimate that the project will cost $85 million in total, take two years to complete, and develop to a 6.5% stabilized cap rate. JJ will provide further updates to the project. In our office portfolio, the lease roll of 250 Livingston Street property will occur in August, at which time our new lease, where the city is expected to initially add approximately $5 million to the property's annual NOI. At 141 Livingston Street property, the rent will increase 25% at the end of 2020, which will add $2.1 million to the property's annual NOI. Together, these rolls are expected to add an incremental $7.1 million of annual NOI to our portfolio, representing a 10% increase on our portfolio run rate. At our Frappage Gardens property, we are progressing with the EULA process, albeit it's slowed down because of the pandemic crisis, but we expect to get that back on track after the city planning office is opened up fully. There's no assurance, however, that the application will be fully or partially approved as submitted. I would like to provide an update on the Tribeca House 421G litigation. As previously disclosed, the New York City Court of Appeals ruled in June 2019 that apartments and buildings receiving 421G tax benefits are not subject to luxury deregulation, issuing an order that overturned the previous unanimous appellate division decision. On January 7th, the appellate division granted a full stay of the special referees' hearing regarding the calculation of potential rent overcharges in the Kuzmich pending appeal, which is currently expected to be argued during the September 2020 hearing. 2020 term. We do not believe that the order will have a material impact on our business. Lastly, I would like to comment on our first quarter results. We are very proud to report record quarterly revenue of $30.9 million, record quarterly NOI of $17.1 million, and a strong AFFO of $5.6 million, all of which reflect robust leasing performance and expense management. Michael will provide further details on our financial performance shortly. I will now turn the call to JJ, who will provide an update on operations and our response to the pandemic.

Thank you. I would like to begin by reiterating our deep gratitude to both our employees and residents during this challenging time. Our colleagues have worked tirelessly to assist our tenants and communities in maintaining as much of a sense of normalcy as possible. We have taken significant steps to keep our residents and employees safe in compliance with the government mandated orders, including requiring all of our employees and service providers who enter our buildings to wear compliant personal protective equipment and practice social distancing. Our properties remain open and operational, providing permitted regular services to our tenants. We are utilizing technology as appropriate to conduct operations at all levels. For example, our property management teams are using technological resources to limit in-person contact while continuing to provide essential maintenance services and address resident service needs. Our leasing team are able to interact remotely with prospective tenants to guide them through the process. Our collections have been strong. In April, our collections were 94% of our collections in March, prior to the impact of COVID-19. In situations where tenants notify us that they cannot meet their rent obligations as a result of the pandemic, we may review potential alternative payment arrangements on a case-by-case basis. Turning to the first quarter, we continue to leverage our strong position operating performance, driving ongoing cash flow improvements through efficient leasing and focused expense management. We are very proud that our portfolio is 98% leased. Our leasing performance at Clover House has been very strong. The property is 99% leased and the average $71 per square foot rent is a new record. We are well positioned moving forward with exceptional occupancy providing leverage to future rent discussions. At 1010 Pacific Street, we are proceeding with development. The existing warehouse structure onsite has been demolished. We have filed plans for the new building and are working through the associated regulatory processes. We expect to develop a nine-story, fully amenitized, multifamily rental building, including indoor parking, with approximately 119,000 rentable square feet and 175 total residential units, 70% of which will be free market and 30% affordable. Significantly, the property is eligible for a 35-year 421A tax abatement due to the affordable component. We will provide further updates as we get closer to commencing construction. Chebeca House continues its strong performance. We increased residential revenue by 4.5% in the first quarter over Q1 last year, driven by occupancy and rent per square foot gains. The property was 99.6% leased at the end of March, building on its exceptionally high occupancy trend through the winter. Importantly, we have delivered these rent recent improvements with limited investment in the property. Chebekah House's luxury-level experience at a more attractive price point compared to the surrounding neighborhood ordered well for the property's overall growth trajectory. With full occupancy, tight apartment turnaround times that strengthen rent negotiations and significant remaining upside potential between our current $71 per square foot rents and the neighborhood's comparable $80 per square foot rents, Chebekah House is well-positioned for the future. At Flapper's Gardens in Brooklyn, the complex continues to benefit from extremely high demand and was 97.2% leased at the end of March, continuing the exceptional occupancy trend of the last several quarters with accompanying rent growth. Rent to square foot of $24.95 at the end of the first quarter is a new record for the property. We increased residential revenue by 3.2% in the first quarter over Q1 last year. Importantly, our focus on expense management drove in excess of a 500 basis point improvement in NOI margin at the property during the first quarter versus Q1 last year. As mentioned on prior earnings calls, the June 19 rent stabilization law somewhat tempers the property's future rent growth trajectory. However, rents have continued to increase, future renewals will move in tandem with annual rent guideline board increases, and preferential unit vacancies still offer the ability to increase the new rent up to the maximum legal limit. Clapper's Gardens remains a very significant part of our portfolio and growth story with the FAR expansion project and incremental value opportunity. I will now turn the call over to Michael, who will discuss our financial results.

Thank you, JJ. Our first quarter results demonstrate the strong leasing and operational efficiencies highlighted by David and JJ. For the first quarter, we achieved record revenues of $30.9 million. an increase of $3.2 million, or 11.7%, compared to the same period in 2019. We achieved record NOI of $17.1 million and a quarter, a 16.3% increase compared to the same period in 2019, an AFFO of $5.6 million, or 13 cents per share, a 5.8% increase compared to the same period in 2019. The year-over-year total revenue increase was primarily attributable to residential rental rate improvements at Flaplers Gardens and Tribeca House, a fully online Clover House, and the completion of the renovation and releasing of approximately 50% of the units at 10 West 65th Street during the second quarter last year. As JJ noted, Flaplers and Tribeca residential revenues grew 3.2% and 4.5% year-on-year, respectively. Cloverhouse generated $1.7 million of revenue during the first quarter and has rapidly approached full occupancy. On the expense side, key year-over-year changes were as follows. Property operating expenses decreased by $0.4 million in the first quarter year-on-year, primarily driven by lower legal and utilities expenses. Real estate taxes and insurance increased by approximately $1.1 million in the first quarter and due to property tax increases across their portfolio and general insurance industry cost increases. Cash general and administrative expenses, excluding non-recurring litigation-related costs and a one-time adjustment related to our CFO transition last year, increased modestly by approximately $200,000 in the first quarter. Interest expense increased by $1.5 million in the first quarter, primarily due to the recognition of interest and connection with bringing Clover House online. As a reminder, we finance our portfolio on an asset-by-asset basis. Our debt is non-recourse and it is not cross-collateralized. We have no debt maturities on any operating properties, including Clover House, until 2027. As David mentioned earlier on the call, we did announce a refinancing of our Flatbush Gardens property. We refinanced it with a $329 million 12-year secured first mortgage loan with New York Community Bank, the property's current lender. The loan bears interest at three and an eighth and requires interest-only payments for the first seven years, which is expected to initially reduce annual debt service by $3 million. With the proceeds, the company repaid the existing $246 million loan on the property due March 2028. which bore interest at 3.5% through February of 2023 and was scheduled to commence principal amortization in September 2020. Net remaining proceeds of $77.8 million before reserves increased the company's cash position. I note that in connection with the refinancing, an independent appraisal commissioned by the lender valued the property at $475 million. Turning to CapEx, we incurred $6.1 million of capital expenditures in the first quarter, a similar amount to the fourth quarter, and an approximate 50% decrease from the average spend the first three quarters of 2019. This decrease was primarily driven by the completion of the Clover House renovation. Lastly, today we are announcing a dividend of $0.095 per share for the first quarter, the same amount as last quarter. The dividend will be paid on May 29th, shareholders of record on May 22nd. Let me now turn the call back over to David for concluding remarks.

Thank you, Michael. We are very pleased with our operations. Our portfolio has performed very well and remains so throughout the pandemic. We will continue to take the necessary steps to navigate through the current challenges further strengthened by the additional liquidity provided by the refinancing We enthusiastically look forward to capitalizing on a myriad of growth opportunities, including the upcoming office lease rolls, the potential expansion of Flappage Guns, and the 1010 Pacific Street redevelopment. We remain well-positioned to execute on our strategic initiatives and create value. We hope everyone stays safe and healthy and sound. With that, I would like to open up the floor for any questions.

Thank you, ladies and gentlemen. The floor is now open for questions. If you have a question or a comment, please indicate so now by pressing star 1 on your touchtone phone. Lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. And it looks like your first question is coming from Buck Horn. Buck, your line is live.

All right. Hey, thanks. Good afternoon, guys, and congrats on the results, the relatively strong April collections, all things considered, and the refinancing, a lot of progress, all done out. Let me start with the April collections, if I could, and specifically maybe if we can drill down at Flatbush and how that performed versus the rest of the portfolio and kind of what percentage of Flatbush residents came to you or applied for some sort of hardship or relief, and how are you working with those residents in particular?

Yes, so as I mentioned in my remarks, we're taking this on a case-by-case basis. Obviously, workforce housing is going to, not obviously, but we believe that workforce housing in our instance is taking somewhat of a bigger effect to this pandemic and we're being cognizant of that and we're working with each individual on an individual case basis to see what we can do to help them get through this crisis we're not doing anything in a global manner it's being done on a case-by-case basis and they're telling all you know residents if they have something that they would like to discuss with us about their deferring payments and some sort of that nature if it makes sense and if it's valid we will try to cooperate and give them that release.

And back to your initial question, I think in terms of the collections, again, we're over 90% in collections in April. And as you can imagine, that's pretty much across the board here. I know I understand the question with Flatbush Gardens, but just as a point of reference, Flatbush in April was roughly 88 or 89% collected. So again, I think we had a very strong performance across the board, but Flatbush, just like the rest of the properties, performed well. And so far, it's continuing to progress here into the first 10 or so days of May. And we'll keep watching it and keep folks updated.

Okay. Yeah. So that was it. You think you jumped in my next question? Just to clarify, make sure I understood it. So are you saying through the first 10 days of May that your portfolio is over 90% collected and Flatbush is pretty similar to that so far?

No, what I was trying to say, the numbers I gave were for April. Again, 90 plus percent across the board. Flatbush was at 88 or 89 percent in April. In May, I was just saying that, again, it's only 10 days in, so it's still early. But our indication so far is that we continue to collect. And again, we don't have final numbers yet. Flatbush is one of the properties in particular where I think the payments come in a little bit more staggered during the month. But So far, what we're seeing is things look pretty good, and we'll know more, obviously, in the next week or two here, but so far, so good.

Okay. Great, great. And maybe just with this, again, the refinancing, congratulations on that. That's a huge, again, like you said, a huge liquidity event. Leaves you a little flush with cash at the moment. Is the plan just to hold it through the duration of what's to come with the pandemic? Do you have any Other plans, redevelopment-wise, or have you considered share repurchases? I don't know what the thought process on leverage is at this point, but any thoughts on what to do with the excess cash right now?

Right now, it's going to sit tight. We're going to see how this pandemic plays itself out. It's not very predictable, as you can see what's going on with this pandemic. We thought it was a very astute move to take advantage of this money because it reduces the amount of debt service that we pay on the property, it reduces the interest cost, and it pushes out the maturity date of that particular property. So we thought that was important to do, and we're going to wait and see how this thing plays out and see what opportunities are going to present itself in the future.

And Buck, as you can imagine as well, on the CapEx side, just Again, as you know, our portfolio is operating except for the one property we just bought at 1010 Pacific Street. Everything else is pretty much done and ready to go. We are fully operating. In terms of kind of future CapEx spend, well, obviously, we're doing the essential stuff that needs to be done, obviously, to keep the property safe and operational and fully maintained. But as David said, you know, we're just sort of hunkering down here doing what we need to do. And as we move forward on 1010 Pacific, which is really the only CapEx requirement at this point, obviously going to put a permanent loan in place as we move into development. So we'll get to that. But as we sit here today, from a CapEx perspective, it's pretty minimal requirements.

Okay.

If I can sneak one more in, just a quick update on 1010 Pacific. Do you think what's going on in the city and just either delays permitting-wise or construction-wise, is the timeline on 1010 Pacific moving out yet, or are you feeling still confident in the construction costs to build and hitting your initial underwriting targets? Any change on that front?

We believe the construction timeline will be steady. There won't be any push out of that. The city has been permitting properties, especially properties that have affordable components to it. As we said on the call, the demolition is just about completed. And we think that we have a good chance there might be a decrease in some of the construction costs out of this pandemic crisis. I think we'll soften on construction costs.

Every little bit helps. All right. Thank you so much, guys. I'll hand the floor over to someone else. It's a pleasure.

Thanks for the question. Okay. Your next question is coming from Yehuda Katz. Yehuda, your line is live.

Thanks so much, guys, for taking the question, and certainly congratulations on the refinancing. That's a massive liquidity event for the company, as you said. Just kind of as we look at 1010 Pacific and embarking on an $85 million development, I just wanted to clarify maybe what the realized yield on the last two redevelopments that you guys did, Cloverhouse and 10 West 60th Street were. So I guess what were the unlevered yields and were those kind of on target with what you expected when you embarked on those projects? Thanks. Michael?

Yeah, I think on Cloverhouse, 107 Columbia Heights, I think we developed that to a kind of roughly to a 5% yield here. Again, I think as we mentioned on prior calls, I think we put a lot of renovation capex into, we realized the potential for the property and where we thought it could go. So I think the timeline, as we previously disclosed, took a little longer than we initially planned, but I think we've got it to a spot now where, as you can see in the performance, we're basically 99% leased after five months or so, six months. and rents continue to rise. So I think we developed that one to roughly kind of a 5% range. On 10 West 65th, that one is sort of a TBD in the sense that right now we're doing okay. I think, as you're aware, when we bought the property, it had 76,000 rentable square feet. It also has 52,000 square feet of air rights, which, just given the current state of the market, it's not something we're in a position to utilize yet. Um, but, um, that is something that we're going to deal with obviously in the future as soon as the time's right. So from kind of a yield perspective, I think it's sort of inning three of a nine inning ball game, if you will, where, uh, we're going to get there on the development here. So right now we're sort of just, uh, kind of moving along with it.

Great. Um, so, so I guess just to follow up on, on, on the five percentage number on Cloverhouse, um, Do you mind just bridging? I think the purchase price was $87,500. And then how much CapEx did that project kind of take up from start to finish? And then I guess what's the NOI number that you guys kind of see a stable at the yield?

CapEx roughly turned out to be kind of a $30 million range in terms of kind of final costs here. And right now we are projecting, again, we don't get kind of forecasts, if you will, but I think on a kind of run rate basis, we're sort of in the kind of $5.5 to $6 million range for NOI, which puts you roughly 5%. Got it. And would that come on target? Yeah, look, I think we can have this conversation. I think if I happen to follow up separately on a separate phone call, if that's easier here, I think we'd like to talk about sort of the current numbers here. So again, I can have to reach out after this call and we can talk through it if that's easier, but I can answer your questions perhaps in more detail.

Okay, great. Thank you so much. And again, congratulations on the great quarter.

Thank you. Your next question is coming from Liz Bow. Liz, your line is live, Liz.

Thanks for the call. When do you expect a resolution on the Tribeca House lawsuit? And can you clarify your September 2020 comments?

It's hard to predict. When there's a lawsuit out there, it's very hard to predict what the courts will do, especially now in these times when the courts are not functioning, so it's difficult to tell. Right now, I'm sitting with an arbitrator who is supposed to come out and determine what the new rents will be. As we've said, we don't believe that that's material. in our results, but we have no way of telling you, you know, how long this code will take its time to come to fruition.

Okay. Your next question is coming from David Boyer. David, your line is live.

Good afternoon. My question relates to the CARES Act, and has the company been able to benefit at all from any of the government subsidies or programs?

We have decided not to make ourselves available to that advice of counsel. We think that it's been clarified it's not for public companies, so we decided to not proceed with that.

Got it. And a quick follow-up is regarding the current share price being at a record low. Are any of the insiders considering increasing their position?

I'd rather not comment on what insiders are going to do at this point. So if the insiders do anything, obviously they'll file the requisite forms, and you'll see it published as it happens.

Thank you. You're welcome. Okay. Your next question is coming from Nathan Gweck. Nathan, your line is live.

How are you doing, guys? Thanks for taking the questions. So just, I know kind of Buck asked about, you know, what are you guys planning on doing with cash? You mentioned you're kind of hunkering down. I know you do have with 1010 Pacific, there's a decent amount of cash obligations over there. So I'm, you know, trying to just curious or, or I guess asking, you know, as far as return on investment over there relative to, you know, maybe buying back shares, you know, how do you view that clearly? where the share price is, possibly the investment in buying back shares could be incrementally greater than the investment in 1010 Pacific. I know you mentioned you're hunkering down, but there's cash needs to be spent in order to kind of proceed over there. So, I mean, have you guys thought about, hey, should we be spending that cash right now? Could we be getting a greater return on investment in buying back shares?

We may decide to do that. We just closed on this refinancing was Friday, late in the day. So we haven't determined yet what to do with it. The cash is not earmarked for 1010 Pacific. There's a construction loan lined up for that. And the construction loan will be used to construct that building. And then as soon as we finish the building, it will be refinanced as we did with the other properties on a permanent standalone fixed rate market.

So no cash needs to go in, additional cash into that kind of silo. Is that what you're saying?

No cash, but most of the money will come from the financing of construction mobiles.

Okay. So I guess with the existing cash on the balance sheet, what are the opportunities available other than buying back shares?

We don't know yet. It remains to be seen. We think that this particular pandemic will make a lot of things available to us in the future. We're not ready to act on any of them right now. We want to see how this shakes out completely. It's a little bit too soon to tell where values and things will shake out and what opportunities will present themselves. We think towards the middle and the end of the year we'll be in a better position to answer that question.

Okay. If I could just say as an investor, we'd love to see Vibex shares and I think the return on investment at these prices could be significant. If I could just ask one more question, the Tribeca, the litigation, I don't know if you quantified kind of the range of where that could fall out. Is it possible you could give us a sense?

We'd rather not quantify it because as we've said on these calls many times, it's subject to... As an arbitrator, we're going to determine how to calculate it, but we think it's not in any way close to being a material event for us. In that lawsuit, very little new people have taken advantage of that lawsuit and joined the lawsuit, so we think the effect on the company is not material at all.

Only two people? Okay. And more people can get involved?

I think originally there were like 40 people in the lawsuit, and 20 that moved out of the building. It's not to say they're not plaintiffs, but they moved out, and I think another 20 people have joined. So that's, I think, the amount of people that are involved in that lawsuit.

Can that change in a meaningful manner, or that cannot change?

It cannot go beyond, I think, the top, if I'm not mistaken, JJ, is about 75 people who will be entitled to become part of that lawsuit. I think it's not a meaningful number.

I will say that the lawsuit came about, or the decision, I should say, came about last June, so we're approaching the one-year anniversary of the appeals order. And as we've said, there's roughly 60-odd people that have come across in the last year or so or 10 months. And just in clarifying timing, because this question was also asked before in terms of September, I mean, as we said, the key point is that this is a little bit of uncharted territory just given the nature of the decision. So in terms of actually how you would go about calculating the potential rent overcharge payment or whatever it may be, if there is any, it's, it does need to be fully worked out with the help of a special referee, which is because this is the first time we're basically going through this. So again, that we've, as we disclosed in our 10 Q today, it's, it's a process that's ongoing occasional appeals, but right now the best timing we have is that it is scheduled to be heard in the September, 2020 term. So at least a couple of months out, but to the extent we get more clarity on either the amount timing, et cetera, we will then provide an update to folks. Okay, thank you so much. You're welcome.

Your next question is coming from Craig Kucera. Craig, your line is live.

Hey, good afternoon, guys. I just wanted to clarify, was the collections number for April across the entire portfolio or just multifamily? Just some color there would be great. As we said, it's about 90% collections.

That is across the entire portfolio. It is a good point, Greg. In the city, which again, we have two buildings within, as you know, the city is current with their payments as you would expect them to be. So again, that's helpful to us, but the 90 plus percent that we talked about, that is across the entire portfolio, but each property on its own in April was roughly in that 90% wage to begin with. So, so far we've seen very good results.

And as far as you do have some modest retail exposure, can you talk about how you're, you know, maybe working with some of those tenants? Are they asking for abatements or are you, you know, working with them on deferrals or just in color and kind of where you're, how you're managing that process?

Yeah.

So as, as I'm sure, you know, everyone's hearing the retailers are getting hurt the most and the whether it's the parking facilities or the fitness centers that we have in some of our properties. These are things that are happening, and these people are not functioning right now, so they're not able to pay the rent. So right now we're in the position of waiting to see what happens. We don't have the ability to change anything about it for the moment because it's a government-mandated closure, but we hope to come out of this sooner than later and then resume the rent collections on those properties.

Okay. That's it for me. Thank you. Thank you. Thanks, Greg.

And you have one remaining question in queue from Howie Shen. Howie, your line is live.

Hi, everyone. Good afternoon. I actually think my questions were answered earlier, but thanks again for taking my question. Thank you.

Thanks, Eric. Are there any remaining questions? Please indicate so now by pressing star one. Okay, we have no further questions in queue.

Thank you for joining us today. We look forward to speaking with you again soon. Stay well.

Thanks, everyone. Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.