Clipper Realty Inc.

Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty First Quarter 2021 Earnings Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Michael Frenz, Chief Financial Officer. Sir, the floor is yours.

Good afternoon, and thank you for joining us for the First Quarter 2021 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 2020 Annual Report on Form 10-K, which is 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 10, 2021, 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 Visterser.

Thank you, Michael. Good afternoon, and welcome to the first quarter of 2021 earnings call for Clipper Realty. I will provide an update on our business performance, including recent highlights and milestones, as well as how our company continues to respond to the COVID-19 pandemic. Mr. JJ will discuss property-level activity, including leasing performance. Finally, Michael will speak about our quarterly financial performance. We will then take your questions. I will begin by once again extending our thanks to the entire Clipper Realty team for their ongoing hard work, perseverance during these unprecedented times. We remain grateful to their efforts over the past 14 months under very, very challenging circumstances, are proud of their continued dedication to the residents, communities, and our business. Properties have remained open and operational throughout the pandemic. The increase in New York City residential leasing activity That took hold in the fourth quarter of last year continues today as both the city and the economy in general further strengthen from the depths of the pandemic. We expect rental demand to remain elevated and pricing to improve as New York City continues to reopen and vaccinations proliferate. At the end of the first quarter, our properties were 95% leased and rents at our Tribeca house in the first week of May have increased over 20%. over a similar period in April. We continue to take the necessary steps to keep our tenants safe in compliance with state and local orders and are providing typical services to our residents. We remain confident in the resiliency of New York City. We expect our properties in the city to stay desirable to a broad range of tenants and operations to continue to return to a more normal state over time. Our balance sheet continues to be well positioned from a liquidity perspective to manage through the pandemic. We have approximately $106 million of cash consisting of $88 million of unrestricted cash and $18 million of restricted cash. We finance our portfolio on an asset-by-asset basis. Our debt is non-recourse. subject to limited standard coverage and is non-cross-collateralized. We have no debt maturities on any of our operating properties until 2027. Turning to some more recent developments, we continue to proceed with the redevelopment of 1010 Pacific Street acquisition located in Prospect Heights, Brooklyn, about one mile from Atlantic Terminal Barclays Center Hub. Construction is well underway. As previously discussed, we estimate that the project will cost $85 million total take two years to complete and develop to a six and a half stabilized capitalization rate. JJ will provide further updates on the project shortly. And that project today has a commitment from a major insurance company to finance the construction law. In our office portfolio, the city rent at 141 Livingston Street increased two and a half, 25% at the end of December 2020, which will add $2.1 million in profit annual NOI. Together with the expected additional $5 million of annual NOI resulting from New York City's new lease at 250 Livingston Street property that commenced in August of 2020, these rent rolls are expected to add an incremental $7.1 million of annual NOI to our portfolio representing and a proximate 10% increase in our normalized run rate. I would like to comment on the quarterly results. We are reporting quarterly revenue of $30.7 million, NOI of $14.8 million, and AFFO of $3.1 million. Michael will depart as Chief Financial Officer to pursue another opportunity. Larry Kreider, our former CFO, since the formation of the company in 2015, will return as CFO. On behalf of the entire company, we thank Michael for his many contributions to Clipper Realty. I am excited to welcome back Larry as our CFO. Larry initially joined the business in 2014, led the company, ruled 144 area offering in August of 2015, initial public offering in February of 2017. His intimate knowledge of operations Management expertise and extensive financial experience will help drive our strategic vision for the future. Michael and I will work with our executive management, finance, and accounting teams to ensure a smooth transition. I will now turn the call over to JJ, who will provide an update on operations.

Thank you. I begin again sending our thanks to the company's employees for their inspiring efforts throughout this unprecedented period. We are grateful for their ongoing commitment to our tenants and communities. The increase in residential leasing activity that began toward the end of last year continues today. At the end of the first quarter, all of our residential properties were leased in the mid to high 90% range, building on year-end trends and a marked improvement versus the approximate 90% level seen six months ago. We anticipate that rental demand will remain strong as New York City further reopens and vaccines continue to become more widespread. Occupancy at Tribeca House continues to strengthen. At the end of the first quarter, the property was 96.5% occupied versus 90% at year end and 80% six months ago. To that effect, new leases in the second quarter are on average 20% higher than new leases in the first quarter. We continue to work diligently to manage revenue at the property. We believe that rental rates at Tribeca House will return to pre-COVID levels over time, given the asset's quality and attractiveness from a pricing standpoint compared to other luxury buildings in the surrounding neighborhood. The Flappage Don's complex in Brooklyn held up well in the first quarter from a revenue standpoint. As it has throughout the pandemic, the property maintained high occupancy, ending the quarter 94% least. Rent per square foot was $25.07 at the end of the quarter, a near record level. As noted previously, we have reorganized certain operations at the property as part of ongoing efforts to manage our expense base, which is expected to result in annual cost savings in excess of $800,000. So, average bonds remain the key element of our portfolio and growth story. Rent collections remain strong despite the challenges of the pandemic. Our collection rate in the first quarter was over 96% and uptick versus 95% at year end. We continue to work with tenants on a case-by-case basis if they notify us that they cannot meet their rent obligations due to the pandemic. On the development side, we have commenced construction at 1010 Pacific Street on a nine-story, 119,000 rentable square foot, fully amenitized multifamily rental building with underground indoor parking. The property is expected to have 175 total units, 70% of which will be free market and 30% affordable, and is eligible for a 35-year 421A tax abatement. We are currently negotiating a construction loan for the project. Looking ahead, we remain focused on optimizing occupancy, pricing, and expenses across the business to best position ourselves as New York City continues its emergence from the pandemic. I will now turn the call over to Michael, who will discuss our financial results.

Thank you, JJ. For the first quarter, we achieved revenues of $30.7 million compared to $31.3 million for the first quarter of 2020. We achieved NOI of $14.8 million and AFFO of $3.1 million. The year-over-year revenue change was primarily attributable to decline the lease occupancy and residential rental rate at the Tribeca House property and the termination of certain commercial leases at the property, partially offset by the commencement of the new office lease at the 250 Livingston Street property during the third quarter of 2020. On the expense side, key year-over-year changes were as follows. Property operating expenses increased by $1.5 million in the first quarter year-on-year primarily driven by an increase in the provision for bad debt due to the impact of COVID-19 and an approximate $600,000 catch-up for previously unbilled utility expenses. Real estate taxes and insurance increased by $0.4 million in the first quarter year on year due to property tax increases across the portfolio and general insurance industry cost increases. Interest expense increased by $0.4 million in the first quarter year on year primarily due to the refinancing of the Flatbush Gardens property in May 2020 and the 141 Livingston Street property in February this year. As David mentioned earlier, we are well positioned from a liquidity perspective. We have $106 million of cash, consisting of $88 million of unrestricted cash and $18 million of restricted cash. We finance our portfolio on an asset-by-asset basis. Our debt is non-recourse, subject to limited standard carve-outs, and is not cross-collateralized. We have no debt maturities on any operating properties until 2027. Today, we are announcing a dividend of 9.5 cents per share for the first quarter, the same amount as last quarter. The dividend will be paid on May 27th to shareholders of record on May 20th. Lastly, as mentioned earlier, I will be departing the company. It has been a privilege to work with David, JJ, the board, and the entire Clipper Realty team. The organization is well positioned to take advantage of opportunities to grow shareholder value, and I'm excited to watch their success in the years to come. I wish everyone in the company all the best. Larry Kreider, the team, and I will work closely together to ensure a smooth transition. Let me now turn the call back over to David for concluding remarks.

Thank you, Michael. We remain focused on efficiently operating our portfolio with the safety of our tenants and employees our highest priority. We continue to take the necessary steps to navigate through the current challenges, butchers by a long, strong balance sheet. We expect New York City's recovery from the pandemic to continue to accelerate to 2021 and beyond. We look forward to capitalizing on a myriad of growth opportunities, including 1010 Pacific Street, development and other possibilities that may present themselves. We hope everyone remains safe and healthy. I would like now to open up the line for questions.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone now. Please hold a moment while we poll for questions. We have no questions from the phone lines at this time.

Thank you very much. Thank you for joining us today, and we look forward to speaking with you again soon.

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.