Clipper Realty Inc.

Good afternoon, ladies and gentlemen, and welcome to today's Clipper Realty second quarter 2022 earnings call. At this time, all participants have been placed on a listen-only mode, but we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn it over to your host, Lawrence Kreider. Lawrence, the floor is yours.

Thank you very much. Good afternoon, and thank you for joining us for the second quarter 2022 earnings call. 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 2021 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, August 9, 2022, 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 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 Bisterster.

Thank you, Larry. Good afternoon and welcome to the second quarter of 2022 earnings call for Plipper Realty. I will provide an update of our business performance, including recent highlights and milestones, as well as our company's progress. I will then turn the call over to JJ, who will address property level activity, including leasing performance. Finally, Larry will speak about our quarterly financial performance. We will then take your questions. We see positive operational trends as we look forward. Residential leasing activity is rapidly improving, despite the recent headline news on inflation and interest rate increases. We expect rental demand to remain strong and pricing to improve. Now that New York City is largely reopened, people seek to relocate back to the city and employees increasingly return to their offices. At the end of the second quarter, our properties were 98% leased and new leases at our property are reaching or exceeding pre-pandemic levels. including at Rebecca House property, where new lease rates in the second quarter exceeded $80 per square foot, more than 30% better than the previous rents and June average rents per square foot increased to $67 per foot from $65 per foot at the end of March and $63 per square foot at the end of December. With respect to interest rate increases, we believe we are buttressed by relatively long duration of our debt, of which 95% is fixed at 3.76%. has an average duration of 7.13 years and is non-recourse subject to limited standard carbon non-cost collateralized. With respect to inflation, we looked at a short duration of our residential leases to allow us to cover increased expenses on a substantial number of our leases and our major existing construction project, our contracts were all bought out in 2021. Our balance sheet continues to be well positioned from a liquidity perspective. We have approximately $44 million consisting of $29.5 million of unrestricted cash and $14.5 million of restricted cash. We finance our portfolio on an asset-by-asset basis. Turning to recent developments. The centrally ground-up development of a 1010 Pacific acquisition is moving along very well, and we are targeting substantial completion in the fourth quarter. The property is located in Prospect Heights, Brooklyn, a mile from the Atlantic Ocean, terminal Barclays Center Hub. As previously discussed, we estimate the project to cost $85 million and develop to a 6.5% stabilized cap rate. JJ will provide further update on the project shortly. At the end of the year, we also brought another property in the same area of Brooklyn at 953 Dean Street that we intend to redevelop from the ground up. In April, we completed the incremental purchase of land and financing to bring the initial purchase to a total cost of approximately $48 million with acquisition financing of $37 million. We expect to build a nine-story fully amenitized residential building with 160,000 residential rentable square feet, 240 units, 70% free market, 30% affordable, which is under the 421A program, which is a tax stop for 35 years with 85 and a half, 8,500 commercial rental square feet. With regard to our second quarter results, we are reporting quarterly revenue of $31.9 million, NOI of $17.2 million, and AFFO of $5.1 million as a result of the improved leasing I mentioned above. These results represent significant improvements over the second quarter last year, as JJ and Larry will further detail. I will now turn the call over to JJ, who will provide an update on operations.

Thank you. New residential leasing activity that began towards last year continues to improve. At the end of the second quarter, all our residential properties were leased in the high 90% range. and new rental rates per square foot in the second quarter are reaching or exceeding pre-pandemic levels and all exceeding present average rent rates. As I will detail shortly, combined for all our properties, new lease rental rates in the second quarter exceeded previous rents by over 20% and renewal rental rates exceeded previous rents by over 10%. We are experiencing strong rental demand at our Tribeca House property While lease occupancy has averaged 98% over the last 12 months, we have increased average rent per square foot to $67 per square foot from $60 over that same period. In the last six months, rent on new leases have risen to over $80 per square foot, representing an increase of 30% over previous rents, and rent on renewals have increased 18% over previous rents. Further, we expect rent per square foot to continue to grow significantly steadily through next year as a result of turnover of our one and two year leases entered into last year in response to pandemic conditions. We also continue to make progress on new leases at retail properties at the Tribeca House property. We have entered into four new smaller leases this year at substantially higher rates, renewed our garage lease, and firmed up our gym lease. At the Flappers Gardens Complex in Brooklyn in the second quarter, We have focused on leasing the units vacated in the pandemic since mid-2020. Since the beginning of the year, we have increased lease occupancy to nearly 98%, while new leases averaged nearly $33,000 per square foot, approximately 8% higher than the units previously rented. Overall, average rents for the property have begun to increase again, rising to $25,059 per square foot, at the end of the quarter versus $25.12 at the end of the last year. Looking forward, we should also benefit from the new guidelines put forth by the Rent Stabilization Board, which beginning October 1, which will allow increases on rent-stabilized units of 3.25% for one-year leases and 5% for two-year leases. Such increases have been limited to 0% and 2% for the last couple of years. These increases will help offset our continued investment in the property, which has amounted to nearly $2 million this year. Lastly, we continue to benefit from the 2020 reorganization of the property's operation that created nearly $800,000 in savings. Our other residential properties, Clover House, 10 West 65th Street, Aspen, and 250 Livingston Street continue to perform well. Leased occupancy has remained high, all above 95%, while average overall rental rates, with the exception of Aspen, have increased 5% to 8% since the beginning of the year. Increases on both new leases and renewals have averaged over 20%. Aspen has been stable with very little turnover. Rent collections across our portfolio remain strong despite the residual challenges of the pandemic. The overall collection rate in the second quarter was over 97%. We have continued to benefit from remittance under the New York Emergency Rental Assistance Program, or ERAP, and the Landlord Rental Assistance Program, or LRAP, by which we received $1.4 million in the second quarter, $600,000 in the first quarter, and $2.5 million in the fourth quarter of 2021. On the development side, we are moving well on construction at 1010 Pacific Street and are on target for substantial completion by the fourth quarter. We have nearly completed facade work, sheetrocking and window installation, and have begun installing finishes. Costs are as expected as we bought out virtually all our construction contracts last year before the recent spike in costs. We have financed our construction fully through our 52.5 million construction loan. The development is a nine-story, 119,000 rentable square foot, fully amenitized multi-family 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. Looking ahead, we remain focused on optimizing occupancy, pricing, and expenses across the business to best position ourselves for growth. I will now turn the call over to Larry, who will discuss our financial results.

Thank you, JJ. For the second quarter, revenues increased by $1.2 million to $31.9 million from $30.7 million last year's second quarter. NOI this quarter increased by $1.1 million to $17.2 million from $16.1 million last year's second quarter. AFFO increased by $1 million to $5.1 million this quarter, from $4.1 million last year's second quarter. As I discussed last quarter, adoption of a new accounting standard, ASC 842, shifted the classification of bad debt expense from expense to revenue and accelerated the recognition of bad debt expense on accounts that are not fully collectible. As a result, we have deducted bad debt expense from revenue in 2022 versus adding to expense in 2021 and earlier. To record the effect of the acceleration of bad debt expense recognition from the new accounting standard, we recorded a $5.8 million charge to retained earnings in the first quarter and then a $1.1 million credit to revenue for improved prospects of a commercial tenant of the Tribeca House property. As a result, excluding the impact of the new accounting standard, Revenue in the second quarter increased by $1.9 million to $32.6 million from $30.7 million last year, primarily due, as JJ detailed, to increased occupancy at the Flatbush Gardens property, higher residential rental rates at the Tribeca House, Clover House, 10 West 65th Street, and Flatbush Gardens properties, new commercial tenants at the Tribeca House property, and increased CAM billings at the 141 Livingston Street property. These increases were partially offset by $700,000 of bad debt expense this quarter versus a $900,000 charge to operating expenses last year. On the expense side, the key year-over-year changes were as follows. Property operating expenses were $600,000 higher than last year, excluding the $900,000 charge for bad debt expense in last year's second quarter. This was due primarily to increased prices of heating, oil, and gas, and increased expenses to make vacant units at the Flatbush Gardens property ready for improved leasing this year. Real estate taxes and insurance increased by approximately $500,000 in the second quarter year on year due to increased insurance costs across the portfolio for arrangements begun in the third quarter last year. Interest expense decreased by $360,000 in the second quarter year-on-year due to additional capitalization of interest associated with the 1010 Pacific Street and 953 Dean Street development projects. With regard to our balance sheet, as David mentioned, We have $29.4 million of unrestricted cash and $14.5 million of restricted cash. We are funding our development of our 1010 Pacific Street and Dean Street acquisitions substantially with construction financing. We finance our portfolio on an asset-by-asset basis, and our debt is non-recourse, subject to limited standard carve-outs, and is not cross-collateralized. We have no debt maturities on any properties until 2022 with average overall duration of 7.13 years. Today we are announcing a dividend of $0.095 per share for the second quarter, the same amount as last quarter. The dividend will be paid on August 26 to shareholders of record on August 19th. Let me now turn the call back over to David for concluding remarks.

Thank you, Larry. We remain focused on efficiency operating our portfolio. We look to current operating improvements to continue to accelerate through 2022 and beyond. We look forward to capitalizing on a myriad of growth opportunities, including the 1010 Pacific and 953 Dean Street developments and other possibilities that may present themselves. I would now like to open up the line for questions. Thank you.

Ladies and gentlemen, the floor is now open for questions. If you would like to ask a question at this time, you may press star one on your telephone keypad to enter the queue. We do ask if listening on speakerphone today that you please pick up your handset to provide optimal sound quality. Once again, ladies and gentlemen, you can press star then one on your telephone keypad at this time if you would like to ask a question. Please hold a moment while we poll for questions. And as a reminder, ladies and gentlemen, that'll be star one on your telephone keypad at this time. Once again, please hold a moment while we poll for questions. And we do have a question coming from Buckhorn from Raymond James. Buck, your line is live, please go ahead.

Hey, thanks. Good afternoon. Hey, guys. Good afternoon. Just curious with completion of 1010 Pacific coming into visibility here, what the timeframe would be for putting in some sort of permanent financing on that property or taking out the construction loan and what kind of costs you see in the market in terms of like, what do you think you can go to market at in the next few months and price that loan out at?

We haven't yet, you know, gone to the market. We are starting to speak to the lender itself, who has a program for permanent financing. And we're starting to make such applications. It's a little bit early because it hasn't rented yet. And we think that, you know, jumping the gun before it's rented will hurt us in the interest rate and other terms of the loan. But, you know, we're very focused on it, and we know that's one of the things that we'll be doing more towards the fourth quarter of this year where we'll engage with different lenders on it.

Okay. Okay. Appreciate that. And on the Dean Street redevelopment, so what's the projected timeline for completion on that, if you have any idea on what pro forma stabilized yield on cost might look like there?

This is something we'll have to get back to. I don't have that number here. We actually have it, but I don't have it in front of me. We'll get back to you after the call.

Okay. All right, guys. Thanks.

Sure. You're welcome. Nice talking to you.

Thank you. And as a reminder, ladies and gentlemen, if you would like to ask a question at this time, you may press star then one on your telephone keypad. And there are no further questions in queue at this time. I would now like to pass the floor back to the management team for closing remarks.

Thank you for joining us today. We look forward to speaking with you again soon. Have a happy, healthy summer.

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.