Clipper Realty Inc.

Good day, ladies and gentlemen, and welcome to the Clipper Realty First Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Larry Kreider. The floor is yours.

Thank you, and good afternoon. Thank you for joining us for the First Quarter 2023 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 2022 Annual Report on Form 10-K and updated in the 2023 First Quarter Report on Form 10-Q, which are 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 4, 2023, 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 in form 10Q 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 Vistaser.

Thank you, Larry. Good afternoon and welcome to the first quarter 2023 earnings call for Clipper Realty. I will provide an update to 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 discuss property-level activity, including leasing performance. Finally, Larry will speak about our quarterly financial performance. We will then take your questions. Our operating results continue their positive trends. Residential leasing activity continues to improve based on strong rental demand at our properties. As New York City is fully reopened, people seek to relocate back to the city and employees increasingly return to their offices. At the end of the first quarter, our properties were 99% leased, and new leases at all our properties continue to exceed pre-pandemic levels. At the Tribeca house, for example, new leases in the first quarter exceeded $77 per foot, 17% better than the previous rents, and overall rent levels were a record $75 per foot, 19% better than the $63 at the end of December 2022. And at the Flappage Gardens complex, new leases averaged $36 this quarter, and overall rent levels rose to $26.17 per foot. With respect to interest rate increases, we believe we are buttressed by the relatively long duration of our debt on our operating properties, of which 94% is fixed at an average of 3.72% interest, with an average duration of 6.47 years and is non-recourse, subject to limited standard carve-outs, and is not cross-collateralized. With respect to inflation, we look to the short duration and high demand for our residential leases to allow us to cover increased expenses on our operating properties and higher construction costs on our development profits. Our balance sheet continues to be well-positioned from a liquidity perspective. We have a total of $38 million in cash, consisting of $19 million of unrestricted cash and $19 million of restricted cash. We finance our portfolio on an asset-by-asset basis. We are pleased to announce that as of today, we have completed on schedule 1010 Pacific Street, ground-up development, now branded Pacific House, refinanced it with permanent debt and begun leasing in anticipation of full operation in the second quarter. The property is located in Prospect Heights, Brooklyn, about one mile from the Atlantic Terminal slash Barclays Center Hub. It comprises 175 units. It came in at the budget of $85 million total cost and is leasing to a cap rate above 7%. Due to the excellent progress on construction and leasing in February, we replaced the construction load ahead of schedule With a five-year, $80 million loan, $60 million is already drawn at closing, $20 million available upon achievement of certain financial targets. It has an initial interest rate of 5.7%, reduced by another 25 basis points upon full lease-up. Also, we have begun to develop the land parcels we bought in 2021 and 2020. At Dean Street, we also intend to develop From the ground up, a nine-story fully amenitized residential building with 166 residential rentable square feet, 240 total units, 70% of which are free market, and the balance is affordable. Along with the 8,500 commercial rental square feet, we paid $56.5 million for the parcels, partially funded for acquisition financing of $36 million, and we tend to fund the development with a construction loan. With regard to our first quarter results, we are reporting record quarterly revenue of $33.7 million, NOI of $17.1 million, both exceeding pre-pandemic levels, and AFFO of $4.5 million as a result of improved leasing I mentioned above. These results represent significant improvements over the first quarter last year and a testament to the prowess of the management and executive team. 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. I'm pleased to report that our residential leasing performance at all our properties continues to improve. At the end of the first quarter, all our residential properties' occupancy and rent levels are exceeding pre-pandemic levels. Overall, new lease rental rates in the first quarter exceeded previous rents by over 14% and renewal rates by over 8%. We are experiencing particularly strong rental demand at our Tribeca House property. While lease occupancy has averaged 98% over the last 12 months, we have steadily increased average rent per square foot to $75 from $63 over that same period. In the first quarter, rents on new leases were $77 per square foot, a 17% increase over previous rents, and rents on renewals were $74 per square foot, a 14% increase over previous rents. We expect rent per square foot to continue to grow for at least another quarter as a result of turnover of our one- and two-year leases entered into last year in response to pandemic conditions and as a result of continued strong overall leasing conditions. We also continue to benefit from the new leases at retail properties at the Tribeca House property. The four new leases we entered into last year at substantially higher rates are cash flowing and we are actively seeking to lease the last remaining retail space vacated in the pandemic. At the Flappage Gardens Complex in Brooklyn, we are focused on maintaining high occupancy at the 99% level and keeping up with maintenance activities. New leases in the first quarter have averaged nearly $36 per foot approximately 40% higher than the units previously rented. As a result, overall average rents for the property have begun to increase again, rising to $26,017 per square foot at the end of the quarter versus $25.12 at the end of last year. We are now benefiting from the guidelines put forth by the Rent Stabilization Board in October 2023, which allowed increases on rent-stabilized units of 3.25% per 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 capital investment in the property, which has amounted to $900,000 so far this year, and our continued aggressive spending on maintenance and supplies. Our other residential properties, Clover House, 10 West 65th Street, Aspen, and 250 Livingston continue to perform well. While average leased occupancy for these properties has maintained at 99%, average rental rates have increased 11% from a year ago. Rent collections across our portfolio remain strong despite the residual challenges of the pandemic. The overall collection rate in the first quarter was over 98%. Surprisingly, we have continued to benefit, but at a lower rate, from remittances under the New York Emergency Rental Assistance Program, or ERAP, and the Landlord Rental Assistance Program, or LRAP. We received remittances this quarter of $500,000 versus average 2022 quarterly amount of $776,000 and a fourth quarter 2021 amount of $2.5 million. On the development side, the construction of Pacific House in the Prospect Heights area of Brooklyn is completed with a certificate of activity issued by the New York City Building Department. We began leasing in the first quarter and have already leased 60% of the 122 free market leases as of today. We expect to be substantially leased in the third quarter. The development is a nine-story, 119,000 rentable square foot fully amenitized multifamily rental building with underground indoor parking. The property has 175 total units, 70% free market, and 30% affordable, and has 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 first quarter, reported revenues increased by $1.6 million to a record record. $33.7 million from $32.1 million last year first quarter. On a more comparable basis, after eliminating a one-time recovery of previously written-off receivables of $1.1 million under the new accounting standard implemented last year, revenue last year was $31 million, representing an increase of $2.7 million, or 9%. NOI this quarter was $17.1 million, or $0.6 million better than last year as reported, and $1.7 million better after adjusting for the one-time revenue recovery. Similarly, AFFO this year was $4.7 million, an increase of $0.2 million from the $4.5 million reported last year, or $1.3 million better after adjusting for the one-time recovery item. The revenue increase was due to the higher residential revenue rates from continued strong leasing, as mentioned by JJ, and higher occupancy at the Flatbush Gardens property. Bad debt expense was substantially level with last year, reflecting the high and stabilized collections, as JJ also discussed. On the expense side, key year-over-year changes were as follows. Property operating expenses were $600,000 higher than last year, due primarily to increased utility gas heating prices compared to last year, and higher repair costs at Flatbush Gardens from our increased focus on maintenance. Real estate taxes and insurance increased by approximately $600,000 in the first quarter year-on-year, $500,000 due to the regular increase in real estate taxes mid-year last year, and $100,000 due to insurance cost increases. General and administrative costs increased by $350,000 in the first quarter year-on-year, primarily due to extra auditor transition costs and higher amortization costs of LTIPS issued after the first quarter last year. Interest expense increased by $200,000 in the first quarter year-on-year due to conversion of the debt at the 10 West Street property to variable rate, according to its terms, partially offset by additional capitalization of interest associated with the Pacific House and 953 Dean Street development projects. With regard to our balance sheet, as David mentioned earlier, we have $18.8 million of unrestricted cash and $19 million of restricted cash. We initially funded development of our Pacific House and Dean Street acquisitions substantially with construction financing. In February, we refinanced the Pacific House construction loan with an $80 million mortgage that provided initial funding of $60 million and a further $20 million subject to achievement of certain financial targets. The loan has a five-year term and an initial interest rate of 5.7%, subject to a reduction by up to 25 basis points upon achievement of certain financial objectives. The loan is interest only for the first two years and principal and interest thereafter based on a 30-year amortization schedule. 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 operating properties until 2027, with average overall duration of 6.47 years. At the end of 2023, currently 9.4% of debt at our operating properties is fixed at an average rate of 3.72%. 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 24th to shareholders of record on May 15th. Let me now turn the call back over to David for concluding remarks.

Thank you, Larry. We remain focused on efficiently operating our portfolio. We look forward to our current operating improvements to continue to accelerate through the next quarter and into 2023. We look forward to capitalizing on a myriad of growth opportunities, including Pacific House and Dean Street developments and other possibilities that may present themselves. I will now open the line for your questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. The first question comes from Buck Horn with Raymond James. Buck, please proceed.

Hey, thanks, guys. Good afternoon and congrats on the progress. I'm wondering if we could just revisit Flatbush and going back to late last year, it sounded like you guys were marketing the property or at least taking some indications of interest in the market to see if there was a potential buyer or transaction that might be possible for Flatbush. I'm just wondering if you can give a progress update or is Flatbush still potentially on the market?

Flatbush is no longer on the market. We took it off the market and we have some other plans for the property, which we cannot talk about at the moment. But hopefully next quarter we should be in a better position to what direction we're going, but at the moment, we're not considering a sale of the property. Okay.

All right. I appreciate the update. And for this year, it sounds like there's new, I guess, new discussions and proposals from the Rent Guidelines Board about potential increases for rent-stabilized units. I just read the articles talking about, you know, up to 2% to 5% increases on one-year leases and higher than that on two-year leases. So it sounds like there may be some additional changes you know, progress or rent increases coming in. I'm just wondering if, I guess the question would be, you know, related to Flatbush and those properties. Do you think, well, I don't know what you can opine on in terms of what do you think the likelihood of those types of increases being pushed through would be?

If history is a guide, which it usually is, there will be some increases. If you read the news reports about how they conduct these meetings, it's more of a circus than anything else. But there will be, I think, a good possibility that there will be an increase. It's too early to tell until we know what the results are in a couple of weeks or so. And stay tuned. But there will be something coming, I think. That seems to be an indication.

And, Buck, as I also noted, we've already started to benefit from the increases that were permitted effective October of last year. And they come in gradually. It's a large property, and turnover is reasonably slow. Okay.

I appreciate that. And just last one for me, just kind of taking a higher level in terms of where the stock price is at relative to obviously what you guys consider the NAV of the company materially higher than these levels. Do you guys give any thoughts to other strategic transactions or potentially one of the smaller properties, potentially monetizing a property to fund either debt repayments or stock repurchases at these levels?

It's something which we have not considered at the present time. The climate is not ripe, I think, for that at this particular moment where interest rates are. With the pause in interest rates, seemingly the pause in interest rates, I think after that comes a sort of a – I think the rates will come back the other way around, and that will probably be a better time to explore what you're suggesting.

Got it. Got it. All right, guys. Well, appreciate the time, and good luck, and thanks for the update. Thank you.

Thank you. Nice talking to you.

Once again, if there are any remaining questions or comments, please press star 1 on your phone at this time. There are no further questions in queue. Do you have any closing comments you'd like to finish with?

Thank you for joining us today. We look forward to speaking with you again soon. And please stay healthy. Have a good night.

Thank you. 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.

Thank you. Thanks, John. Bye. Thank you.

Thank you, gentlemen.