Clipper Realty Inc.

Good afternoon and thank you for joining us for the fourth quarter 2023 Clipper Realty Inc. earnings conference call. Participating with me on today's call are David Bisteresser, co-chairman of the board and chief executive officer and JJ Bisteresser, 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 2023 annual report on form 10K which is accessible at .scc.gov and our website. As a reminder the forward-looking statements speak only as of the date of this call, March 14th, 2024 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 advertisement or adjusted EBITDA and net operating income or NOI. Please see our press release supplemental financial information and form 10K 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 chairmen and our co-chairman and CEO David Bisteresser.

Thank you Larry. Good afternoon. Welcome to the fourth quarter of the 2023 earnings call for physical ability. I will provide a summary of some of our business performance and some existing new developments after which JJ will discuss property level activity including leasing performance and Larry will speak to our quarterly financial performance. We will then take your questions. I am pleased to report that we have recorded record operating income in AFFO continuing the positive trends from previous quarters. Rental demand continues to be strong at all our properties. In the fourth quarter new leases exceeded prior rents by 6% across the entire market and our properties were 98% leased. At the Rebecca House property in Manhattan and the Clover House property in Brooklyn new leases were $88 per square foot and overall rent levels remain at record levels $78 at Rebecca House $81 at Clover House 40% better than the 63 square foot at the end of December 2021. At Flapridge Garden since July as previously announced we are operating under a 40 year agreement according to the Article 11 of the private housing finance law in New York City Housing and Preservation Development. Under this agreement known as the Article 11 the elimination of real estate taxes and enhanced rental recoveries for assisted tenants should allow us to profitably provide for communities for property improvements, tenant assistance and higher wages. Of course we are at the early stages of reporting progress as we move forward. Operationally we are pleased to report that our ground up development at Pacific House at 1010 Pacific Street in Brooklyn came online last quarter on budget and is 100% leased and on target to yield a 7% cap rate. The property is located at Pacific Heights in Brooklyn about one mile from the Zagreb terminal, block to the center, cub. The property has 175 units, 70% free market and 30% affordable and this is tax abated for 35 years. As the nearby 953 D Street ground up development which is underway we have completed the superstructure have scheduled, expected to complete the construction on time for 2025 leasing season. Utilizing the 123 million dollar construction we closed on last quarter. We purchased the land in 2021 and 2022 which to build a nine story fully amenitized residential building with 163,000 square feet of rentable square feet, 240 units, 70% free market, 30% affordable, 8500 commercial rentable square feet and again this is also tax abated for 35 years. As the continued high interest rate environment we believe the higher rates make for high demand for our rental product versus the purchase option and we are buttered by the relatively long duration of debt at our operating properties. Debt is 93% fixed at an average rate of .8% and average duration of 5.5 years. Non-recourse subject to limited time is carve out and is not cross-scalalized by any one of the properties. We finance our properties on asset by asset basis. With respect to inflation we look to the short duration and high demand for the residential leases to allow us to cover increased operating expenses. With regard to our fourth quarter results we are reporting quarterly revenue at $34.9 million, record NOI of $20 million, and record AF of over $6.3 million as a result of the strong leasing and cost reduction I just mentioned. These results represent significant improvements over the fourth quarter last year and 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 am pleased to report that our residential leasing performance at all our properties continues to improve. At the end of the fourth quarter all our residential properties had very high occupancy averaging 98% and rents are continuing at record levels while still recording increases over previous levels. Overall new lease and renewal rental rates in the fourth quarter exceeded previous rents by over 6% at our free market properties. We expect leasing to remain very strong in the foreseeable future as demand remains high and the overall rental housing supply remains constrained in the absence of significant new developments as widely publicized. At Chebaka House and Clover House we have maintained lease occupancy between 96 to 99% increased average rent per square foot to $78 per square foot from $71 over the last 12 months and $63 per square foot near the end of the pandemic. At our new development property Pacific House is almost fully stabilized. The 70% free market and 30% affordable property came online at the beginning of the second quarter and was 100% leased at the end of this quarter. We expect the property to achieve a cap rate over 7% in 2024 in line with the original underwriting. At the Flappers Gardens property we are pleased to be operating under the new Article 11 agreement made with the Housing Preservation Department of New York City that was completed on June 29, 2023. We received the full abatement of real estate taxes beginning July 1, have begun completing the capital projects we committed, have begun placing formerly homeless residents and have obtained the enhanced reimbursement under Section 610 of the private housing finance law for tenants receiving assistance. The benefits we receive will allow us to profitably improve the property. We are also getting increases from non-assisted tenants where increases have been permitted under rent guidelines board for the last couple of years at the 3% level per annum. As a result overall average rents for the property are increasing rising to 26.69 cents per square foot at the end of the quarter versus 25,097 cents at the end of the last year. Operationally our other residential properties at 10 West 65th Street, Aspen and 250 Livingston Street continue to perform well. Average leased occupancy for these properties has been above 96% and average rental rates have increased 11% from a year ago. Rent collections across our portfolio remain as expected at seasonally high levels. The overall collection rate in the fourth quarter was over 95% despite the lingering challenges of the pandemic. Looking ahead we remain focused on optimizing occupancy, pricing and expenses across the business, expeditiously completing our development projects and fully implementing the Article 11 transaction 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 fourth quarter revenues increased to a record $3.9 million from $33 million last fourth quarter by $1.9 million or excluding the impact of Pacific House that came online in the second quarter an increase of $0.7 million. NOI this quarter was $20 million, an increase of $2.8 million from last year or $2 million excluding the impact of Pacific House. AFFO this year was $6.3 million, an increase of $1.6 million from last year or $1.9 million excluding the impact of Pacific House which reflected full interest expense since going online but only partial initial lease up. For the fourth quarter residential revenue increased to $25.1 million by $2.1 million or a $1 million revenue increase excluding the impact of Pacific House. This 4% increase was primarily due to higher residential rental rates for all properties from continued strong leasing previously discussed. Bad debt expense was substantially the same as last year reflecting high and stabilized collections. $300,000 decline in commercial rental income was caused by a couple of leases at the Aspen property that are being replaced. On the expense side key year over year changes quarter on quarter were as follows. Property operating expenses were flat compared to last year excluding the impact of Pacific House primarily due to lower utilities costs mostly offset by higher repairs and maintenance and major role at the Flatbush Gardens property to make necessary repairs and to comply with wage requirements under the Article 11 transaction. Real estate taxes and insurance decreased by approximately $1.3 million in the fourth quarter year on year excluding the impact of Pacific House. $1.8 million due to elimination of real estate taxes at Flatbush Gardens partially offset by $200,000 for routine increases in real estate taxes at the other properties and $300,000 for insurance cost increases. General and administrative costs decreased by $300,000 in the fourth quarter year on year primarily due to lower audit costs and compensation related expenses. Interest expense increased by $300,000 in the fourth quarter year on year excluding the impact of Pacific House due to conversion of the debt at the 10 West 65th property to variable rate according to its terms and the elimination of capitalized interest for Pacific House. With regard to our balance sheet we have $22.2 million of unrestricted cash and $14.1 million dollars of restricted cash. In the fourth quarter we had no new debt activity other than draws under the construction loan that we closed last quarter for our Dean Street property development. We financed our portfolio on an asset by asset basis. Our operating debt is non-recourse subject to limited standard carve-outs and is not collateralized. The average duration of our debt of our operating properties is 5.5 million, 5.5 years and 93% of our debt at our operating properties is fixed rate at an average rate of 3.87%. Today we are announcing a dividend of nine and a half cents per share for the fourth quarter, the same amount as last quarter. The dividend will be paid on April 4, 2024 to shareholders of record on March 27, 2024. Let me turn the call back to David for concluding remarks.

Thank you Larry. We remain focused on efficiently operating our portfolio. We look for our current operating improvements to continue through 2024 into 2025. We look forward to capitalizing a myriad of growth opportunities including optimizing Flapper's Garden's Article 11 transaction, Pacific House and 953 Dean Street development and capitalizing other possibilities that may present itself. We look forward to the transition of the 250 Lingston tenant at end of the DCAS lease, which is coming up at the end of 2025. Thank you. We look forward to seeing you at the next quarter.

Thank you. 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 of listing on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Once again, please press star one if you have any questions or comments. The first question comes from Buckhorn with Raymond James. Please proceed.

Hey, good afternoon, guys. I was wondering if we could start with just 250 Livingston and the situation with the lease and the notification that the City of New York plans to vacate. Can you walk us through what the next steps are in terms of either trying to re-tenant the building or what your options are if re-leasing the space is not realistic? Do you have a $125 million mortgage out on the property? Does it make sense at some point to consider just handing the keys back?

We think that's a premature type of a conversation. The city who is basically the cash that organizes all the leases for the city is looking, is in the marketplace for a new building occupation for about 300 and something thousand square feet by one of the city agencies. We are told that this building at 250 and the other building that we have 141 is a prime candidate for it. There's no guarantee, obviously, that we will be awarded that opportunity. But we're working diligently to try to get that tenant into our building. That would be an improvement of what we have right now. We are in a position to be able to renovate that building if we had to, to accommodate for a new tenant. We have excellent relationship with DCAS over the many, many years. In that particular marketplace, I think we're in a good position for the core spaces that we have in the building to be able to compete very aggressively in the marketplace to attend the rent that they're looking for. That's only one option, and that's the one that we're most focused on at the moment.

Okay, appreciate that. Do you have any idea realistically what the cost to put in the tenant improvements or additional capex in the 250 living to any range of estimate of what that would cost to get that ready for a new tenant?

We don't know yet because we haven't yet got that granular with this conversation. But usually the way it would work is whatever we put into the building would be met by, obviously, we're making our $50 a foot on that particular tenancy. It's not a very high rent for the marketplace, but it's a fair rent for the condition of the building that it's in. Any money that we invest in the property will be always tested by return on equity to commensurate the needs for that investment. We wouldn't just put in the money for the building not to get back a fair return on it. So it would be a long-term lease. It would be for a credited lease tenant. DKS leases are all credited with credit. So that would be commensurate with those who think the credit is in the tenant and also the amount of money that usually what they're looking to do is not that most commercial tenants ask for a lot more luxury types of improvements. This is really very, very, I think, a bare bones kind of operation that these agencies look for. So we don't have more details than that right now. We'll see as we go along. We'll report when we have something to report.

All right. Got it. And for now, any income and revenue from the building goes into an escrow account? Is that how this works until what requirements need to be satisfied before you can start continue booking revenue from the building again?

Well, the revenue is the revenue. Nothing can stop the revenue until the end of the lease. The revenue is going to be reported by the company. It's taxable by the company, whatever the taxes is. It's our revenue. Whether there's going to be an escrow account yet, that has not been determined yet.

Okay. Got it. And my last one is just simply a larger or bigger picture, I guess, just noting where shares are trading and relative to even our estimates of what the NAV of the company is. Is there a consideration or longer term thought of, does it make sense to look at a potential property sale to try to either de-lever the balance sheet and or potentially deploy some proceeds into stock repurchases?

We haven't yet discussed that yet at the property. The value of the stock, the price of the stock has been where it is for quite some time. Obviously, it comments, I think, indicative where the overall market is. And that discussion has not yet been considered yet with your reference.

Got

it.

All right, guys. Thanks. Thank you.

If there are any remaining questions, please indicate so by pressing star one. I would now like to turn the floor back to management for closing remarks.

Thank you for joining us today. We look forward to speaking with you again soon. Have a good evening.

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.