This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Clipper Realty Inc.
3/14/2024
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 Bistresser, co-chairman of the board and chief executive officer, and J.J. 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 2023 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, March 14, 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 amortization or adjusted EBITDA, and net operating income or NOI. Please see our press release supplemental financial information and form 10-K 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 chairman and our co-chairman and CEO, David Bisserson.
David Bisserson Thank you, Larry. Good afternoon. Welcome to the fourth quarter of 2023 earnings call for Clipper Realty. I will provide a summary of some of our business performance and some existing new developments Afterwards, JJ will discuss property level activity, including leasing performance, and I will speak to our quarterly financial performance. We will then take your questions. I'm 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, move leases exceeded prior rents by 6% across the entire market-based portfolio. and our properties were 98% leased. At the Tribeca House property in Manhattan and the Clover House property in Brooklyn, new leases were $88 per square foot, and overall rent levels remained at record levels, $78 at Tribeca House, $81 at Clover House, 40% better than the 63 square foot at the end of December 2021. And Flavage Gardens, since July, previously announced to be operating under a 40-year agreement according to the Article 11 of the Private Housing Finance Law and 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 our communities for property improvements, tenant assistance, and higher wages. Of course, we are at the early stages of reporting our 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 across the High East Brooklyn, about one mile from the Atlantic Terminal, 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 of development, which is underway, we have completed the superstructure ahead of schedule, expect to complete the construction on time for 2025 leasing season, utilizing the $123 million construction loan we closed on last quarter. We purchased the land in 2021 and 22, which to build a nine-story fully amenitized residential building with 162,000 square feet of rentable square feet, 240 units, 70% free market, 30% affordable, 8,500 commercial rental 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 buttressed by the relatively long duration of debt at our operating properties. Our debt is 93% fixed at an average rate of 3.8%, an average duration of 5.5 years, non-recourse subject to limited standards carve-outs, and is not cross-collateralized by any one of the properties. We finance our properties on an 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 Chebekah House and Clover House, we have maintained leased occupancy between 96 to 99% and 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. And 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 begun obtaining 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 $2,600 at the end of the quarter versus $25,097 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. 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. A $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 payroll at the Flatbush Gardens property to make necessary repairs and to comply with wage requirements under the Article 11 transactions. Real estate taxes and insurance decreased by approximately $1.3 million in the fourth quarter year-on-year, excluding the impact that Pacific has $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 of restricted cash. In the fourth quarter, we have no new debt activity other than draws under the construction loan that we closed last quarter for our Dean Street property development. We finance our portfolio on an asset-by-asset basis. Our operating debt is non-recourse. subject to limited standard carve-outs and is not cross-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 9.5 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 Flappage Gardens Article 11 transaction, Pacific House and 953D redevelopment, and capitalizing other possibilities that may present itself. We look forward to the transition of the 250 Livingston 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 forum.
Thank you. The floor is now open for questions. If you have any questions or comments, please press star 1 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. Once again, please press star 1 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 releasing the space is not realistic? Do you... 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 DCAS, organizes all the leases for the city, 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 an excellent relationship with DCAS over the many, myriad of years. And in that particular marketplace, I think we're in a good position for the cost basis that we have in the building to be able to compete very aggressively in the marketplace to the tenants at 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, you know, put in the tenant improvements or additional capex in the 250 Livingston, 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, you know, we haven't yet got that granular with this conversation. But usually the way it would work is whatever we would put into the building would be met by, obviously, we're making now $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. And any money that we invest in the property will be always tested by return on equity to commence 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. ZCAS leases are all credited and with credit. So that would be commensurate with those who think the credit of the tenant and also the amount of money that usually what they're looking to do is not that, you know, most commercial tenants ask for a lot more, you know, luxury types of improvements. This is really very, very, I think, bare bones kind of operation that the 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.
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?
The revenue is the revenue. There's nothing going to 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 tax it 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, you know, even our estimates of what the NAV of the company is. Is there a, you know, consideration or longer-term thought of, you know, does it make sense to look at a potential property sale to try to either delever the balance sheet and or potentially deploy some proceeds in the 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 commits, I think, indicative of where the overall market is And that discussion has not yet, you know, been, you know, 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 1. 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. 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.