Clipper Realty - Q2 2024

Transcript

Operator (participant)

Good day, and welcome to the Clipper Realty Quarterly 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. Sir, the floor is yours.

Lawrence Kreider (CFO)

Thank you very much, John. Good afternoon and thank you for joining us for the second quarter 2024 Clipper Realty Inc. earnings conference call. Participating with me on today's call are David Bistricer, Co-Chairman of the Board and Chief Executive Officer, and J.J. Bistricer, 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, August 1st, 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-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 Bistricer.

David Bistricer (Co-Chairman of the Board and CEO)

Thank you, Larry. Good afternoon, and welcome to the second quarter of 2024 earnings call for Clipper Realty. I will provide an update on our business performance and some new developments, after which J.J. will discuss property-level activity, including leasing performance, and I will speak to our quarterly financial performance. We'll then take your questions. I am pleased to report that we are reporting record operating results, including record revenue, net operating income, and AFFO, based on excellent residential activity. Rental demand continues to be strong at all our properties. Overall, rents are generally at all-time highs and continue to increase, and we are nearly fully leased. In the second quarter, new leases exceeded prior rents by over 7% across the entire market-based portfolio, led by the Tribeca House property in Manhattan, the Clover House property in Brooklyn.

There were new leases over $84 and $90 per sq ft, and overall rent levels were $81 and $84 a sq ft, all compared to $63 per sq ft at the end of December 2021. Results at the stabilized rent property, Flatbush Gardens, are also strong. Since last July, we have operated under the 40-year operating, according to the Article 11 of the Private Housing Finance Law, the New York City Housing Preservation and Development, which eliminated real estate taxes at the property and provided for enhanced rental revenues, rental recoveries for assisted tenants, which are beginning to receive meaningful amounts. As a result, we are aggressively fulfilling our commitment for property improvements and assistance and higher wages. Operationally, we are very pleased with our new ground-up development at Pacific House at 1010 Pacific Street in Brooklyn.

After a year of full operation, it's fully stabilized and is contributing to cash flow. It is now 100% leased and yielding the projected 7% cap rate as projected. At the nearby 953 Dean Street, ground-up construction is proceeding ahead of schedule. We completed the superstructure ahead of schedule, expect to complete construction in time for the 2025 leasing season, utilizing the $123 million construction loan we entered into last year. We bought the land in 2021 and 2022, on which to build a nine-story, fully amenitized residential complex with 160,000 residential sq ft, 240 total units, 70% free market, and 30% affordable, and 8,500 commercial rental sq ft.

At 250 Livingston Street, as previously disclosed, New York City notified us of their intention to vacate in August 2025. We are seeking solutions and pursuing up to opportunities supported by cash flows from our other properties. Of course, we will keep you informed as of our progress regularly. At our other New York City office property, 141 Livingston Street, we're actively negotiating a five-year extension to our current lease that expires in December 2025, but we cannot assure that this will be completed favorably. Also, we have begun thinking about recycling properties at our portfolio to maximize performance and improve cash flow. As such, we have begun preliminarily marketing activities for some of our other properties, including 10 West 65th Street, while potentially resulting in some loss compared to book value, would allow us to achieve better overall returns going forward.

We will announce any definitive arrangements promptly as they arise. As to the continuing high interest rate environment, we believe the higher rates make for higher tenant demand for our rental product versus the purchase option. We are also bolstered by the relatively long duration of debt at our operating properties. Our operating debt is 91% fixed, an average rate of 3.87%, an average duration of 4.9 years is non-recourse, subject to limited standard carve-outs and is not cross-collateralized. We finance our properties on an asset basis and not cross-collateralized.

...With regard to our second quarter results, we are reporting record quarterly revenue of $37.3 million, NOI of $21.1 million, an AFFO of $7.1 million as a result of the strong leasing and cost reductions I just mentioned. These results represent improvements over the second quarter of last year, as J.J. and I will further detail. I will now turn the call over to J.J., who will provide an update on operations.

J.J. Bistricer (COO)

Thank you. I'm pleased to report that our residential leasing at all our properties is very strong and continues to improve. At the end of the second quarter, our residential properties were over 99% leased, and rents were at record levels and still recording increases over previous levels. Overall, new lease and renewal rental rates in the second quarter exceeded previous rents by over 7% at our residential properties. We expect leasing to remain strong in the foreseeable future as demand remains high and the overall rental housing supply remains constrained, as widely publicized. As of the end of June, Tribeca House had leased occupancy of nearly 100%, rent per sq ft of $81, and new rent of $84 per sq ft.

The Clover House property had leased occupancy of 97%, average rates of $84 a foot, and new leases of $90 a foot. Our recently completed Pacific House property, consisting of a blend of free market and rent-stabilized tenants, had leased occupancy of 97%, free market rents of $76 per sq ft, and new free market rents of $76 per sq ft. This property is now fully stabilized, with operating cash flows achieving the projected 7% cap rate in the original underwriting. Our other residential properties at 10 West 65th Street, Aspen, and 250 Livingston Street, continue to perform at record levels, with average lease occupancy above 98% and new rents and renewals 11% higher compared to previous leases.

Lastly, at the large Flatbush Gardens property, we continue to be pleased with our performance operating under the new Article Eleven agreement made with the Housing Preservation Department of New York City in June of last year. Using the full abatement of real estate taxes beginning last July, we are completing the capital projects we committed, aggressively dealing with maintenance issues and placing formerly, formerly homeless residents. We have begun to meaningfully obtain the enhanced reimbursement on the Section 610 of the Private Housing Finance Law for tenants receiving assistance as we fill vacancies with formerly homeless residents and renew leases with assisted tenants. These benefits have amounted to nearly $500,000 so far this year and should steadily increase over the next couple of years and facilitate profitable improvements to the property.

We are also getting increases for non-assisted tenants, where increases have been permitted under the Rent Guidelines Board for the last couple of years at the 3% level per annum. As a result, together with the Section 610 benefits for assisted tenants, overall average rents for the property have risen to $28.10 per sq ft at the end of the quarter, versus $26.38 at the end of the second quarter last year. Rent collections across our portfolio remain strong. The overall collection rate in the second quarter on all residential properties was 98%. Collections at Flatbush Gardens have been at historically high 97% levels for the last two quarters, without the benefit of the ERAP program payments as in prior years. We are responsibly and steadily working through the court system to minimize arrears.

Looking ahead, we remain focused on optimizing our occupancy, pricing, and expense across the business, expeditiously completing our development projects, and fully implementing the Article Eleven transaction to best position ourselves for growth. I will now turn the call over to Larry, who will discuss our financial view.

Lawrence Kreider (CFO)

Thank you, JJ. For the second quarter, we achieved record results on 3 measures important to us. Revenues increased to $37.3 million from $34.5 million last year, an increase of $2.8 million or 8.1%. NOI increased to $21.1 million from $19.2 million last year, an increase of $1.9 million or 9.9%. And AFFO increased to $7.1 million from $5.5 million, an increase of $1.6 million or 29%. For the second quarter, residential revenue increased to $27.7 million by $2.1 million. This increase was due to the strong leasing for all properties, as previously discussed. Occupancy and rental rates were at all-time highs in the quarter.

We further benefited in the quarter from $400,000 of Section 610 rents, which are now beginning to meaningfully contribute. We expect this revenue source to increase steadily over the next few years. Commercial revenue was flat in the quarter compared to last year. On the expense side, key year-over-year changes, quarter-on-quarter, were as follows: property operating expenses increased by $2.2 million year-on-year, $1.8 million at Flatbush Gardens, working within the Article 11 agreement to fulfill so-called prevailing wage requirements to refurbish units for our new formerly homeless residents and to focus on general repairs and maintenance. Our utility gas expense also increased somewhat in the quarter from an underestimate in the first quarter. We expect expenses for refurbishment and repairs and maintenance expenses to decrease over time as we achieve the benefits of our capital spending.

Real estate taxes and insurance decreased by $1.3 million in the second quarter, year-over-year, due to $1.8 million from the elimination of real estate taxes at Flatbush Gardens, partially offset by $400,000 for the routine increases in real estate taxes at the other properties, and $100,000 for insurance cost increases. General and administrative expenses increased slightly by $63,000 in the second quarter, year-over-year, primarily due to higher legal fees. Interest expenses increased by $407,000 in the second quarter, year-over-year, due to the additional $20 million of borrowings at 1010 Pacific Street in the third quarter last year. With regard to our balance sheet, we have $20.3 million of unrestricted cash and $16.5 million of restricted cash.

In the second quarter, we had no new debt activity other than draws under the Dean Street Property Construction loan, which closed in the third quarter of 2023. 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 22nd, 2024, to shareholders of record on August 15th, 2024. Let me now turn the call back to David for concluding remarks.

David Bistricer (Co-Chairman of the Board and CEO)

Thank you, Larry. We remain focused on efficient, efficiently operating our portfolio. We look forward to the current operating improvements to continue through 2024 and 2025. We look forward to optimizing Flatbush Gardens, Article 11 transaction, 953 Dean Street development, and other growth opportunities, managing the New York City leasing issues at Livingston Street properties, and to capitalizing on other possibilities that may present themselves. I would now like to open the line for questions.

Operator (participant)

Thank you. The floor is now open for questions. If you have any questions or comments, please indicate so by pressing star one on your phone at this time. We ask that while posing your question, you please pick up your handset if we're sitting on speaker phone to provide optimum sound quality. Please hold while we poll for questions. Once again, please press star one if you have a question or a comment. The first question comes from Buck Horne with Raymond James. Please proceed.

Buck Horne (Managing Director and Senior Equity Research Analyst)

Hey, good afternoon, guys. Just kind of wanted to start with the office properties and kind of the situation there with the leasing arrangement or I guess with the notices provided by the City of New York there, that they're... Maybe start with 250 Livingston. You know, it's my understanding that, correct me if I'm wrong, if the revenue and the cash flows from 250 Livingston are those going directly into an escrow account with, for the lender's benefit at this?

David Bistricer (Co-Chairman of the Board and CEO)

No, not, not at the present time.

Buck Horne (Managing Director and Senior Equity Research Analyst)

Not at present time. Okay. I'm sorry, I couldn't hear that. Is there a point at which, you know, if that lease is, I mean, well, is there a risk of the revenues from that building cease to, to flow to the company?

David Bistricer (Co-Chairman of the Board and CEO)

Yes.

Buck Horne (Managing Director and Senior Equity Research Analyst)

Okay. All right. Is there any notice of, you know, and I know you're in the process of negotiating or renegotiating that lease at 141 Livingston, but, you know, the city's already given notice at 250 that they're leaving. Have they provided any formal notice of their intention to leave 141 at this point?

David Bistricer (Co-Chairman of the Board and CEO)

Larry?

Lawrence Kreider (CFO)

Well, no, the city... Well, maybe JJ can-

J.J. Bistricer (COO)

Yeah. I'll take this one. On the contrary, they're actually looking for an extension. So we're in the midst of negotiating an extension with them, and that's what we mentioned in the call, that there is a conversation around a five-year extension.

Buck Horne (Managing Director and Senior Equity Research Analyst)

Okay. If there is an extension, my understanding is that building may require some significant upgrades or CapEx to refurbish it for any potential new, new leasing or, you know, extension or a new tenant. What kind of CapEx requirements do you think would be needed to extend that lease?

J.J. Bistricer (COO)

The extension that the city is looking for is not a CapEx type of extension. It's pretty much as is.

Buck Horne (Managing Director and Senior Equity Research Analyst)

Okay. Okay. And in terms of the thought process around marketing 10 West 65th at this point, I guess, you know, what's the need to sell that property at this point? Or, you know, are you looking to raise liquidity for you know any other particular reasons?

David Bistricer (Co-Chairman of the Board and CEO)

There might be some better opportunities for the value in that property that we could achieve by selling it. It's something we're looking at right now, so we're testing the market to see what kind of, what kind of a price we might be able to achieve. And so there are several interested purchasers. Once that thing is crystallized, obviously we'll come back and advise the market of that. Right now, it's just in the preliminary stages of testing the market.

Buck Horne (Managing Director and Senior Equity Research Analyst)

Okay. And is there any progress or thoughts on terms of extending or refinancing the mortgage on 1010 Pacific? I believe, if my notes are correct, that the mortgage is coming due in about a year's time. Any thoughts on refinancing 1010 Pacific?

David Bistricer (Co-Chairman of the Board and CEO)

1010 Pacific, I mean, when the mortgage is getting a little bit closer to maturity, well, obviously we would think about refinancing it and seeing what levels of interest are available at that time. Whether it's a Freddie Mac, a Fannie Mae mortgage, or with the existing lenders, is something that we will look at it a bit later on, as we do expect that the overall rental markets for fixed assets, fixed-term mortgages are about to decrease, as has been noted by the Fed.

Buck Horne (Managing Director and Senior Equity Research Analyst)

All right. Thanks, guys. Good luck.

David Bistricer (Co-Chairman of the Board and CEO)

Thank you.

Buck Horne (Managing Director and Senior Equity Research Analyst)

Thanks.

Operator (participant)

Okay. We have no further questions in queue. I'd like to turn the floor back to management for any closing remarks.

David Bistricer (Co-Chairman of the Board and CEO)

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

Operator (participant)

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.