Clipper Realty - Q3 2023

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.

Larry Kreider (CFO)

Thank you, John. Good afternoon, and thank you for joining us for the third quarter 2023 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, the 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 third 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, November 2, 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, 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 and CEO)

Thank you, Larry. Good afternoon, and welcome to the third quarter 2023 earnings call for Clipper Realty. I will provide an update of our business performance and some exciting new developments, after which J.J. will discuss property-level activity, including leasing performance, and I will speak to our quarterly financial performance. We will then take your questions. I am pleased to report that we have record operating results on most key metrics and continuing the positive trends from previous quarters. Rental demand has been very strong at all our properties. In the third quarter, new leases exceeding prior rent by 12% across the entire market-based portfolio, and our properties are 98% leased.

At Tribeca House in Manhattan and Clover House in Brooklyn, new leases were $91 per sq ft, and overall rent levels reached a record $78 per foot on average, 40% better than the $63 per foot at the end of 2021. At Flatbush Gardens, we have begun operating as of July 1, under the previously announced 40-year agreement with the New York City’s Housing Preservation Department, so-called Article Eleven of the Private Housing Finance Law. Under this agreement, the elimination of real estate taxes and enhanced rental recoveries for assisted tenants will allow us to profitably provide for our commitment to property improvements, tenant assistance, and higher wages for everyone's benefit. Of course, we are at the early stages, and we'll report our progress as we move forward.

Operationally, we are also very pleased with our new ground-up development project, Pacific House, 1010 Pacific, which became online last quarter and is 93% leased and on target to yield a 7% cap rate. Property is located in Prospect Heights, Brooklyn, one mile from the Atlantic Terminal, Barclays Center. Properties are 175 units, 70% free market, 30% affordable. It also has a tax abatement for 30 years under the 421-a program. In recognition of the property's excellent prospects, we completed the final $20 million draw from our bank in the third quarter on the $80 million loan we entered earlier in the year.

At the nearby 953 Dean Street ground-up development project, we have completed the foundation, brought out 80% of the vendors that are going to work on the project, finalized a $133 million construction loan, which will enable us to complete the project on time, as we did with the 1010 Pacific Street project. We purchased the land in 2021 and 2022, on which to build a nine-story, fully amenitized residential building, 160,000 residential sq ft, 240 units, 70% free market, 30% affordable, which will again provide us with a 421-a tax abatement for the next 30 years, and 8,500 commercial sq ft of rental space.

As to the continued higher interest rate environment, we believe the higher rates make for high demand for our rental product, hence the higher rents that we've been reporting, and it will be so for a longer duration. Most of our debt is fixed at 94% of our debt is fixed at 3.82%, average duration of 6.25 years, non-recourse, subject to limited standard cover, and does not cross collateralized, so each property stands on its own. We finance our portfolio on an asset-by-asset basis. With respect to inflation, we look to short duration and high demand for residential leases to allow us to cover increased expenses-

Larry Kreider (CFO)

... as we're seeing the increases in the rents from, really a product of inflation. With regard to our third quarter results, we are reporting record quarterly revenue, $35.1 million, record NOI of $20 million, and AFFO of $6.3 million as a result of improved leasing I just mentioned. These results represent significant improvements over the third quarter of last year, and J.J. and I will give you further details. I will now turn the call over to J.J., who will provide an update on operations.

J.J. Bistricer (COO)

Thank you. I am pleased to report that our residential leasing performance at all our properties continues to improve. At the end of the third quarter, all our residential properties had very high occupancy, averaging 98%, and rents are at record levels. Overall, new lease rental rates in the third quarter exceeded previous rents by over 12% and renewal rental rates by over 6% at our free market properties. We continue to see particularly strong rental demand at our Tribeca House and Clover House properties, both free market buildings. At Tribeca House, we have maintained lease occupancy between 97%-99% and increased average rent per sq ft to $78 per sq ft from $71 over the last 12 months, and $62 per sq ft near the end of the pandemic.

In the third quarter, rents on new leases were $91 per sq ft, a 13% increase over previous rents, and rents on renewals were $87 per sq ft, an 8% increase over previous rents. The rental rates have continued to increasing even after the COVID pandemic lower rates turned over. Leasing at Pacific House almost fully stabilized. The 70% free market and 30% affordable property came online at the beginning of the second quarter and was 93% leased at the end of this quarter. We expect the property to achieve a cap rate of over 7% in 2024, in line with original underwriting. At the Flatbush Gardens property, we are also very excited to begin operating under the new Article Eleven agreement made with the Housing Preservation Department of New York City that we completed on June 29th.

This agreement, as intended, will facilitate ongoing capital requirements and allow for much-needed affordable housing in New York City. We received the full abatement of real estate taxes beginning July 1, and have submitted initial planning for the capital projects we committed, and are in the process of obtaining the enhanced reimbursement for tenants receiving assistance that were committed to us under the agreement. As to leasing at Flatbush Gardens, we expect overall rents to continue to increase modestly as before, under the Rent Guidelines Board limits. These have now recommenced over the last two years to allow annual increases of roughly 3% per annum. This compares to the more generous 5.8% increases in area median income, otherwise known as AMI, for 2023, provided by the Article Eleven agreement.

Overall, we are looking for our leasing activities to proceed smoothly under the modestly changed guidelines of the Article Eleven agreement, including incorporating the 249 new subsidized residents as vacancies arise. In the quarter, new leases averaged $31 per sq ft, 10% higher than previous rents, and renewals averaged $25 per sq ft, 5% higher than previous rents. As a result, overall average rents for the property have begun to increase again, rising to $26.62 per sq ft at the end of the quarter versus $25.12 at the end of the last quarter, the last year. Operationally, at our other residential properties at 10 West 65th Street, Aspen and 250 Livingston Street, continue to perform well.

Average leased occupancy for these properties have been above 96%, and average rental rates have increased 11% from a year ago. Rent collections across our portfolio remain strong and steady, despite the lingering challenges of the pandemic. The overall collection rate in the third quarter was over 98%, and we have continued to benefit, but at a lower rate from the remittances under the New York Emergency Rental Assistance Program, or ERAP, and the Landlord Rental Assistance Program, or LRAP, which totaled $280,000 this quarter versus $400,000 last quarter. Looking ahead, we remain focused on optimizing occupancy, pricing, and expenses 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 over the call to Larry, who will discuss our financial results.

Larry Kreider (CFO)

Thank you, J.J. For the third quarter, revenues increased to a record $35.1 million from $32.8 million last year, third quarter, by $2.3 million, or excluding the impact of Pacific House that came online in the second quarter, an increase of $1.2 million. NOI this quarter was $20.0 million, an increase of $2.6 million from last year, or $1.9 million, excluding the impact of Pacific House. AFFO this year was $6.3 million, an increase of $1.2 million from last year, or $1.4 million excluding the impact of Pacific House, which reflected full interest expense in the quarter, but only partial initial lease-up.

The $1.2 million or 4% revenue increase, excluding the impact of Pacific House, was primarily due to higher residential rental rates from all properties from continued strong leasing, as previously discussed. Bad debt expense was substantially the same as last year, reflecting high and stabilized collections. On the expense side, key year-over-year changes were as follows. Property operating expenses were approximately $400,000 higher than last year, excluding the impact of Pacific House, primarily due to higher repairs and maintenance and supplies at the Flatbush Gardens property to make the necessary repairs, and higher payroll at Flatbush Gardens to comply with the new living wage requirements under the Article Eleven agreement. Real estate taxes and insurance decreased by approximately $1 million in the third 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 increase due to routine increases in real estate taxes mid-year last year at the other properties, and $600,000 due to insurance cost increases. General and administrative costs increased by $100,000 in the third quarter, year-over-year, primarily due to regular payroll increases. Interest expense increased by $300,000 in the third quarter, year-over-year, excluding the impact of Pacific House, due to conversion of debt at the West, the Ten West 65th Street property to variable rate according to its terms, and the elimination of capitalized interest for Pacific House, partially offset by additional capitalization of interest associated with the 953 Dean Street development project and higher interest income on cash deposits.

With regard to our balance sheet, we have $22.5 million of unrestricted cash and $14.9 million of restricted cash. In September, we borrowed the last $20 million tranche under the Pacific House $80 million mortgage loan that we entered in February of this year, and we successfully completed the $123 million construction loan for the Dean Street ground-up development that should see us through completion, projected mid-2025. We finance our portfolio on an asset-by-asset basis, and our operating debt is non-recourse, subject to limited standard carve-outs and is not cross-collateralized.

We have no debt maturities on any properties in 2027, with average overall duration of 6.23 years and 94% of debt at our operating properties was fixed at an average rate of 3.87%. Today, we are announcing a dividend of $0.095 per share for the third quarter, the same amount as last quarter. The dividends will be paid on November 22, to shareholders of record on November 14. Let me now turn the call back over to David for concluding remarks.

David Bistricer (Co-Chairman and CEO)

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 optimizing the Flatbush Gardens Article Eleven transaction, the Pacific House, and 953 Dean Street developments, and other possibilities that may present themselves. I would like now to open the line to questions.

Operator (participant)

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 if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Once again, that's star one if you have a question or a comment. Once again, ladies and gentlemen, please press star one if you have a question or a comment. Okay, there are currently no questions in queue. I would now like to turn the floor back to management for any closing remarks.

David Bistricer (Co-Chairman and CEO)

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

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.

Larry Kreider (CFO)

Thank you, John. Bye.

Operator (participant)

You're very welcome. Take care.