Clipper Realty Inc. Q2 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty 2Q 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Larry Kreider, Chief Financial Officer. Sir, the floor is yours.

Good afternoon and thank you for joining us for the second quarter 2021 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 JJ Bistricer, Chief Operating Officer. Please be aware that statements made during the call that are not historical may be deemed forward-looking, 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 2020 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 9, 2021, 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.

Thank you, Larry. Good afternoon, and welcome to the second quarter 2021 earnings call for Clipper Realty. I will provide an update on our business performance, including recent highlights and milestones as well as how our company continues to respond to the COVID-19 pandemic. 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. I will begin by once again extending our thanks to the entire Clipper Realty team for their ongoing hard work and perseverance during this unprecedented time. We remain grateful for their efforts over the past 17 months under very challenging circumstances and proud of their continued dedication to our residents, communities, and our business. Our properties have remained open and operational throughout the pandemic. The increase in New York City residential leasing activity that took hold in the fourth quarter of last year continues today, as both the city and the economy in general, further strengthen from the depths of the pandemic. We expect rental demand to remain elevated and pricing to improve as New York City continues to reopen and vaccinations proliferate. At the end of the second quarter, our properties were 94% leased, and new leases at our properties are reaching pre-pandemic levels, including our Tribeca property, where new lease rates in July were approximately $78 per square foot. We continue to take the necessary steps to keep our tenants safe, in compliance with state and local orders, and are providing typical services to our residents. We remain confident in the resiliency of New York City, and we expect our properties and the city to stay desirable to a broad range of tenants as our operations continue to return to a more normal state over time. Our balance sheet continues to be well positioned from a liquidity perspective to manage through the pandemic. We have approximately $98 million of cash, consisting of $85 million of unrestricted cash and $13 million of restricted cash. We financed our portfolio on an asset-by-asset basis. Our debt is non-recourse, subject to limited standard carve-outs and is not cross-collateralized. We have no debt maturities on any of our operating properties until 2027. Some more recent developments: We continue to proceed with the redevelopment of 1010 Pacific Street in Brooklyn, located in Prospect Heights, about 1 mile from the Atlantic Terminal/Barclays Center Hub. Construction is well underway. As previously discussed, we estimate that the project will cost approximately $85 million in total after all construction. It will take two years to complete and to develop to a 6.5% stabilized cap rate. At this point, approximately 80% of our construction contracts are completed and we are about to enter into a new $52.5 million construction loan facility that will provide us with financing through completion. JJ will provide a further update on the project shortly. In our office portfolio, the city rent at 141 Livingston Street increased 25% at the end of 2020, adding $2.1 million to the property’s annual NOI. Together with the expected additional $5 million of annual NOI resulting from the city’s new lease at the 250 Livingston Street property that commenced in August of 2020, these increases are expected to add an incremental $7.1 million of annual NOI to our portfolio, representing an approximate 10% decrease on a normalized run rate. I would like to comment on our second quarter results. We are reporting quarterly revenue of $30.7 million, NOI of $16.1 million and AFFO of $4.1 million. While revenue was stable with last quarter as we turned the corner on residential rental leasing, NOI and AFFO improved by over $1 million each as a result of reduced utility expenses and improved collections, as Larry will further detail. I will now turn the call over to JJ, who will provide an update on operations.

Thank you. I begin by again extending our thanks to the company’s employees for their inspiring efforts throughout this unprecedented period. We are grateful for their ongoing commitment to our tenants and communities. The increase in residential leasing activity that began toward the end of last year continues today. At the end of the second quarter, all of our residential properties were leased in the mid to high 90s percent range, building on year-end trends and a marked improvement versus approximately 90% levels seen nine months ago. As we anticipated last quarter, we are seeing improved rental demand as New York City further reopens and vaccines continue to become more widespread. New rental rates are reaching or exceeding pre-pandemic levels and all exceeding current average rates. For example, new leases in July at the Tribeca House property were $78 per square foot; at Flatbush, down to $31 per square foot; and at Aspen, $41 per square foot. Occupancy at Tribeca House remains high. At the end of the second quarter, residential units were 97% occupied versus 96.5% last quarter, 90% at year-end and 80% nine months ago. We continue to work diligently to manage revenue at the property. Rental rates at Tribeca House are beginning to return to pre-COVID levels as mentioned above, given the asset’s quality and attractiveness from a pricing standpoint compared to other luxury buildings in the surrounding neighborhood. Revenue at the Flatbush Gardens complex in Brooklyn held up well in the second quarter, as it has throughout the pandemic. The property maintained high occupancy, ending the quarter 93% leased. The rent per square foot was $27 at the end of the quarter, near record level. As noted previously, we have reorganized certain operations at the property as part of an ongoing effort to manage our expense base, which is expected to result in annual cost savings in excess of $800,000. Flatbush Gardens remains a key element of our portfolio and growth story. Rent collections remained strong despite the challenges of the pandemic. Our collection rate in the second quarter was 96%, an uptick versus 95% at year-end. We continue to work with tenants on a case-by-case basis if they notify us that they cannot meet their rent obligations due to the pandemic. We also expect to benefit from the Emergency Rental Assistance Program (ERAP) when the city begins paying out. We already have residents with approximately $1 million of applications pending. On the development side, we have commenced construction at 1010 Pacific Street on a nine-storey, 119,000 rentable square foot, fully amenitized multifamily rental building with underground indoor parking. The property is expected to have 175 total units, 70% of which will be free market and 30% affordable and is eligible for a 35-year, 421(a) tax abatement. We are about to enter into a $52.5 million construction loan facility with financing through completion. In addition, we have finalized approximately 80% of our construction contracts. Looking ahead, we remain focused on optimizing occupancy, pricing, and expenses across the business to best position ourselves as New York City continues its emergence from the pandemic. I will now turn the call over to Larry, who will discuss our financial results.

Thank you, JJ. For the second quarter, we achieved revenues of $30.7 million compared to $31.2 million for the second quarter of 2020 and $30.7 million in the first quarter of 2021. In the second quarter, we achieved NOI of $16.1 million and AFFO of $4.1 million as compared to $17.3 million and $5.5 million for the second quarter of 2020, but up from the $14.8 million and $3.1 million in the first quarter of 2021. The year-on-year revenue change was primarily attributable to bargain residential rates we offered at the Tribeca House property last year to maintain occupancy at the property and the termination of certain commercial leases at the property, partially offset by the commencement of the new office lease at the 250 Livingston Street property during the third quarter of 2020. At this point, the rates we are achieving on new residential leases have substantially recovered from last year as the Tribeca House residential rates in July were at the $78 per square foot level, with similar increases at our other properties as well. On the expense side, key year-over-year changes were as follows: property operating expenses increased by $0.4 million in the second quarter year-on-year, primarily driven by an increase in the provision for bad debt due to the impact of COVID-19; some resumption of normal repairs and maintenance, and tenant legal activities at Flatbush Gardens, partially offset by a decrease in staff costs from the realignment of operating activities at Flatbush Gardens. Real estate taxes and insurance increased by $0.6 million in the second quarter year-on-year due to property tax increases across the portfolio and general insurance industry cost increases. Insurance expense increased by $0.4 million in the second quarter year-on-year, primarily due to the refinancing of the Flatbush Gardens property in May 2020 and the 141 Livingston Street property in February this year. As David mentioned, we are well positioned from a liquidity perspective. We have $98 million of cash consisting of $85 million of unrestricted cash and $13 million of restricted cash. We finance our portfolio on an asset-by-asset basis. Our debt is non-recourse, subject to limited standard carve-outs and is not cross-collateralized. We have no debt maturities on any properties until 2027. 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 26 to shareholders of record on August 19. Let me turn the call back to David for concluding remarks.

Thank you, Larry. We remain focused on efficiency, operating our portfolio, with the safety of our tenants and employees as our highest priority. We continue to take the necessary steps to navigate through the current challenges, buttressed by a strong balance sheet. We expect now to see the recovery from the pandemic to continue to accelerate through 2021 and beyond. We look forward to capitalizing on a myriad of growth opportunities, including the 1010 Pacific Street development and other possibilities that may present themselves. We hope everyone stays safe and healthy. I will now open up the line for questions.

Thank you. Your first question is from Craig Kucera from B. Riley Securities. Craig, you can go ahead.

Yes. Thank you. I appreciate you guys taking my call. I noted that you had some acquisition costs this quarter. Can you comment at all on kind of what you’re evaluating? And do you have any sense of at what point all the cash that you currently have on balance sheet might be put to work, given that it appears that rents are getting back to pre-pandemic levels?

Well, the cash that we have on hand, we don’t have plans specifically now to put it to work yet. We have it available for opportunities as they arise. And we’ll evaluate each opportunity as it comes. Regarding your question about the acquisition cost on the quarterly, I’ll let Larry see if he…

Yes. Craig, I see $60,000 from – more from the first quarter. What are you referring to?

Yes, it was in regard to that. Okay, that’s it.

There’s nothing more to that. I think – yes, that was just spillover, I think, for adjustment of some invoices from prior acquisitions.

Okay. That’s fair. And can you kind of walk me through the mechanics of what’s going on at Tribeca? Occupancy increased by about 50 basis points. I think earlier in the quarter, you said that rents were up 20% on what you were signing and clearly, this quarter, they’re at $70 versus the current $60. Is that a mix issue when you have a sequential decline in residential rents? Or can you kind of tell me what’s going on there?

Well, it’s very simple. I mean, people are coming back to the city, so the occupancy is up. And with occupancy going up, obviously, the rents are going back slowly, but they’re going back to where they were pre-pandemic. So the rent levels that you’re seeing now in this quarter are approaching where they were before the pandemic, and people are in a different mode than they were previously.

Okay. That’s it for me. Thank you, I appreciate your time.

Okay. We have no further questions. We have a question coming from Buck Horne from Raymond James.

Great. Thanks. Just curious with the eviction moratorium from the CDC kind of getting extended here, whether that’s – the legality of that, I think is still up in question, but it does seem like these moratoriums could drag on for a while. What effect, if any, do you anticipate that having operationally? Or how you’re thinking about how bad debt accruals will trend through the remainder of the year?

Not to answer that with any specificity, but I think we’ve performed much better during the pandemic than we had feared at the onset regarding collections. We have collections that are doing much better than we anticipated and it’s continuing to improve. People, by and large, are now more comfortable with their economic standings and they’re more comfortable with paying the bills. This is a bill that people do not want to miss because at the end of the day, whether the courts are open or not, nobody wants to have a bad credit rating. This affects their rating through the courts, which are not yet fully open, but they’re starting to take some chances. So in some of our buildings where we have some problems, we’re issuing summonses and processing it. Courts are processing them. I think it’s only a matter of time until these politicians will let the courts open up. Nonetheless, I believe the collections are improving month-to-month and not worsening, as people understand that the economic climate is better. They also realize that eventually if they don’t pay, they will have a bad credit rating and/or wind up on the street.

And maybe conversely to that point, would you think that once the moratoriums are finally fully expired, do you feel like a substantial portion of your tenants would find a way to catch up on their rent so that you don’t have to incur turnover? Or are these situations where there’s going to be a substantial level of turnover at the end of the process?

I think the level of people who are not paying is small. It’s a small amount. Obviously, we’re watching it. And whatever write-off reserves we have to consider, we do that on a quarter-by-quarter basis. I see it getting better, and it’s not getting worse. So even when the courts open up, I think the situation will improve because at the end of the day, people do not want to find themselves on the sidewalk. It’s not like we have luxury housing, where people have the ability to downgrade their living situation. That rarely happens. By and large, we’re delivering the quality that people are paying for. So I think that moving forward, it’s going to improve, not decrease.

Okay. One last one, I was just curious with the…

Buck, let me just add to that. I’ll just say that we’re taking the opportunity to apply for the government subsidies that they’re going to be giving out to people that could not pay their rents. We made applications for that in excess of around $1 million at this point. They’re working out the logistics of that, but we expect those to start coming in pretty soon for the residents who cannot cover their rental expenses on a monthly basis.

Got it. That’s helpful. Thanks. Appreciate it, JJ. Yes, my last one then is just any progress or update in terms of re-leasing retail, commercial space, whether it’s Tribeca or any of the other properties, the ground level retail space? Any improvement there?

I think we’ve…

I’ll take that. David, I’ll just give a precursor. We made a conscious decision to wait a bit because we don’t have a lot of retail. During the pandemic, leasing out these spaces would have meant we have to take a substantial discount from where we were charging. We don’t think that was prudent right now. The few stores that we have vacant, mostly in Tribeca, we think that we’re going to do much better if we market them over the next couple of months than we were doing previously. Now we have one specific spot on the corner; the tenant vacated and was paying like $40 in rent, which is way below the market, even today’s market. By and large, we think we will, over time, re-lease these spaces at more than we were achieving during the pandemic.

Right. And just to add to that, I’ll say that we’re actively engaged with brokers on a daily basis. We’re speaking to them all the time. We’re actively listening and negotiating with potential tenants, but we’re not going to strike a deal that seems artificially low because of the COVID effect. Commercial deals go out for 10, sometimes over 20 years. We don’t want to lock ourselves into rent that benefits from a short-term depression that will phase out, hopefully very soon. We’re talking to them, but we’re not just going to make a deal that will look silly in a few years from now.

Right, got it. Got it. Appreciate the clarity. Have a great day.

Thank you.

Thank you.

Okay. We have no remaining questions in queue.

Thank you very much. Thank you for joining our call, and everybody stay safe. Have a good night.

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.