Earnings Call Transcript - CLPR Q4 2022

Operator, Call Operator

Good day, everyone, and welcome to the Clipper Realty Fourth Quarter 2022 Earnings Call. It is now my pleasure to hand it over to your host, Larry Kreider. The floor is yours.

Lawrence Kreider, Host

Hi. Good afternoon, and thank you for joining us for the Fourth Quarter 2022 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 2022 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 16, 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-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 Co-Chairman and CEO, David Bistricer. David?

David Bistricer, Co-Chairman and CEO

Thank you, Larry. Good afternoon, and welcome to the fourth quarter 2022 earnings call for Clipper Realty. I will provide an update on our business performance, including recent highlights and milestones, as well as our company's progress. I will then turn over the call to J.J., who will discuss property-level activity, including recent performance. Finally, Larry will speak about our quarterly financial performance. We will then take your questions. Our operating results continued their positive trends. Residential leasing activity continues to improve despite the recent headlines on inflation, interest rate increases, and banking risks. Rental demand in our properties has been very strong all year as New York City has largely reopened, people seek to relocate back to the city, and employees increasingly returned to their offices. At the end of the fourth quarter, a seasonally slow leasing period, our properties were 99% leased, and new leases at all our properties continue to exceed pre-pandemic levels. At the Tribeca House property, new leases in the fourth quarter exceeded $80 per square foot, nearly 20% better than the previous rents, continuing the trends we have seen all year, causing the average of all leases to increase to a record $73 per foot from $63 per foot at the end of December 2021. At the Flatbush Gardens property, new leases on units not yet at the legal limit averaged $38 per foot versus an overall lease rate of $25 at the end of September. With respect to interest rate increases, we believe we have been buttressed by the relatively long duration of our debt on our operating properties, of which 94% is fixed at 3.72%, with an average duration of 6.61 years and is nonrecourse subject to limited standard carve-outs and is noncross-collateralized. With respect to inflation, we look to the short duration and high demand for our residential leases to allow us to cover increased expenses on our operating properties and higher construction costs on our development properties. Our balance sheet continues to be well positioned from a liquidity perspective. We have approximately $31 million in cash, consisting of $80 million of unrestricted cash and $30 million of restricted cash. We finance our portfolio on an asset-by-asset basis. And again, I reiterate it is noncross-collateralized. We are pleased to announce that as of today, we have completed or are on schedule with our 1010 Pacific Street ground-up development project, refinancing with permanent debt, and begun leasing in anticipation of full operation in the second quarter. The property is located in Prospect Heights, about 1 mile from the Atlantic Terminal, Barclays Center Hub, and comprises 175 units. It came in on budget at $85 million and is leasing to a cap rate above 7%. Due to the excellent progress, in February, we replaced the construction loan ahead of schedule with a 5-year $80 million loan, $60 million drawn at closing, $20 million available upon achievement of financial targets after full lease-up. It has an initial interest rate of 5.7%, reduced by 25 basis points upon full lease-up. At the end of last year, in April and August of this year, we also bought several properties in the same area of Brooklyn comprising the 953 Dean Street project that we also intend to develop from the ground up. That construction has commenced with excavation as we speak on the property. We paid $56.5 million for it, potentially partially funded with acquisition financing of $37 million. We expect to build a 9-story fully amenitized residential building, with 160,000 residential rentable square feet, 240 units, 70% free market and 30% affordable, which is known as the 70-30 affordable plan with 35 years of tax abatements and 8,500 commercial rental square feet. With regard to our fourth quarter results, we are reporting record quarterly revenue of $33 million, NOI of $17 million, both exceeding pre-pandemic levels, and AFFO of $4.7 million as a result of improved leasing, as I mentioned above. These results represent improvements from the fourth quarter last year, as J.J. and Larry will further detail. I will now turn the call over to J.J., who will provide an update on operations.

J.J. Bistricer, Chief Operating Officer

Thank you. I am pleased to share that the positive trends in residential leasing across all our properties have carried into the fourth quarter. By the end of the fourth quarter, occupancy rates and rent levels per square foot for our residential properties have surpassed pre-pandemic figures. New lease rental rates in the fourth quarter were over 16% higher than previous rents, and renewal rates increased by more than 9%. We've noted particularly strong rental demand at our Tribeca House property, which has maintained an average leased occupancy of 98% over the past year. During this time, the average rent per square foot has risen to $73 from $63. Over the last year, new lease rents have escalated to above $80 per square foot, marking a 26% increase from earlier rates, with renewal rents up 15%. We anticipate continued growth in rent per square foot over the next year due to the turnover of 1- and 2-year leases signed last year in response to pandemic conditions. Progress on new leases and retail spaces at the Tribeca House is ongoing, with four new smaller leases secured at significantly higher rates, a renewed garage lease, a finalized gym lease, and negotiations nearing completion for leasing the final retail space that was vacated during the pandemic. At the Flatbush Gardens complex in Brooklyn, our focus in the fourth quarter has been on maintaining high occupancy and addressing maintenance needs. Since the start of the year, leased occupancy has improved to nearly 99%, up from 92% at the beginning of the year, with new leases averaging nearly $36 per square foot, about 13% more than previous rentals. Consequently, the overall average rent for the property has started to rise again, reaching $25.75 per square foot at the quarter's end compared to $25.12 at the end of last year. Looking ahead, we expect to benefit from guidelines set by the rent stabilization board effective October 1, 2022, which permit increases of 3.25% for 1-year leases and 5% for 2-year leases. These increases are a welcome change from the previous limits of 0% and 2% over the past few years and will help balance our ongoing capital investments in the property, which totaled $3.3 million this year. Alongside these costs, we have also invested heavily in maintenance, indicated by higher operating costs year-on-year. We continue to reap the benefits from the 2020 restructuring of the property's operations, yielding nearly $800,000 in savings. Our other residential properties, including Clover House, 10 West 65th Street, Aspen, and 250 Livingston Street, are also performing well, with leased occupancy averaging 99% and average rental rates rising by 17% since the start of the year, barring Aspen, which is up 3% due to minimal turnover. For the entire group, average increases on new leases have surpassed 28%, while average renewal increases exceeded 15%. Rent collection across our portfolio has remained robust, with an overall collection rate of over 97% in the fourth quarter. Although we are receiving lower remittances under the New York Emergency Rental Assistance Program and the Landlord Rental Assistance Program—$600,000 in the fourth quarter, a decrease from previous quarters—we still find ourselves in a strong position. On the development front, the construction of the rental property at 1010 Pacific Street in Brooklyn, now known as Pacific House, is nearly complete, and the building is almost fully operational. The project was delivered on budget and schedule, and we anticipate obtaining the Temporary Certificate of Occupancy soon. We began leasing ahead of schedule, achieving 45 leases already, with expectations to reach full occupancy by the end of the second quarter. This development comprises a 9-story, 119,000 square foot multifamily rental building with full amenities and underground parking, housing 175 units—70% free market and 30% affordable—and benefits from a 35-year tax abatement. Moving forward, our focus will remain on optimizing occupancy, pricing, and expenses to strategically position ourselves for growth. I will now hand the call over to Larry, who will discuss our financial results.

Lawrence Kreider, Host

Thank you, J.J. For the fourth quarter, reported revenues increased by $2.2 million to a record $33 million from $30.8 million last year during the fourth quarter. On a more comparable basis, revenue from actual billings increased by $3.4 million as opposed to the $2.2 million to $34.2 million, excluding the bad debt expense, which is now deducted directly from revenue this year due to our adoption of the ASC 842 leasing accounting standards for 2022. NOI this quarter increased $700,000 to $17.1 million from $16.4 million the last year in the fourth quarter. AFFO increased by $200,000 to $4.7 million this quarter from $4.5 million last year in the fourth quarter. The revenue increase was due to the higher residential rental rates as mentioned by J.J., higher occupancy at the Flatbush Gardens property, new commercial tenants at the Tribeca House property, and increased escalation billings at the 141 Livingston Street property. Bad debt expense reduced revenue in the fourth quarter this year by $1.2 million but actually reduced expense in the fourth quarter last year due to the large amount of ERAP payments received, as J.J. mentioned above, for a net swing of $1.6 million. On the expense side, key year-over-year changes were as follows: Property operating expenses were $700,000 higher than last year, excluding the $400,000 charge for bad debt expense in last year's fourth quarter. This was due primarily to increased utility costs from higher rates and higher repairs and maintenance and supplies costs at the Flatbush Gardens from our increased focus there. Real estate taxes and insurance increased by approximately $600,000 in the fourth quarter year-on-year due to increased real estate taxes of $500,000 and insurance costs of $100,000. General and administrative costs increased by $600,000 in the fourth quarter year-on-year due to higher LTIP amortization costs from prior year awards, higher executive salary costs, and some initially higher costs in connection with our newly required Sarbanes-Oxley audit and the transition to new auditors. Interest expense decreased by $200,000 in the fourth quarter year-on-year due to additional capitalization of interest associated with the 1010 Pacific Street and 953 Dean Street development projects. With regard to our balance sheet, as David mentioned earlier, we have $18 million of unrestricted cash and $12.5 million of restricted cash. We initially funded development of our 1010 Pacific Street and Dean Street acquisitions substantially with construction financing. In February of this year, we refinanced the 1010 Pacific Street construction loan with an $80 million mortgage loan that provided an initial funding of $60 million and a further $20 million subject to the achievement of certain financial targets. The loan has a 5-year term and an initial rate of 5.7%, subject to a reduction by up to 25 basis points upon achievement of certain financial objectives. The loan is interest-only for the first 2 years and principal and interest thereafter based on a 30-year amortization schedule. We finance our property on an asset-by-asset basis, and our debt is nonrecourse, subject to limited standard carve-outs and is not cross-collateralized. We have no debt maturities on any operating properties until 2027, with an average duration of 6.61 years. At the end of 2022, 94% of our debt on our operating properties was at a fixed rate, at an average of 3.73%. Today, we are announcing a dividend of $0.095 per share for the fourth quarter, the same amount as last quarter. The dividend will be paid on April 5 to shareholders of record on March 27. 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 for current operating improvements to continue to accelerate into the next quarter and into 2023. We look forward to capitalizing on a myriad of growth opportunities, including 1010 Pacific and 953 Dean Street developments and other possibilities that may present themselves in the future. I would now like to open the line for questions.

Operator, Call Operator

Thank you for joining us today. We look forward to speaking with you again soon. 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.