Q1 2022 Clipper Realty Inc Earnings Call
Operator: Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty`s first quarter 2022 earnings call. At this time, callers 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, Lawrence E. Kreider. Sir, the floor is yours.
Lawrence E. Kreider: Thank you very much, Matt. Good afternoon, and thank you for joining us for the first 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, Jacob Joseph Bistricer, Chief Operating Officer.
Lawrence E. Kreider: 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 2021 annual report on Form 10-K , which is accessible at www.SEC.gov and our website.
Lawrence E. Kreider: As a reminder, the forward looking statements speak only as of the date of this call, may 10th, 2022, 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: Thank you, Larry. Our new residential leasing activity that began toward the end of last year, continues to improve. At the end of the first quarter, all our residential properties will lead to the mid high 90% range. New rental rates per square foot, in April and May, are reaching or exceeding pre-pandemic level.
David Bistricer: And all exceeding present average rates. For example, leasing in April at Tribecca house for $83 per square foot. [inaudible]: $35 per square foot. Cloval: $84 per square foot. We are experiencing strong rental demand at our Tribecca House property.
David Bistricer: Year on year, lease occupancy has increased to 99 from 89% in the same year, with an average occupancy of 98% over the 12 months. As occupancy increased, last year we achieved high rent per square foot levels, which now have reached an excess of 3000 in April 2022, a 35% increase over higher rents on the same unit. As a result, average rents per square foot of the whole property have increased to nearly $65 in March, $66 per square foot last week. We expect rent per square foot to continue to grow steadily higher, as our one and two year leases turn over. Revenue at [inaudible] in Brooklyn held up well in the first quarter and four quarter, based under rather pandemic, properly maintained lease occupancy between 92% and 93%, which we increased to 95% lease at the end of March and hope to go higher.
David Bistricer: Throughout, we have maintained steady rent per square foot at $25 per square foot, a new record level, and began trending up again in the first quarter, based on new leases, generally an excess of $30 per square foot. Lastly, we continue to benefit from the [inaudible] organization of the property operations that created nearly $800.000 in operating savings. Rent collections across our portfolio remain strong, despite the residual challenges of the pandemic. Our overall collection rate in the fourth quarter was 96.5%. This reflected a partial pause in the New York emergency rental assistant program, or commonly known as ERAP, by which we received $2.5 million in the fourth quarter, versus $600.000 this quarter. We are moving well on construction at 10-10 Pacific Street, on target for substantial completion by the fourth quarter. We have completed [inaudible] is well on the way, window isolation is during completion.
David Bistricer: And we expected to be in finishes in the third quarter of this year. We have finalized approximately 95% of our construction contracts, having bought on most of them last year, mitigating the recent inflation concerns. We are financing our construction fully to $52.5 million construction. The development is nine stories, 119 thousands square feet for rent of the space, and monetized multi-family rental building with underground parking. Property is expected to have 175 total units, 70% of which will be free market, 30% affordable and eligible for 35 year, 4,21 tax abate.
David Bistricer: Looking ahead, we remain focused on optimizing occupancy, pricing and expenses across the business, to best position ourselves as the New York City continues recovery from the pandemic. With that, I'd now turn over the floor to J.J. Bistricer.
Jacob Joseph Bistricer: Thank you. We see positive operational trends as we look forward, residential leasing activity is rapidly improving, despite the recent headline news on inflation and interest rate increases.
Jacob Joseph Bistricer: We expect rental demand to remain strong and pricing to improve, now that New York City is largely reopened, people seek to relocate back to the city, and employees increasingly return to their offices.
Jacob Joseph Bistricer: At end end of the first quarter, our properties were 96.5% leased.
Jacob Joseph Bistricer: And new leases at our properties are reaching or exceeding pre-pandemic levels, including at our Tribeca House property, where new leases rates in April exceeded $83 per square foot, more than 35% better than the previous rents, and May rent per square foot jumped from $65 at the end of March, to $66.
Jacob Joseph Bistricer: With respect to interest rate increases, [inaudible] by the relatively long duration of our debt, of which 95% is 6 - 33.76% , has an average duration of 7.45 years and is nonrecourse, subject to limited standard carve-outs, not cross collateralized.
Jacob Joseph Bistricer: With respect to inflation, we look to the short duration of our residential leases, to allow us to cover increased expenses on a substantial number of leases and our major existing construction projects. Our contracts were all bought out in 2021.
Jacob Joseph Bistricer: Our balance sheet continues to be well-positioned from a liquidity perspective.
Jacob Joseph Bistricer: We have approximately $43.8 million of cash, consisting of $25.3 million of unrestricted cash and $18.5 million of restricted cash. We financed our portfolio on a asset by asset basis.
Jacob Joseph Bistricer: Turning to recent developments. Essentially ground up development, our 10-10 Pacific Street acquisition is moving along very well, and we are targeting substantial completion in the fourth quarter. The property located in [inaudible] Brooklyn, about one mile from the Atlantic terminal Barclay`s Central hub. As previously discussed, we estimate the project to cost $85 million and develop to a 6.5 stabilized cap rate.
Jacob Joseph Bistricer: At the end of the year, we also bought another property in the same area of Brooklyn, 953 Dean Street, that we also intend to redevelop from the ground up. In April, we completed the incremental purchases of land and financing to bring the initial purchase to total cost of approximately $48 million, with acquisition financing of $37 million.
Jacob Joseph Bistricer: We expect to build a nine story, fully-monetized residential building, with 160.000 residential rental square feet, 240 total units, 70% free market and 30% affordable, along with 8500 commercial rental square feet. With regards to our first quarter results, we are reporting quarterly revenue of $32.1 million, NOI of $16.5 million and ASFO of $4.4 million dollars. All these results represent improvements over the first quarter last year, and Larry will further detail. I will now turn the call over to Larry, who will provide more information. Thank you.
Lawrence E. Kreider: Thank you, J.J. For the first quarter, revenues increased by $1.4 million to $32.1 million, from $30.7 million last year first quarter. NOI this quarter increased by $1.7 million through $16.5 million, from $14.7 million last year first quarter. ASFO increased by $1.3 million to $4.4 million this quarter, from $3.1 million last year, first quarter. In reviewing the results, it is important to note our adoption of a new accounting standard known as ASC-842, that impacted our results, particularly the geography of bad debt expense in our income statements and timing of amounts. Under the new standard, in the first quarter, we began recording bad debt expense against revenue without restating a recasting last year.
Lawrence E. Kreider: Where we recorded bad debt expense against operating expense. Additionally, as prescribed by the new pronouncement, we fully wrote off any receivable not expected to be fully collected.
Lawrence E. Kreider: Even if expected to be partially collected, without consideration of future collection prospects. The pronouncement then requires restoration of the receivable if those prospects turnaround, essentially cash basis accounting. As a consequence of this, you will see the effects of bad debt expense, not only in different lines on the income statement, but also with higher levels of variability of amounts. Plus, you will see a so-called "cumulative effect adjustment" in the statement of stockholders' equity of $6 million. This bridges the old to the new accounting standards. To simplify the following discussion if possible, I will focus on business results first, then note the impact of the new accounting standard. Excluding the impact of the new accounting standard, revenue increased by $1 million from $31.7 million to $30.7 million, primarily due to increased occupancy and or residential rental rates at Tribeca house, Aspen and Clover house properties.
Lawrence E. Kreider: Also, new commercial tenants at the Tribeca House property and increased CAM collections at the 141 Livingston Street property. As a result of the new accounting standard, in the first quarter of 2022, residential revenue includes a charge of $700.000 for bad debt expense, and commercial revenue includes a benefit of $1.1 million for the restoration of a receivable of tenant previously deemed probable only of partial payment, at the end of last year. As of last quarter, we are moving residential rents to pre-pandemic levels at an accelerating pace, although we expect the effect to take the next few quarters through evidence itself fully. in April 2022, as David and J.J. articulated, for example, at the Tribeca House property, new residential rental rates were about $83 per square foot, well above the leases they replaced, with similar increases at our other properties as well.
Lawrence E. Kreider: On the expense side, key year over year changes were as follows: excluding the effect of the new accounting standard, property operating expenses were levelled this quarter versus last year. Note that both quarters include seasonally higher level of gas and electric utility expenses than any other quarter. As a result of the new accounting standard, we have no bad debt expense and operating expenses in the first quarter this year, versus a charge of $1.1 million in the first quarter last year, thus causing the apparent variance in the financials. Real estate taxes and insurance increased by approximately $600.000 in the first quarter year on year, due to increased insurance costs across the portfolio, and to a lesser extent, annual real estate tax increases. Interest expense decreased slightly in the first quarter this year, year on year, primarily due to the capitalization of interest associated with the 10-10 Pacific Street and 953 Dean Street development projects.
Lawrence E. Kreider: With regard to our balance sheet, as David mentioned earlier, we have $25.3 million of unrestricted cash, $18.5 million of restricted cash. We are funding our development of the 10-10 Pacific Street and 953 Dean Street property acquisitions substantially, with construction financing.
Lawrence E. Kreider: We finance our portfolio on an asset by asset basis. Our debt is not recourse, subject to limited carve-outs standard and is not cross collateralized. We have no debt maturities on any operating properties until 2027, with an average overall debt duration a 7.45 years.
Lawrence E. Kreider: Today we are announcing a dividend of 9.5 cents per share for the first quarter, the same amount as last quarter. The dividend will be paid on May 27, to shareholders of record on May, 20. So, let me now turn the call back to David for concluding remarks.
David Bistricer: Thank you, Larry. We remain focused on efficiently operating our portfolio. We look for our current operating improvements to continue to accelerate through 2022 and beyond. We look forward to capitalizing our [inaudible] of growth opportunities, including the 10-10, [inaudible] and 953, these three developments and other possibilities that may present themselves. I would like now to open up the line for questions.
Operator: Certainly. Ladies and gentlemen, 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 do ask you, while posing your question, please pick up your handset if you're listening on speaker phone to provide optimum sound quality.
Operator: Once again, if you have any questions or comments, please press star one on your phone. Please hold, while we poll for questions.
Operator: Your first question is coming from Buck Horne, from Raymond James. Your line is live.
Buck Horne: Hey. Good afternoon, gentlemen. Appreciate the call. So, I'd like to start with just the recent news on the New York City rent control board, in the panel's decision to raise the level of rent approved increases for rent regulated properties. Just any color or thoughts on what that means for Flatbush or other properties, in terms of how quickly you can start to implement a higher rate of rent increases on new and renewal leases?
David Bistricer: We could do it as soon as it is finally approved. I don't think it's yet finally approved, but obviously we're glad to see that finally they`re starting to raise a bit the level of renewal leases. So, that was a nice surprise.
Buck Horne: Any idea, like what kind of, at the rate that they've preliminarily discussed or approved, what kind of NOI that might mean for the properties?
David Bistricer: Well, it's too early for us to speculate on that. I know 2% and a 4% increase for 2 year leases, but we haven`t yet set down.
Jacob Joseph Bistricer: But that's not necessarily. This is J.J. That doesn`t necessarily mean that was going to wash out too. Typically, its thoughts are higher than we actually get to prove, which is in June.
Jacob Joseph Bistricer: It`s usually 2 and 4, no, 4 and 8 for one year, and 2 year usually comes down quite a bit, so, we're not yet counting the eggs before they hatch.
Jacob Joseph Bistricer: And also, just to clarify the timeline. The actual increases don't go into effect, I believe, until October or November . I have to double check which month, but it's not immediately, it only kicks in the renewal that happened in October 22.
David Bistricer: It`s a good trend 4% and the 8%. We haven't seen that in ages. We're talking about it, this is a good sign.
Multiple speakers: [Buck Horne] Okay, and also, on the commercial bad debt reversal, which building was that involved with? [Jacob Joseph Bistricer] Tribeca house. [Buck Horne] Tribeca, okay. Perfect. And my last one is: looks like there was some transaction pursuit costs you guys rode off in the quarter, just wondering what that`s related to?
David Bistricer: We were doing the transaction that didn't pan out, we decided not to move forward, and that`s some legal cost that were involved in the negotiations of that contract.
Buck Horne: All right, all right. Thank you, guys. That`ll do it for me.
Operator: Thank you. That concludes our Q&A session. I will now hand the conference back to David Bistricer for closing remarks. Please, go ahead.
David Bistricer: Thank you for joining us today. We look forward to speaking with you again soon. Stay well.
Operator: Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.