Q2 2023 Clipper Realty Inc Earnings Call
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Good day and welcome to the Clipper Realty second quarter earnings call. At this time, all participants have been placed on listen only mode and the floor will be opened for your questions and comments after the presentation.
Pleasure to turn the floor over to your host Larry Kreider the floor is yours.
Thank you.
Afternoon, and thank you for joining us for the second quarter 2023, Clipper Realty, Inc. Earnings Conference call participating with me on today's call are David <unk> Co Chairman of the Board and Chief Executive Officer, and JJ <unk> Chief operating officer. Please be aware that statements made during the call that are not historical may be.
Forward looking statements and actual results may differ materially.
<unk> 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 second quarter report on Form 10-Q, which are both accessible at www Dot FCC Dot Gov web.
As a reminder, the forward looking statements speak only as of the date of this call August three 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 <unk>.
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 die.
Correctly comparable GAAP financial measures with.
With that I will turn the call over to our co chairman and CEO , David This or Sir Thank you Larry and good afternoon, and welcome to the second quarter 2023 earnings call for Clipper.
I will provide an update to our business performance and some exciting new developments.
On the call over to J, J, who will discuss property level activity, including leasing performance.
I will speak about our quarterly financial performance, we'll then take your questions.
Our operating results continue the positive trends, we have reported in prior quarters.
We continue to see strong rental demand at all our properties and the.
The second quarter, our properties were 99% leased.
New leases exceed exceeded prior rents by 15% across the entire market based portfolio.
At Tribeca House in Manhattan, and the Clover House property in Brooklyn, New leases were $83 a foot.
<unk> rental levels reached a record $76.
21% better than $63 at the end of December 'twenty two.
At Flatbush Gardens.
Is it into a transformative new phase of the property with completion in the quarter or 40 agreement with New York City housing Preservation Department under article 11. This.
This is available to all new Yorkers.
<unk> housing finance under which we are committed to maintain coverage right.
As adjusted for annual rent guidelines based on increases.
Increases in May capital improvements over the three year period that will address many of the issue is expected of a law has 70 plus year old properties.
As a part of the agreement with <unk> to receive the Arctic 11th tax exemption that was guns is committed to a three year capital improvement plan at the property maintenance events within current categories based on the area median income set aside a vacant units for formerly homeless household.
And an increase in pay rates for the non you employ the property to prevailing wage guidelines.
Three a capital improvement commitments could amount to 20.
$27 million and follows improvements over the last few years of about the same amount.
Operationally we are pleased.
Roundup development attentive Pacific and Pacific has now Brendan specific assets come online this quarter.
On schedule and on budget.
Property is located in prospect Heights, Brooklyn about one mile about one mile from the Atlantic Terminal Barclays Center hub.
Thing is progressing well it will lease up.
So the cap rate of above 7%.
The property was 75 175 units 17th century buckets, they've sent affordable.
The taxi business.
35 years.
Obviously reported in the first quarter, we replaced the drop as construction loan ahead of schedule. The five year $80 million alone $60 million, the closing $20 million available upon achievement of financial targets. After full Lisa initial interest of $5.
With reduced 15 bps due to issuance is typically is occupancy.
<unk> by a further 25 bps of possible Lisa.
Next door at 95.
We have begun to ground up development, although that passes we brought in 2021 and 2022.
Sorry.
Fully amortize the residential buildings.
<unk> hundred 60000.
Obviously 2000 rentable square feet of residential space 240000 units, 70% of free market, 30% affordable and it's 35 years of tax abatements.
<unk> thousand 500 square foot commercial.
Commercial space.
We paid $56 million. So all the positives partially funded with acquisition financing of $37 million.
Which we are scheduled to convert into construction loans shortly to take us through the completion of the construction.
<unk> has continued interest rate environment. We believe we are buttressed by relatively long duration of debt on it.
Our operating properties of which 94% is fixed at an average rate of three 2% with an average duration of six two or three years.
That is not recourse subject to limited the carve outs is not cross collateralized.
It is a portfolio and a massive asset base with respect to inflation.
The short duration of the high demand of our residential leases to show us to allow us to cover increased expenses on our operation.
Is that the properties.
Cause offset by higher rates.
With regard to our record.
Second quarter results, we are reporting record quarterly revenue of $34 5 million record NOI of $19 $2 million and <unk> $5 $4 million as a result of improved leasing as I. Just mentioned these results represent significant improvements over the second quarter. This year.
I will further detail.
I will turn over the call to J, J, who will provide an update on operations.
Thank you I am pleased to report that our residential leasing performance at all our properties continues to improve at the end of the second quarter. All our residential properties occupancy remains very high above 96% and rents are at record levels overall, new lease rental rate in the <unk>.
Second quarter exceeded previous rent by over 50%.
Renewal rental rate, but over 8% at our free market properties, we continue to see particularly strong rental demand at Tribeca House, and Clover House properties, both fee market buildings, while leased occupancy has averaged 97% to 99% over the last 12 months, we have steadily increased.
Rent per square foot to $76 from $63 over the same period in the second quarter rent on new leases were $83 per foot.
14% increase over previous rents and rent on renewals was $76 per foot and 8% increase over previous rents, we expect rent per square foot to continue to grow for at least another quarter. As a result of continued strong overall.
Leasing at specific house is progressing well, the 70% free market and 30% affordable property came online at the beginning of the second quarter and was 77% leased at the end of the quarter. We expect full lease up in the third and fourth quarters to a cap rate of over 7% in 2024 with initial leasing concessions run off.
At the Flatbush Gardens property. We are also very excited to begin operating under the New article 11 agreement made with H B D of New York City that we completed on June 29th as just described we think disagreement will help us continue making the needed infrastructure improvements expected of a large 21 acres.
Nine building 73 year old large complex.
The leasing is flattish bonds, we expect overall overall rents to continue to increase modestly as before the rent guideline board limits. These have now recommence over the last two years to annual increases of roughly 3% per annum. These are more stringent than the more generous five 8% increases.
In area median incomes for 2023 provided by the article 11 agreement overall, we are looking for our leasing activities to proceed smoothly under the modestly change guidelines of the article in the agreement, including incorporating a 249, new subsidized residents as vacancies arise. Most importantly, we will seek to maintain.
Full occupancy at the property, which was nearly 100% leased in the second quarter just completed.
In the quarter, and new leases averaged $32 per foot, 9% higher than the previous rents and renewals averaged $29 per foot, 3% higher than previous rents as a result overall average rents of the property has begun to increase again rising to $26 17 per foot.
At the end of the quarter versus $25 and Olson at the end of last year.
The other residential properties 10, West 60, <unk> Street Aspen.
And 250 Livingston Street continues to perform well while average leased occupancy for these properties has been above 96%.
Rental rates have increased 11%, 11% from a year ago rent collections across the portfolio remain strong despite the lingering challenges.
The pandemic the overall collection rate in the second quarter was over 96% and we have continued to benefit but at a lower rate from remittances under the New York Emergency rental assistance program or Iraq, and the landlord rental assistance program or LDAP, which totaled $400000 this quarter versus 500000.
Last quarter looking ahead, we remain focused on optimizing occupancy pricing and expenses across the business and fully implementing the article 11 transaction to best position ourselves for growth I will now turn over the call to Larry who will discuss our financial results.
Thank you J J for the second quarter reported revenues increased to a record $34 5 billion from $31 9 million last year's second quarter by $2 $7 million or excluding the impact of Pacific House that came online in the second quarter, an increase of $1.9 million.
NOI this quarter was $17 1 million, an increase of $1.1 million from last year or <unk> $5 million, excluding the Pacific House.
For this year was $5 $5 million, an increase of $4 million from last year or $7 million, excluding the impact of Pacific House, which reflected full interest expense, but only a partial initial lease up the.
The one 9 million, 6% revenue increase excluding the impact of <unk> Pacific was primarily due to the higher residential rates for all properties from continued strong leasing as mentioned by J J has slightly higher occupancy at Flatbush gardens bad debt expense was substantially the same as last year, reflecting high and stabilized.
As Jay discussed.
On the expense side key year over year changes were as follows property operating expenses were $300000 lower than last year, excluding the impact of Pacific cost, primarily due to repairs and maintenance fees at the Flatbush Gardens, and 141 Livingston Street properties, partially offset by.
The annual increases in payroll costs, we expect Flatbush gardens payroll and other expenses to increase by approximately $250000 quarterly as a result of our commitment to pay prevailing wages under the article 11 agreement.
Real estate taxes, and insurance increased by approximately $700000 in the second quarter year on year, excluding the impact of Pacific has $500000 due to the regular increase in real estate taxes midyear last year and.
And $200000 due to insurance cost increases.
Future real estate taxes will not include those from Flatbush Gardens as a result of the article 11 transaction.
Which were otherwise projected at approximately $1 $9 million for the third quarter of this year.
General and administrative costs increased by $100000 in the second quarter year on year, primarily due to higher payroll and <unk> amortization.
Interest expense increased by $600000 in the second quarter year on year.
Net of exclusion of Pacific has due to conversion of the debt at the 10 west.
St.
Property in Manhattan, two variable rate according to the terms of CT.
Two its terms and the elimination of capitalized interest for Pacific has partially offset by additional capitalization of interest associated with the 953, Dean Street development projects and higher interest income on cash deposits.
With regard to our balance sheet, we have $16 $3 million in unrestricted cash and $14 $7 million of restricted cash in February we refinanced the Pacific <unk> construction loan with an $80 million mortgage loan as previously disclosed and the rate has since decreased from five 7% to 555 <unk>.
<unk> based on issuance of certificate of occupancy.
We expect to enter a construction loan for the 953 Dean Street property in the near future we will.
Refinance refinance our portfolio on an asset by asset basis that our operating debt is nonrecourse subject to limited standard carve outs. It is not is not cross collateralized, we have no debt maturities of any properties until 2027 with an average overall duration of 623 years at the end of two.
<unk> thousand 23, 94% of that are operating properties was fixed at an average rate of 382%.
Today, we announced our announcing a dividend of $99.05 per share for the second quarter. The same amount as last quarter. The dividend will be paid on August 20, <unk> to shareholders of record on <unk>.
August 15.
Now I'll turn the call back over to David for concluding remarks. Thank you, though we remain focused on efficiently upgrades portfolio.
For operating improvement to continue to accelerate through next quarter and into 2023, we look forward to capitalizing on a myriad of growth opportunities, including optimizing Flatbush gardens.
Civic House.
These three developments at other possibilities.
It themselves.
Now like to open the line for questions.
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 pickup your handset if listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions. Once again Thats star one if you have a question or comment.
Okay. The first question.
Is from Buck Horne with Raymond James Please proceed.
Hey, good afternoon, guys and again congratulations on the new article 11 deal.
Big Big achievement for the property and I think for the company as well.
Just going to ask maybe just to start with could you just.
Give us a little more background on how are you.
The article 11.
Negotiation kind of came together how you guys proceeded.
From that and also just a little detail on how you think.
The revenue reimbursement program for.
Yeah.
Are you getting some rental assistance from tenants, but you know you'll get those enhanced reimbursement how does how does that going to feather into the red.
Over the next couple of years, you can just give us a little more color on that.
Okay.
Nice to speak to you again book as David.
The transaction is.
Not new political elevens have been available in New York City for quite some time in fact in June HPT closed on many article 11 transactions.
Sue just one of many.
And you know.
It's something that came to us and should we apply to it.
The H D D came they inspected the property to.
<unk> I think impressed by the investment that the company is amazing.
Uh huh.
The decade, and this drop in multi millions of dollars are spent.
They were impressed by the management of the property and you know JJ you spent a lot of time talking to them and showing them. How we run the property and that gave them comfort that this was a good.
A good property for them to.
Approve and applications such as auto Colo.
The Reds themselves.
Subsidized rents is very stiff.
Programs some of them is quite new.
So it's going to take the city, sometimes they get it implemented but they gave us a reassurance that this is a real program that's going to be implemented.
Time, but they love us.
The added income to sort of balance out.
The investments.
The company has to make and back into the infrastructure.
Alright, fantastic and it's.
It's part of the 27 million or your projected capex over a three year period should we think that that's that level of spending is going to or how.
How quickly will that spending ramp up over the next.
Really over the back half of this year and into 2024.
Will it be kind of a pro pro rate at $9 million per year kind of capex.
Capex spend on Flatbush or.
How should we think about the timing of that.
So too early to.
And today, the JJ wild type bucket stage.
I'll try to give you some more clarity so you understand it.
Just to add to what my dad.
A few minutes ago. The reason why the city like this article 11, the flattish guidance specifically is because the city has made it very clear that the mandate is to achieve as much affordable housing that is maintainable, especially the housing stock of generally rent stabilized units or 70 years plus.
And they are reaching a sudden life shelf life that they need to be upgraded and there is some restrictions on the income side or a lot of restrictions. So this is a creative way for the city to work with owners of properties. So that they can keep these properties in good shape comply with all the codes and all the other elements that go on in New York City and therefore.
Not hurt the tenants in the process. So it's a win win situation for everyone.
That's how we look at it and that's why we applied for it in HDD liked it because this is 2500 units. That's the size that they are benefiting from the mayor has made it clear and again city hall of medically that they want to do I think they said around 18000 units. So 2500 help them a lot in this quarter to get there.
So that's the reason for it now in terms of the expenditure of the Capex. The way. It works is we hired an engineer and that was done through a very deliberate process with hdds oversight to demonstrate what are the things that need to be upgraded and repaired whether replaced or repaired depending on each individual item and there is a timeline.
For them they get the they have to be done within that period of time of three years. Some of them are let's call them more pressing and theyre going to be done in the first.
Yes, and the less pressing one less critical ones theyre going to be done over the remaining two years. So we have the three year program to get this done.
Estimated at approximately somewhere between eight and $10 million a year on average that's what we estimate it to be obviously, that's not exactly the dollar value, but it's pretty much what it's been based on the estimates and the engineering that was done.
These numbers and that HBV approved so you can if you're looking for in a footnote approximation. It's around 10 million per annum. That's how we're looking at it.
Alright very helpful.
This happened in June sort of half a year, so we're adjusting to that as well.
Got it got it got it one last one from me it looked like there were some transaction pursuit costs written off in the quarter. Just curious is that potentially a new deal that you guys are looking at or is that just related to pulling flatbush off market in related to completing the article 11 deal.
Yeah, Buck as Larry Yeah, Yeah, those transaction costs were exclusively related to the article 11 deal we had to write some of those expenses off of it.
It's our attorneys and some fees paid to <unk>.
Housing preservation, who was our nominal owner download sponsor.
Got it alright, very very very clear. Thank you guys. Congratulations thank you.
Thanks.
Yes.
The next question is from Aaron Hecht with JMP Securities. Your line is live.
Hey, guys on that agreement at Flatbush Gardens wondering if you have to finish the capital spending requirements before you start.
Being able to benefit from some of the components like the tax changes in the reimbursement rates for tenants receiving government assistance.
Hi, Ben its actually the opposite the tax benefit of the tax abatement is immediate.
The July one bill was not paid because it's no longer own.
We have to do the work and we're going to we are starting to do the work already but the abatement is immediate the section 610 benefits, which is the item the benefit that you get from having to subsidize tenancies and what the city is calling a rent standard which is an increase in the rent.
Above even the legal rent that you can charge. If you will on a regulatory agreement that is something that's going to phase in as we either renew the existing tenants with subsidies wise when you bring in new tenants with subsidies that are part of the regulatory requirements.
Right.
And then are the benefits.
Of the article 11.
Transferable to any new water, if you ever decide to dispose of the asset.
Only if the city agrees to it meaning it transfers yet it stays with the property, but and new owner would have to get approved by HBV.
Right and how long did that process take you guys to execute on.
Got it from beginning to end.
From January to June .
Gotcha.
Okay and then.
Specifically what are you guys looking for on.
The yield at stabilization.
Well I said, roughly 7%, we think it might be a little higher but.
That's the cap rate that we think we're building to.
Is that all shook out.
Do you have enough transparency now the.
Give a projection on the street as well or too early to tell.
I would.
Estimate so it's only an estimate because we just got.
So that's going to be about the same as Pacific Street.
Alright.
The result was really good it's nice to see earnings going in the right direction.
That agreement with the city.
Look to be significant in the company. So I appreciate your time guys.
Thanks.
The next question is from Craig Kucera with B Riley Securities Craig. Please proceed.
Hey, good afternoon guys.
You go back a few years ago. When you were excited about potentially expanding flatbush gardens by possibly going vertical I know the last couple of years, you've been focused on other developments like 10, 10, and 953, but but does this article 11 agreement does that impact that process either way. If you were to decide to go in that direction again.
Yeah.
We don't think that we're going to be doing that kind of work there at the moment, we think this methodical alone.
I want to do implementing.
We just spoke about.
At the moment, that's what we're going to be doing.
Okay fair enough.
And you know, obviously, a really rapid lease up that specific house.
I guess when do you expect that to be fully leased and once that occurs how close does that bring you to get into some of those financial targets were you able to draw down an additional 20 million and see a reduction in rate.
We think the market is very strong as you've seen and we've gotten to this point.
Our best estimate in the next 60 days will be there.
You'll be there on the I'm being fully leased or I guess at what point.
$20 million.
Within 60 days, we should be able to draw it down and we should be.
We opened the sublease at that time.
Okay. Thanks, that's it for me I appreciate it.
Sure. Thank you.
Okay.
This concludes the question and answer session I would now like to turn the floor back to management for any closing remarks.
Thank you very much for joining us.
<unk>.
Thanks, everybody.
Good evening and hope to see you next quarter. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your lines at this time and have a wonderful day. Thank you bye bye all.
Participation right.