Q2 2024 Clipper Realty Inc Earnings Call
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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: Thank you very much, John . Good afternoon, and thank you for joining us for the second quarter 2024 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 2023 Annual Report on Form 10-K , which is accessible at www.scc.gov.
Operator: 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 in 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.
Larry Kreider: 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.
With that, I will now turn the call over to our Co-Chairman and CEO , David Bistricer.
David Bistricer: Thank you, Larry. Good afternoon, and welcome to the second quarter 2024 earnings call for Clipper Realty. I will provide an update on our business performance and some new developments, after which JJ will discuss property level activity, including leasing performance, and Larry will speak to our quarterly financial performance. We will then take your questions.
David Bistricer: I will provide an update on our business performance and some new developments, after which J.J. will discuss property level activity, including leasing performance, and Larry will speak to our quarterly financial performance. We'll then take your questions.
David Bistricer: I am pleased to report that we are reporting record operating results, including record revenue, net operating income, and AFFO based on excellent residential activity. Rental demand continues to be strong at all our properties. Overall rents are generally at all-time highs and continue to increase, and we are nearly fully leased. In the second quarter, new leases exceeded prior rents by over 7% and spanned the entire market-based portfolio, led by the Chebeca House property in Manhattan and the Clover House property in Brooklyn.
J.J.: Overall rents are generally at all-time highs and continue to increase.
J.J.: And we are nearly fully leased. In the second quarter, new leases exceeded prior ends by over 7% and crossed the entire market-based portfolio, led by the Chebeca House property in Manhattan and the Clover House property in Brooklyn.
David Bistricer: There were new leases were over $84.90 per square foot, and overall rent levels were $81.84 per square foot, which is also strong. Since last July, we have operated under a 40-year operating lease, according to Article 11 of the Private Housing Finance Law, the New York City Housing Preservation Development, which eliminated real estate taxes at the property and provided for enhanced rental recovery use for assisted tenants, who are beginning to receive meaningful amounts.
J.J.: There were new leases were over $84 and $90 per square foot and overall rent levels were $81 and $84 per square foot All compared to $63 per square foot at the end of December 2021 Results are a stabilized rent property
Speaker Change: Sabbath Garden
Speaker Change: According to the Article 11 of the Private Housing Finance Law, the New York City Housing Preservation and Development Act, which eliminated real estate taxes as a property.
Speaker Change: and provided for enhanced rental revenues, rental recoveries for assisted tenants which are beginning to receive meaningful amounts. As a result, we are aggressively fulfilling our commitments for property improvements, tenant assistance, and higher wages.
David Bistricer: As a result, we are aggressively fulfilling our commitments for property improvements and assistance in higher wages. We bought the land in 2021-22 on which to build a nine-story, fully amenitized residential complex with 160,000 residential square feet, 240 total units, 70% free market, 30% affordable, and 8,500 commercial rental square feet at 250 Livingston Street. As previously disclosed, New York City notified us of their intention to vacate in August of 2025 We are seeking solutions and pursuing opportunities supported by cash flows from our other properties.
Speaker Change: Operationally, we are very pleased with our new ground-up development at Pacific House.
Speaker Change: at 1010 Pacific Street in Brooklyn, after a year of full operation, it's fully stabilized and is contributing to cash flow. It is now 100% leased and yielding the projected $0.07 cap rate as projected.
David Bistricer: Of course, we will keep you informed of our progress regularly. At our other New York City office property, 141 Livingston Street, we are actively negotiating a five-year extension to our current lease that expires on December 25, but we cannot assure you that this will be completed favorably. Also, we have begun thinking about recycling properties in our portfolio to maximize performance and improve cash flow. As such, we have begun preliminarily marketing activities for some of our other properties, properties including 10 West 65th Street, which while potentially resulting in some losses compared to book value, would allow us to achieve better overall returns going forward.
Speaker Change: where, as previously disclosed, New York City notified us of their intention to vacate in August of 2025. We are seeking solutions and pursuing up to opportunities supported by cash flows from our other properties. Of course, we will keep you informed as of our progress regularly.
Speaker Change: At our other New York City office property, 141 Livingston Street, we are actively negotiating a five-year extension to our current lease that expires on December 25, but we cannot assure that this will be completed favorably.
Speaker Change: Also, we have begun thinking about recycling properties out of our portfolio to maximize performance and improve cash flow. As such, we have begun preliminarily marketing activities for some of our other...
Speaker Change: properties, including 10 West 65th Street, while potentially resulting in some loss compared to book value, would allow us to achieve better overall returns going forward. We will announce any definitive arrangements promptly as they arise.
David Bistricer: We will announce any definitive arrangements promptly as they arrive. As for the continuing high interest rate environment, we believe the higher rates make for higher tenant demand for our rental product versus the purchase option. 37.3 million NOI
Speaker Change: As for the continuing high interest rate environment, we believe the higher rates make for higher tenant demand for our rental product versus the purchase option.
Speaker Change: We are also buttressed by the relatively long duration of debt on our operating properties. Our operating debt is 91% fixed, an average rate of 3.87%, an average duration of 4.9 years, is non-recourse, subject to limited standard carve-outs, and is not gross collateralized.
Speaker Change: We finance our properties on an asset-by-asset basis, and that cost collides. With regard to our second quarter results, we are reporting record quarterly revenue.
Speaker Change: of 21.1 million dollars.
David Bistricer: Thank you. I am pleased to report that our residential leasing at all our properties is very strong and continues to improve. At the end of the second quarter, our residential properties were over 99% leased, and rents were at record levels and still recording increases over previous levels. Overall, new lease and renewal rental rates in the second quarter exceeded previous rents by over 7% at our residential properties. We expect leasing to remain strong in the foreseeable future as demand remains high and the overall rental housing supply remains constrained, as widely publicized. As of the end of June, Chebekah House had leased occupancy of nearly 100%, rent per square foot of $81, and new rent of $84 per square foot.
Speaker Change: Thank you. I'm pleased to report that our residential leasing at all our properties is very strong and continues to improve. At the end of the second quarter, our residential properties were over 99% leased.
Speaker Change: Overall, new lease and renewal rental rates in the second quarter exceeded previous rents by over 7% at our residential properties.
Speaker Change: We expect leasing to remain strong in the foreseeable future, as demand remains high and the overall rental housing supply remains constrained, as widely publicized.
Speaker Change: As of the end of June , Chebeke House had leased occupancy of nearly 100%, rent per square foot of $81, and new rent of $84 per square foot.
Speaker Change: The Clover House property had lease occupancy of 97%, average rates of $84 a foot, and new leases of $90 a foot.
Speaker Change: Our recently completed Pacific House property consisting of a blend of free market and rent-stabilized tenants
Speaker Change: had lease occupancy of 97%, free market rent of $76 per square foot, and new free market rent of $76 per square foot. This property is now fully stabilized with operating cash flows achieving the projected 7% cap rate in the original underwriting.
Speaker Change: Our other residential properties at 10 West 65th Street, Aspen, and 250 Livingston Street continue to perform at record levels with average lease occupancy above 98% and new rents and renewals 11% higher.
Speaker Change: compared to previous leases. Lastly, at the large Flappers Gardens property we continue to be pleased with our performance operating under the new Article 11 agreement made with the Housing Preservation Department of New York City
David Bistricer: We have begun to meaningfully obtain enhanced reimbursement under Section 610 of the Private Housing Finance Law for tenants receiving assistance as we fill vacancies with formerly homeless residents and renew leases with assisted tenants. These benefits have amounted to nearly $500,000 so far this year and should steadily increase over the next couple of years and facilitate profitable improvements to the property. We are also getting increases for non-assisted tenants where increases have been permitted under the Rent Guidelines Board for the last couple of years at the 3% level per annum. Overall, average rents of the property have risen to $28.10 per square foot at the end of the quarter versus $26.38 at the end of the second quarter last year.
Speaker Change: We have begun to meaningfully obtain the enhanced reimbursement under Section 610
Speaker Change: Nearly $500,000 so far this year and should steadily increase over the next couple of years and facilitate profitable improvements to the property.
Speaker Change: We are also getting increases for non-assisted tenants, where increases have been permitted under the Rent Guidelines Board for the last couple of years at the 3% level per annum.
Speaker Change: As a result, together with the Section 610 benefits for assisted tenants, overall average rents for the property have risen to $28.10 per square foot at the end of the quarter versus $26.38 at the end of the second quarter last year.
David Bistricer: Rent collections across our portfolio remain strong. The overall collection rate in the second quarter on all residential properties was 98%. Collections at Flappage Gardens have been at historically high 97% levels for the last two quarters without the benefit of the ERAP payments as in prior years. We are responsibly and steadily working through the court system to minimize arrears. Looking ahead, we remain focused on optimizing
Speaker Change: Collections at Flappage Gardens have been at historically high 97% levels for the last 2 quarters without the benefit of the ERAP payments as in prior years. We are responsibly and steadily working through the court system to minimize arrears.
Speaker Change: Looking ahead, we remain focused on optimizing
Speaker Change: occupancy, pricing, and expense across the business, expeditiously completing our development projects, and fully implementing the Article 11 transaction to best position ourselves for growth. I will now turn the call over to Larry who will discuss our financial results.
Larry Kreider: For the second quarter, residential revenue increased to $27.7 million by $2.1 million. This increase was due to the strong leasing for all properties as previously discussed. Occupancy and rental rates were at all-time highs in the quarter.
Larry Kreider: We further benefited in the quarter from $400,000 of Section 610 rents, which are now beginning to meaningfully contribute. We expect this revenue source to increase steadily over the next few years. Commercial revenue was flat in the quarter compared to last year.
David Bistricer: On the expense side, key year-over-year changes, quarter-on-quarter, were as follows.
David Bistricer: Property operating expenses increased by $2.2 million year-on-year, $1.8 million at Flatbush Gardens working within the Article 11 agreement to fulfill so-called prevailing wage requirements to refurbish units for our new, formerly homeless residents.
Larry Kreider: Property operating expenses increased by 2.2 million dollars year-on-year 1.8 million dollars at Flatbush Gardens working within the article 11 agreement to fulfill so-called prevailing wage requirements to refurbish units for our new formerly homeless residents
Larry Kreider: and to focus on general repairs and maintenance.
Speaker Change: Our utility gas expense also increased somewhat in the quarter from an underestimate in the first quarter. We expect expenses for refurbishment and repairs and maintenance expenses to decrease over time as we achieve the benefits of our capital spending.
Larry Kreider: Real estate taxes and insurance decreased by $1.3 million in the second quarter year-on-year due to $1.8 million from the elimination of real estate taxes at Flatbush Gardens.
Larry Kreider: Partially offset by $400,000 for the routine increases in real estate taxes at the other properties and $100,000 for insurance cost increases.
Larry Kreider: General and administrative expenses increased slightly by $63,000 in the second quarter year-on-year.
Larry Kreider: primarily due to higher legal fees.
Speaker Change: Interest expenses increased by $407,000 in the second quarter year-on-year.
Speaker Change: With regard to our balance sheet, we have $20.3 million of unrestricted cash and $16.5 million of restricted cash.
Speaker Change: In the second quarter, we had no new debt activity other than draws under the Dean Street property construction loan, which closed in the third quarter of 2023.
Speaker Change: Thank you, Larry. Remain focused and efficiently. Thank you. Thank you.
Speaker Change: Operating our portfolio, we look forward to the current operating improvements that continue through 2024 and 2025. We look forward to optimizing Flatbush Garden's Article 11 transaction, I-53 street developments, and other growth opportunities.
David Bistricer: managing the New York City leasing issues at Livingston Street Properties and to capitalizing on other possibilities that may present themselves.
Operator: Thank you. The floor is now open for questions. If you have any questions or comments, please indicate so by pressing star 1 on your phone at this time. We ask that while you are posing your question, you please pick up your handset and listen on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Once again, please press star 1 if you have a question or a comment.
Speaker Change: Thank you. The floor is now open for questions. If you have any questions or comments, please indicate so by pressing 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.
Speaker Change: Once again, please press star 1 if you have a question or a comment.
Speaker Change: And the first question comes from Buckhorn with Raymond James. Please proceed.
Questioner: Hey, good afternoon, guys. I just kind of wanted to start with the office properties and the kind of the situation there with the leasing arrangement or, I guess, with the notices provided by the City of New York there that they're maybe starting with 250 Livingston. You know, it's my understanding that the
Speaker Change: Hey, good afternoon guys. I just kind of wanted to start with the office properties and kind of the situation there with the leasing arrangement, or I guess with the notices provided by the city of New York there that they're maybe start with 250 Livingston.
Speaker Change: It's my understanding that the...
Operator: None of the further information.
Operator: [inaudible]
Speaker Change: Is there a point at which, you know, if that lease is, I mean, well, is there a risk that the revenues from that building cease to flow to the company?
Questioner: Alright, and, and, uh...
Questioner: Okay.
Speaker Change: All right, and
Speaker Change: Is there any notice of, you know, and I know you're in the process of negotiating or negotiating at least at 141 Livingston, but that, you know, the city's already given notice at 250 that they're leaving.
Speaker Change: Have they provided any formal notice of their intention to leave 141 at this point?
Questioner: Larry?
Questioner: Well, no, the city, well, maybe JJ can, I'll take this one. On the contrary, they're actually looking for an extension.
Speaker Change: So we're in the midst of negotiating an extension with them, and that's what we mentioned in the...
Speaker Change: in the call that there is a conversation around the five-year extension.
David Bistricer: If there is an extension, my understanding is that the building may require some significant upgrades or CapEx to refurbish it for any potential new lease or extension or a new tenant. What kind of CapEx requirements do you think would be needed to extend that lease?
David Bistricer: Okay.
David Bistricer: My understanding is that building may require some significant upgrades or CapEx to refurbish it for any potential new leasing or extension or new tenant. What kind of CapEx requirements do you think would be needed to extend that lease?
David Bistricer: The extension that the city is looking for is not a CapEx type of extension. It's pretty much as is.
David Bistricer: The extension that the city is looking for is not a CAPEX type of extension.
Questioner: Okay, okay. And in terms of the thought process around marketing, uh, 10 West 65th at this point, what is, I guess, you know, what's the, uh,
Questioner: It's pretty much as is.
David Bistricer: There might be some better opportunities. What is the value of that property that we could achieve by selling it? That's something we're looking at right now, so we're testing the market to see what kind of a price we might be able to achieve. There are several interested parties. Once that thing is crystallized, obviously, we'll come back and advise the market about that. Right now, it's just in the preliminary stages of testing the market.
David Bistricer: for the value in that property that we could achieve by selling it.
David Bistricer: And so there are several interested purchases. Once that thing is crystallized, obviously we'll come back and advise the market of that. Right now, it's just in the preliminary stages of testing the market.
Questioner: And is there any progress or thoughts on terms of
Questioner: [inaudible]
David Bistricer: When the mortgage is getting a little bit closer to maturity, obviously, we would think about refinancing it and seeing what levels of interest are available at that time. Whether it's a Freddie Mac or Fannie Mae mortgage or with existing lenders, it's something that we will look at a bit later on, as we do expect that the overall rental markets for fixed assets, fixed-term mortgages are about to decrease, as noted by the Fed.
Questioner: All right. Thanks, guys. Good luck.
Speaker Change: Okay, we have no further questions in queue. I'd like to turn the floor back to management for any closing remarks.
Speaker Change: Thank you for joining us today and we look forward to speaking with you again soon.