Clipper Realty Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Clipper Realty First Quarter 2023 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 Crowder, the floor is yours.

Speaker 1

Thank you, and good afternoon. Thank you for joining us for the Q1 of 2023 Clipper Realty, Inc. Earnings Conference Call. Participating with me on today's call are David Bissercer, Co Chairman of the Board and are Chief Executive Officer and JJ Visser, 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.

Speaker 1

These statements are subject to numerous risks and uncertainties, including those disclosed in the company's 2022 annual report on Form 10 ks and updated in the 2023 Q1 report on Form 10 Q, which are accessible at www.sec. Gov and our website. As a reminder, the forward looking statements speak only as of the date of this call, May 4, 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 for 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.

Speaker 1

With that, I will now turn the call over to our Co Chairman and CEO, David Vistraer.

Speaker 2

Thank you, Larry. Good afternoon, and welcome to the 1st Quarter 2023 Earnings Call for Quipa Realty. I will provide an update to our business performance, including recent highlights and milestones as well as our company's progress. I will then turn the call over to JJ, who will discuss profitable activity, including leasing performance. Finally, Riley will speak about our quarterly financial performance.

Speaker 2

Will then take your questions. Our operating results continue with positive trends. Residential leasing activity continues to improve Based on strong rental demand at our properties at New York City is fully reopened, people seek to relocate back to the city and employees increasingly return to their offices. At the end of the Q1, our properties were 99% leased, And new leases at all our properties continue to exceed pre pandemic levels. At the Tribeca House, for example, new leases in the Q1 exceeded $77 per foot, 17% better than the previous rent and overall rent levels were a record $75 per foot, are 19% better than the $63 at the end of December 2022.

Speaker 2

And at the Flap and Gardens complex. New leases averaged $36 this quarter and overall rent levels rose to 26.17 per foot. With respect to interest rate increases, we believe we are buttressed by the relatively long duration of our debt on our operating properties, of which 94% is fixed at an average of 3.72% interest with an average duration of 6.47 years And is not in any course, subject to limited standing carve outs and is not course collateralized. With respect to inflation, we took 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.

Speaker 2

We have a total of $38,000,000 in cash, consisting of $19,000,000 unrestricted cash and $19,000,000 restricted cash. We finance our portfolio are on an asset by asset basis. We are pleased to announce that as of today, we have completed our schedule, 10/10 Pacific Street Ground Up Development, now branded Pacific House, refinanced it with permanent debt have begun leasing in anticipation of full operation in the Q2. The property is located in Prestwick Heights, Brooklyn about 1 Life Atlanta Terminal Barclays Center Hub comprises 175 units. We came in at budget of $85,000,000 total cost And the leasing to a cap rate above 7%.

Speaker 2

Due to the excellent progress of construction and leasing in February, we replaced the are ahead of schedule for the 5 year $80,000,000 loan, dollars 60,000,000 is already drawn are closing $20,000,000 available upon achievement of certain financial targets. It has an initial interest rate of 5.7%, reduced by another 25 basis points upon full resale. Also, we are going to develop the land parcels we bought In 2020 1 and 'twenty 2, at Dean Street, we also intend to develop from the ground up an eyesore fully amenitized residential building with 166 residential rentable square feet, 240 total units, 70% of which are free market And the balance is affordable. Along with the 8,500 commercial rental square feet, we paid $56,500,000 for the parcels, are partially funded for acquisition financing of $36,000,000 and intend to fund the development with the construction. With regard to our Q1 results, we are reporting record Quarterly revenue of $33,700,000 NOI of $17,100,000 both exceeding pre pandemic levels And AFFO of $4,500,000 as a result of improved leasing I mentioned above.

Speaker 2

These results represent significant improvements over the Q1 last year and are testament to the progress of the management and executive team and JJ and I will further detail. I will now turn the call over to JJ, who will provide an update on operations.

Speaker 3

Thank you. I'm pleased to report that our residential DC performance at all our properties continues to improve. At the end of the Q1, all our residential properties occupancy and rent levels are exceeding pre pandemic levels. Overall, new lease rental rates in the Q1 exceeded previous rents by over 14% and renewal rates by over 8%. We are experiencing particularly Strong rental demand at our Trebecca House property.

Speaker 3

Our lease occupancy has averaged 98% over the last 4 months. We have steadily increased average rent per square foot to $75 from $63 over that same period. In the Q1, rent on new leases were $77 per square foot, a 17% increase over previous rent and rent on renewals were $74 per square foot, a 14% increase over previous rents. We expect rent per square foot will continue to grow for at least another quarter as a result of turnover of our 1 and 2 year leases entered into last year in response to pandemic conditions and as a result of continued strong overall leasing conditions. We also continue to benefit from the new leases at retail properties at the Chebeque House property.

Speaker 3

The 4 new leases we entered into last year had substantially higher rates of cash flowing, and we are actively seeking to lease At the Flatbush Gardens complex in Brooklyn, we are focused on maintaining high occupancy are at the 99% level and keeping up with maintenance activities. New leases in the Q1 have averaged nearly $36 per foot, are approximately 40% higher than the units previously rented. As a result, overall average rents for the property have begun to increase again, Rising to $0.2617 per square foot at the end of the quarter versus $0.25.12 at the end of last year. We are now benefiting from the guidelines put forward by the rent stabilization board in October 2023, which allowed increases in our rent stabilized units of 3 0.25% for 1 year leases and 5% for 2 year leases. Such increases have limited had been limited to 0% and 2% for the last couple of years.

Speaker 3

These increases will help offset our continued capital investment in the property, which has amounted to $900,000 so far this year and our continue to address the spending on maintenance and supplies. Our other residential properties, Clover House 10 West 65th Street, Aspen and 250 Livingston Street, continue to perform well. While average lease occupancy for these properties has maintained at 99%, average rental rates have increased 11% from a year ago. Rent collections across our portfolio remain strong Despite the individual challenges of the pandemic, the overall collection rate in the Q1 was over 98%. Surprisingly, we have continued to benefit, but at a lower rate from remittances under the New York Emergency Rental Assistance Program, or ERAP, and the Landlord Rental Assistance Program, or LRAP, will receive remittances this quarter of $500,000 versus average 2022 quarterly amount of $776,000 and a Q4 2021 amount of $2,500,000 On the development side, the construction of Pacific House in the Prospect Heights area of Brooklyn is completed with the Certificate of Occupancy issued by the New York City Building Department.

Speaker 3

We began leasing in the Q1 and have already leased 60% of the 122 free market leases as of today. We expect to be substantially leased in the Q3. The development is a 9 story 119000 are in a multi family rental building with underground indoor parking. The property has 175 total units, 70% pre market are 38% affordable and has a 35 year 421a tax abatement. Looking ahead, we remain focused on optimizing occupancy, pricing and expenses across the business could best position ourselves for growth.

Speaker 3

I will now turn the call over to Larry, who will discuss our financial results.

Speaker 1

Thank you, JJ. For the Q1, reported revenues increased by $1,600,000 to a record $33,700,000 from 30 $2,100,000 last year Q1. On a more comparable basis, after eliminating a one time recovery of previously written off receivables of $1,100,000 under the new accounting standard implemented last year. Revenue last year was $31,000,000 representing an increase of $2,700,000 or 9%. NOI this quarter was $17,100,000 or $600,000 better than last year as reported and $1,700,000 better after adjusting for the onetime revenue recovery.

Speaker 1

Similarly, AFFO this year was $4,700,000 an increase of $200,000 from the $4,500,000 reported this year were $1,300,000 better after adjusting for the onetime recovery item. The revenue increase was due to the higher residential revenue rates from continued strong leasing, as mentioned by JJ, and higher occupancy at the Flatbush Gardens property. Bad debt expense was substantially level with last year, reflecting the high and stabilized collections as J. J. Also discussed.

Speaker 1

On the expense side, key year over year changes were as follows. Property operating expenses were $600,000 higher than last year, Due primarily to increased utility gas heating prices compared to last year and higher repair costs at Flatbush Gardens from our increased focus on maintenance. The real estate taxes and insurance increased by approximately $600,000 in the Q1 year on year, dollars 500,000 due to The regular increase in real estate taxes midyear last year and $100,000 due to insurance cost increases. General and administrative costs increased by

Speaker 3

$350,000 in

Speaker 1

the Q1 year on year primarily due to extra auditor Transition costs and higher amortization costs of LFIPS issued after the Q1 last year. Interest expense increased by $200,000 in the Q1 year on year due to conversion of the debt at the 10 West Street property to variable rate according to its terms, partially offset Buy additional capitalization of interest associated with the Pacific House and 953 Dean Street Development Projects. With regard to our balance sheet, as David mentioned earlier, we have $18,800,000 of unrestricted cash and $19,000,000 of restricted cash. We initially funded development of our Pacific House and Dean Street acquisitions substantially with construction financing. In February, we refinanced the Pacific House construction loan with an $80,000,000 mortgage that provided initial funding of $60,000,000 and a further will be subject to achievement of certain financial targets.

Speaker 1

The loan has a 5 year term and an initial interest rate of 5.7%, are subject to a reduction by up to 25 basis points upon achievement of certain financial objectives. Belong as interest only for the 1st 2 years and principal and interest thereafter based on a 30 year amortization schedule. We finance our portfolio on an asset by asset basis, and our debt is non recourse, subject to limited standard carve outs And is not cross collateralized. We have no debt maturities on any operating properties until 2027, with average overall duration 6.47 years. At the end of 2023 currently, 9.4% of debt at our operating properties is fixed at an average rate of 3.72%.

Speaker 1

Today, we are announcing a dividend of $0.095 per share for the 1st quarter, the same amount as last quarter. The dividend will be paid on May 24 to shareholders of record on May 15. Let me now turn the call back over to David for concluding remarks.

Speaker 2

Thank you, Larry. We remain focused on efficiently operating our portfolio. We look look forward to our current operating improvements, and we'll continue to accelerate through the next quarter and into 2023. We look forward to capitalizing on a myriad of growth opportunities, including Pacifica's and Dean Street developments and other possibilities that may present themselves. I will now open the line for your questions.

Operator

Thank in the sound quality. Please hold while we poll for questions. Thank you. The first question comes from Buck Horne with Raymond James. Buck, please proceed.

Speaker 4

Hey, thanks guys. Good afternoon and congrats on the progress. Wondering if we could just revisit Flatbush and going back to late last year, it sounded like you guys are marketing the property or at least taking some indications of interest in the market to see if there was a potential buyer or transaction that might be possible for Flatbush, I'm just wondering if you can give a progress update or is Flatbush still potentially on the market?

Speaker 2

Travelers is no longer on the market. We took it off the market, and we have some other plans On the property, which we cannot talk about at the moment. But hopefully, next quarter, we should be in a better position to discuss what direction we're going. But at the moment, we're not Considering the sale of the property.

Speaker 4

Okay. All right. I appreciate the update. And For this year, it sounds like there's new discussions and proposals on the from the rent guidelines board about potential increases for rent stabilized units. I just read the article talking about of the 2% to 5% increases on 1 year leases and higher than that on 2 year leases.

Speaker 4

So it sounds like there may be some additional Progress or rent increases coming in. I was wondering if I guess the question would be Related to Flatbush and those properties, do you think well, I don't know, what you're going to opine on in terms of what you think the likelihood of those types

Speaker 2

If history is in the guide, which is usually, there will be some increase. If you read the news reports about how they conducted the meaning, it's more of a circus than anything else. Well, there will be, I think, a good possibility that there will be an increase. It's too early to tell until we know the results in a couple of A week or so. And stay tuned.

Speaker 2

There'll be something coming, I think. That seems to be an indication.

Speaker 1

And Buck, as I also noted, we've already started to benefit from the increases that were permitted effective October of last year.

Speaker 4

Yes.

Speaker 1

And they come in gradually. It's a large property and turnover is reasonably

Speaker 2

slow. Okay.

Speaker 4

Appreciate that. And just last one for me. Just kind of thinking higher level in terms of where the stock price is Relative to, obviously, what you guys and you guys consider the NAV of the company materially higher than these levels. Do you guys give any thoughts to other strategic transactions or potentially one of the smaller Properties potentially monetizing a property to fund either debt repayments or stock repurchases at these levels?

Speaker 2

It's something which we have not considered at the present time. The climate is not right, I think, with that at this To get a moment where interest rates are, with the pause in interest rate, seemingly the pause in interest rate, I think after that comes a Sort of a, think of it to come back the other way around, and that'd probably be a better time to explore what you're suggesting. Got it.

Speaker 4

Got it. All right, guys. We appreciate the time and good luck and thanks for the update.

Speaker 2

Thank you. Thank you.

Operator

There are no further questions in queue. Do you have any closing comments you'd like to finish with?

Speaker 2

Thank you for joining us today. We look forward to speaking with you again soon. Please stay healthy. Have a good night.

Operator

Thank you. 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

Speaker 3

you for

Operator

your participation.

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Earnings Conference Call
Clipper Realty Q1 2023
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