Clipper Realty Q4 2023 Earnings Call Transcript

Key Takeaways

  • Positive Sentiment: Record financial performance: Q4 revenues reached $34.9 M with NOI of $20 M and record AFFO of $6.3 M, marking significant year-over-year improvements.
  • Positive Sentiment: Strong leasing momentum: Portfolio occupancy was 98% in Q4, with new and renewal rents up over 6%, including record $78/sq ft at Tribeca House and $81/sq ft at Clover House.
  • Positive Sentiment: Development pipeline on track: Pacific House opened on budget and is 100% leased targeting a 7% cap rate, while the 953 Dean Street superstructure is ahead of schedule for 2025 leasing season.
  • Positive Sentiment: Flatbush Gardens Article 11 agreement: A 40-year tax abatement and enhanced rental reimbursements provide funding for capital improvements and tenant assistance.
  • Negative Sentiment: 250 Livingston vacancy risk: NYC plans to vacate its leased space, requiring re-leasing efforts or renovation CapEx, which could pressure future revenues if a new tenant is not secured.
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Earnings Conference Call
Clipper Realty Q4 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

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 your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Larry Crider. Sir, the floor is yours.

Speaker 1

Good afternoon, and thank you for joining us for the Q4 2020 3 Clipper Realty, Inc. Earnings conference call. Participating with me on today's call are David Bisseraser, Co Chairman of the Board and Chief Executive Officer and J. J. Bissreusser, Chief Operating Officer.

Speaker 1

Please be aware that statements made during the call that 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 ks, 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 14, 2024, 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 ks 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 Chairman and our Co Chairman and CEO, David Bisscher.

Speaker 2

Thank you, Larry. Good afternoon. Welcome to the Q4 2023 earnings call for Critical Realty. I will provide a summary of some of our business performance and some existing new developments. Afterwards, JJ will discuss property level activity, including leasing performance and I will speak to our quarterly financial performance.

Speaker 2

We will then take your questions. I am pleased to report that we have reported record operating income and AFFO continuing the positive trends from previous quarters. Rental demand continues to be strong at all our properties. In the 4th quarter, Moody's has exceeded prior rents by 6 percent across the entire market based portfolio and our properties were 98% leased. At the Tribeca House property in Manhattan and Global House property in Brooklyn, new leases were $88 per square foot and overall rent levels remained at record levels 78 dollars at Tribeca House, dollars 81 at Clover House, 40% better than the 63 Square Foot at the end of December 2021.

Speaker 2

At Flavors Gardens, since July, as previously announced, we are operating under a 40 year agreement according to the Article 11 of the Private Housing Finance Law in New York City Housing and Preservation Development. Under this agreement, known as Article 11, the elimination of real estate taxes and enhanced rental recoveries to assist the tenants should allow us to profitably provide for our communities for property improvements, tenant assistance and higher wages. Of course, we are at the early stages of important progress as we move forward. Operationally, we are pleased to report that our ground up development at Pacific House at 10 10 Pacific Street in Brooklyn came online last quarter on budget and is 100% leased and on target to yield a 7% cap rate. The property is located across the United, Brooklyn, about 1 mile from the Atlantic terminal, Bakken Center Club.

Speaker 2

The property has 175 units, 70% free market and 30% affordable and this is tax abated for 35 years. As the nearby 953 D Street ground of development, which is underway. We have completed the superstructure ahead of schedule, expects to complete the construction on time for 2025 leasing season, utilizing the $123,000,000 construction loan we closed on last quarter. We purchased the land in 2021 2022, of which to build a 9 story fully amenitized residential building with 163,000 square feet of rentable square feet, 240 units, 70% free market, 30% affordable, 8,500 commercial rentable square feet. And again, this is also tax abated for 35 years.

Speaker 2

As we continue high interest rate environment, we believe the higher rates make for higher demand for our rental product versus the purchase option and we are buttressed by the relatively long duration of debt at our operating profits. Our debt is 93% fixed at an average rate of 3.8% and an average duration of 5.5 years. Non recourse subject to limited standard carve outs and is not cross collateralized by any one of the properties. We finance our properties on asset by asset basis. With respect to inflation, we look to the short duration and high demand for the residential leases to allow us to cover increased operating expenses.

Speaker 2

With regard to our 4th quarter results, we are reporting quarterly revenue at 34,900,000 dollars a recognized NOI of $20,000,000 and a record AFF of over $6,300,000 as a result of the strong leasing and cost reduction I just mentioned. These results represent significant improvements over the Q4 last year and as J. J. And Larry will further detail. I I will now turn the call over to JJ, who will provide an update on operations.

Speaker 3

Thank you. I am pleased to report that our residential leasing performance at all our properties continues to improve. At the end of the Q4, all our residential properties had very high occupancy averaging 98% and rents are continuing at record levels while still recording increases over previous levels. Overall new lease and renewal rental rates in the 4th quarter exceeded previous rents by over 6% at our free market properties. We expect leasing to remain very strong in the foreseeable future as demand remains high and the overall rental housing supply remains constrained in the absence of significant new developments as widely publicized.

Speaker 3

At Trebecca House and Clover House, we have maintained leased occupancy between 96% to 99% and increased average rent per square foot to $78 per square foot from $71 over the last 12 months and $63 per square foot near the end of the pandemic. And our new development property Pacific House is almost fully stabilized. The 70% free market and 30% affordable property came online at the beginning of the Q2 and was 100% leased at the end of this quarter. We expect the property to achieve a cap rate over 7% in 2024 in line with original underwriting. At the Flatbush Gardens property, we are pleased to be operating under the new Article 11 agreement made with the Housing Preservation Department of New York City that was completed on June 29, 2023.

Speaker 3

We received the full abatement of real estate taxes beginning July 1, have begun completing the capital projects we committed, have begun placing formerly homeless residents and have begun obtaining the enhanced reimbursements under Section 610 of the Private Housing Finance Law for tenants receiving assistance. The benefits we receive will allow us to profitably improve the property. We are also getting increases from non assisted tenants where increases have been permitted on the rent guideline board guidelines board for the last couple of years at the 3% level per annum. As a result, overall average rents for the property are increasing, rising to 0.26 $0.69 per square foot at the end of the quarter versus $25.97 at the end of the last year. Operationally, our other residential properties at 10 West 65th Street, Aspen and 250 Livingston Street continue to perform well.

Speaker 3

Average leased occupancy for these properties has been above 96% and average rental rates have increased 11% from a year ago. Rent collections across our portfolio remain as expected at seasonally high levels. The overall collection rate in the Q4 was over 95% despite the lingering challenges of the pandemic. Looking ahead, we remain focused on optimizing occupancy, pricing and expenses across the business, expeditiously completing our development projects and fully implementing the Article 11 transaction to the best to best position ourselves for growth. I will now turn the call over to Larry, who will discuss our financial results.

Speaker 1

Thank you, J. J. For the Q4, revenues increased to a record 3 point $9,000,000 from $33,000,000 last 4th quarter by $1,900,000 or excluding the impact of Pacific House that came online in the Q2, an increase of $700,000 NOI this quarter was $20,000,000 an increase of $2,800,000 from last year or $2,000,000 excluding the impact of Pacific House. AFFO this year was $6,300,000 an increase of $1,600,000 from last year or $1,900,000 excluding the impact of Pacific House which reflected full interest expense since going online, but only partial initial lease up. For the Q4, residential revenue increased to $25,100,000 by $2,100,000 or a $1,000,000 revenue increase excluding the impact of Pacific House.

Speaker 1

This 4% increase was primarily due to higher residential rental rates for all properties from continued strong leasing previously discussed. Bad debt expense was substantially the same as last year, reflecting high and stabilized collections. The $300,000 decline in commercial rental income was caused by a couple of leases at the Aspen property that are being replaced. On the expense side, key year over year changes quarter on quarter were as follows. Property operating expenses were flat compared to last year, excluding the impact of Pacific House, primarily due to lower utilities costs, mostly offset by higher repairs and maintenance and payroll at the Flatbush Gardens property to make necessary repairs and to comply with wage requirements under the Article 11 transaction.

Speaker 1

Real estate taxes and insurance decreased by approximately $1,300,000 in the 4th quarter year on year, excluding the impact of Pacific House, dollars 1,800,000 due to elimination of real estate taxes at Flatbush Gardens, partially offset by $200,000 for routine increases in real estate taxes at the other properties and $300,000 for insurance cost increases. General and administrative costs decreased by 300,000 dollars in the Q4 year on year, primarily due to lower audit costs and compensation related expenses. Interest expense increased by $300,000 in the Q4 year on year, excluding the impact of Pacific House due to conversion of the debt at the 10 West 65 property to variable rate according to its terms and the elimination of capitalized interest for Pacific House. With regard to our balance sheet, we have $22,200,000 of unrestricted cash and $14,100,000 of restricted cash. In the Q4, we had no new debt activity other than draws under the construction loan that we closed last quarter for our Dean Street property development.

Speaker 1

We financed our portfolio on an asset by asset basis. Our operating debt is nonrecourse, subject to limited standard carve outs and is not cross collateralized. The average duration of our debt of our operating properties is $5,500,000 5.5 years and 93% of our debt at our operating properties is fixed rate at an average rate of 3.87%. Today, we are announcing a dividend of $0.095 per share for the Q4, the same amount as last quarter. The dividend will be paid on April 4, 2024 to shareholders of record on March 27, 2024.

Speaker 1

Let me turn the call back to David for concluding remarks.

Speaker 2

Thank you, Larry. We remain focused on efficiently operating our portfolio. We look for our current operating improvements to continue through 2024 into 'twenty five. We look forward to capitalizing a myriad of growth opportunities including optimizing Flatbush Gardens' Alacol 11 transaction, Pacific Island and 953 D3 development and capitalizing other possibilities that may present itself. We look forward to the transition of the 2 fiscal Livingston tenant at end of the DKS lease, which is coming up at the end of 2025.

Speaker 2

Thank you. We look forward to seeing you at the next quarter.

Operator

Thank you. The floor is now open for questions. First question comes from Buck Horne with Raymond James. Please proceed.

Speaker 4

Hey, good afternoon guys. I was wondering if we could start with just 250 Livingston and the situation with the lease and the notification that the New York City of New York plans to vacate. Just

Operator

can you

Speaker 4

walk us through what the next steps are in terms of either trying to re tenant the building or what your options are if re leasing the space is not realistic? Do you you have $125,000,000 mortgage out on the property. Does it make sense at some point to consider just handing the keys back?

Speaker 2

We think that's a premature type of a conversation. The city who is basically DCAS who organizes all the leases for the city is looking is in the marketplace for a new building occupation for about 300 and something 1000 square feet by one of the city agencies. We are told that this building at 250 and the other building we have 141 is a prime candidate for it. There's no guarantee obviously that we will be awarded that opportunity, but we're working diligently to try to get that tenant into our buildings. That would be an improvement of what we have right now.

Speaker 2

We are in a position to be able to renovate that billings if we had to, to account for a new tenant. We have excellent relationship with DCAS over the many millions of years. And in that particular marketplace, I think we are in a good position for the cost basis that we have in the building to be able to compete very aggressively in the marketplace to attend the rents that they are looking for. That's only one option and that's the one that we are most focused on at the moment.

Speaker 4

Okay. Appreciate that. Do you have any idea realistically what the cost to put in the tenant improvements or additional CapEx in the 250, Livingston? Any range of estimate of what that would cost to get that ready for a new tenant?

Speaker 2

We don't know yet because we haven't yet had got that granular with this conversation. But usually, the way it would work is whatever we put into the building would be met by, obviously, we're making our $50 a foot on that particular tenancy. It's not a very high rent for the marketplace with a fair rent for the condition of the building that it's in. Any money that we invest in the property will be always tested by return on equity to commence the needs of that investment. We will just put in the money and credibility not to get back a fair return on it.

Speaker 2

So, it will be a long term lease. It will be for a credited lease tenant because leases are all credited and good credit. So that will be commensurate with those 2 things, the credited tenant and also the amount of money that usually what they're looking to do is not that most commercial tenants ask for a lot more luxury types of improvements. This is really very, very I think bare bones kind of operation that these agencies look for. So, we don't have more details than that right now.

Speaker 2

We'll see as we go along, we'll report when we have something to report.

Speaker 4

Got it. Got it. And for now, the any income and revenue from the building goes into an escrow account? Is that how this works until what requirements need to be satisfied before you can start continue booking revenue from the building again?

Speaker 2

The revenue is the revenue. There is nothing going to stop the revenue. So then at least the revenue is going to be reported by the company. It's taxable by the company, whatever taxes it is, it's our revenue. Whether there is going to be an escrow account yet, that has not been determined yet.

Speaker 4

Okay. Got it. And my last one is just simply a larger or bigger picture, I guess. Just noting where shares are trading and relative to even our estimates of what the NAV of the company is, is there a consideration or longer term thought of is it does it make sense to look at a potential property sale to try to either delever the balance sheet and or potentially deploy some proceeds in the stock repurchases?

Speaker 2

We haven't discussed it yet at the property. The value of the price of the stock has been where it is for quite some time. Obviously, it commits, I think, indicative where the overall market is. And that discussion has not yet been considered yet, what you're referencing.

Speaker 4

Got it. All right, guys. Thanks.

Speaker 2

Thank you.

Speaker 4

I would now like to turn

Operator

the floor back to management for closing remarks.

Speaker 2

Thank you for joining us today. We look forward to speaking with you again soon. Have a good evening.

Operator

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.