Clipper Realty Q1 2024 Earnings Call Transcript

Key Takeaways

  • Positive Sentiment: Company reported record Q1 results with revenue of $35.8 M, NOI of $20.2 M and AFFO of $5.9 M, marking strong year-over-year growth.
  • Positive Sentiment: Residential portfolio reached an average 98% occupancy and new leases were 6% above prior rents, with stabilized rates at historic highs.
  • Positive Sentiment: Pacific House is now 100% leased and delivering the projected 7% capitalization rate, boosting cash flow as planned.
  • Positive Sentiment: Construction at 293 Green Street is ahead of schedule, with completion targeted for the 2025 leasing season under a $12.3 M construction loan.
  • Negative Sentiment: New York City notified Clipper Realty it must vacate 250 Livingston Street by August 2025, creating uncertainty around replacing this income stream.
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Earnings Conference Call
Clipper Realty Q1 2024
00:00 / 00:00

There are 4 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 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

Thank you, John, and good afternoon and thank you for joining us for the Q1 2024 Clipper Realty, Inc. Earnings conference call. Participating with me on today's call are David Bistreser, Co Chairman of the Board and Chief Executive Officer and J. J. Bistracer, Chief Operating Officer.

Speaker 1

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 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, May 7, 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 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 Bissercer.

Speaker 2

Thank you, Larry. Good afternoon. Welcome to the Q1 of 2024 Earnings Call for Clipper Realty. I will provide an update on our business performance and Sunnoo developments. Afterwards, J.

Speaker 2

J. Will discuss property level activity, including leasing performance, and Larry will speak to our quarterly financial performance. We will then take your questions. I'm pleased to report that we are reporting record revenue and net operating income, continuing the positive trends from previous quarters for our residential properties. Rental demand continues to be strong at all our properties and overall rents are stabilizing as COVID era rents are replaced with current rents.

Speaker 2

In the Q1, new leases exceeded prior rents by 6% across the entire market based portfolio, and our portfolio were 98% leased. At the Trebecca House in Manhattan, the Clover House in Brooklyn, new leases were over $80 per square foot. Overall, rental levels remained at record levels, dollars 78 at Tribeca, dollars 81 at Clover House, 40% better than the $63 at the end of December 2021. At Flatbush Gardens, we continue to be pleased by our results. Since last July, we have operated under the 40 year agreement according to the outlook 11 of Private Housing Finance Law with New York City Housing and Preservation Department, which eliminated for that property real estate taxes as a property and provided for enhanced rental recoveries for assisted tenants.

Speaker 2

This should allow us to profitably operate after providing our commitments for property improvements, tenants assistance and higher wages. We are meeting all our commitments and beginning to meaningfully receive and enhance rental income for assisted tenants. Operationally, we are also very pleased with our new ground up development known as Pacific House and Tencent Pacific at Tencent Pacific region Brooklyn is nearly fully stabilized and meaningfully contributing to cash flow. It is now 100% leased yielding the projected 7% cap rate. Property is located at Prospect Heights about 1 mile from the Atlantic, Barclays Center Hub.

Speaker 2

Property is 175 units, 70% market and 30% affordable which allows us to pay any taxes. At nearby 293 Green Street ground up development, construction is proceeding ahead of schedule. We completed the superstructure ahead of schedule and expect to complete construction in time for 2025 leasing season, utilizing the $12,300,000 construction loan that we closed on last quarter. We bought the land in 2021 2022, and wish to build the 9 story fully amenitized residential building, 160,000 square feet of rentable square feet, 240 units, 70% free market and 30% affordable and 8,500 square foot commercial center. At 250 Livingston Street, where our previously disclosed New York City notified us of their intention to vacate the premises in August of 2025.

Speaker 2

We are seeking solutions and pursuing opportunities supported by cash flows from other properties. Of course, we will keep you informed of our progress regularly. After the continued high interest rate environment, we believe higher rates make for higher tenant demand for our rental products versus the purchase option. We are also buttressed by the relatively long duration of debt at our operating properties. Our operating debt is 92% fixed, an average of 3.87 interest rates.

Speaker 2

Average duration is 5.2 years, non recourse subject to limited standard carve outs and is not cross collateralized. We finance our portfolio on an asset by asset basis. With respect to inflation, we look to the short duration and high demand for residential leases to allow us to cover increased operating expenses. With regard to our Q1 results, we are reporting record quarterly revenue $35,800,000 record of NOI $20,200,000 and AFFO of $5,900,000 as a result of the strong leasing and cost reductions I just mentioned. These results represent improvements over the Q1 last year as JJ and Harry will further detail.

Speaker 2

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, while rents approaches full stabilization and full recovery following the end of the COVID period. At the end of the Q1, 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 Q1 exceeded previous rents by over 6% at our residential properties. We expect leasing to remain very strong in the foreseeable future as demand remains high and the overall rental housing supply remains constrained as widely publicized.

Speaker 3

We are continuing to increase rents even after the COVID pandemic, lower rates have turned over. At Chewbacca House, we have maintained leased occupancy at over 97% and increased overall average rent per square foot to $78 per foot versus $63 per foot near the end of the pandemic. At our Clover House property, leased occupancy is over 7% and average rents are nearly $83 per square foot. At our recently completed Pacific House property, we are 100% leased with a blend of free market and rent stabilized tenants and rents are now fully stabilized with free market rents above $78 per square foot and operating cash flows achieving the projected 7% cap rate in the original underwriting. Similarly, our other residential properties at 10 West 65th Street, Aspen and 250 Livingston Street continue to perform well.

Speaker 3

Average lease occupancy for these properties has been above 98% and average rental rates have increased 6% from a year ago. Lastly, at the large Flatridge 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 on June 29 last year. We received a full abatement of real estate taxes beginning last July, have begun completing the capital projects we committed and have begun placing formerly homeless residents. We have also begun to meaningfully obtain the 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 should steadily increase over the next couple of years and allow us to profitably improve the property.

Speaker 3

We are also getting increases for non res assisted tenants, where increases have been permitted on the rent guideline 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 $26.80 per square foot at the end of the quarter versus $26.17 at the end of the Q1 last year. Rent collections across our portfolio remain as expected at seasonally high levels. Overall collection rate in the Q1 was over 100%, bolstered by seasonally 1st quarter collections at Slappish Gardens and month end prepayments at Trebecca House. Looking ahead, we remain focused on optimizing our occupancy, pricing and expenses across the business, expeditiously completing our development projects and fully implementing the Article 11 transaction to 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, J. J. For the Q1, revenues increased to a record $35,800,000 from $33,700,000 last year, Q1 increasing by $2,100,000 or excluding the impact of Pacific House that came online in the 2nd quarter, an increase of $400,000 NOI this quarter was $20,200,000 an increase of $3,100,000 from last year or $1,500,000 excluding the impact of Pacific House. AFFO this year was $5,900,000 an increase of $1,400,000 from last year or $900,000 excluding the impact of Pacific House. For the Q1, residential revenue increased to 26,100,000 dollars by $2,100,000 or $400,000 excluding the impact of Pacific House.

Speaker 1

This increase was primarily due to the higher residential rental rates for all properties from continued strong leasing previously discussed, partially offset by some temporary concessions at Tropeco House. Bad debt expense was $200,000 better than last year, reflecting improved collections at all properties despite lower ERAP reimbursements at Father's Gardens. The slightly lower commercial rental income was caused by a couple of leases at the Aspen property, one of which has been replaced. On the expense side, key year over year changes quarter on quarter were as follows: property operating expenses increased by 0 point $5,000,000 year on year or $300,000 excluding Pacific House, primarily due to higher payroll requirements at Flatbush Gardens to comply with wage requirements under the Article 11 transaction, partially offset by lower utility costs. Real estate taxes and insurance decreased by $1,400,000 in the Q1 year on year or $1,200,000 excluding the impact of Pacific House, primarily due to $1,800,000 from the elimination of real estate taxes at Flatbush Gardens, partially offset by $300,000 of routine increases in real estate taxes at the other Q1 year on year, primarily due to higher compensation expenses taken as cash, partially offset by lower audit fees.

Speaker 1

Interest expense increased by $1,600,000 in the Q1 year on year or $400,000 excluding the impact of Pacific House due to elimination of capitalized interest for Pacific House, which came in service in the Q2 last year. With regard to our balance sheet, we have $21,900,000 of unrestricted cash and $18,300,000 of restricted cash. In the Q1, we had no new debt activity other than draws under the Dean Street property construction loan we closed in the Q3 of 2023. Today, we are announcing a dividend of $0.095 per share in the Q1, the same amount as last quarter. The dividend will be paid on May 30, 2024, to shareholders of record at May 21, 2024.

Speaker 1

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 for your current operating improvements to continue through 2024 and 'twenty five. We look forward to optimizing Flatbush Gardens' article 11 transaction, 953 Dean Street developments and other growth opportunities, managing the New York leasing issues at the Livingston Street properties and capitalizing on other opportunities that may present themselves. I would now like to open the line for questions.

Operator

Thank you. The floor is now open for questions. We currently have no questions in queue.

Speaker 2

Thank you for joining us today. I look forward to speaking with you again soon.

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.