CLPR - NYSE

Good afternoon, ladies and gentlemen, and welcome to today's Clipper Realty Second Quarter 2022 Earnings Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Lawrence Kreider. Lawrence, the floor is yours.

Thank you very much. Good afternoon, and thank you for joining us for the second quarter 2022 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 2021 annual report on Form 10-K, 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, August 9, 2022, 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 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.

Thank you, Larry. Good afternoon, and welcome to the second quarter 2022 earnings call for Clipper Realty. I will provide an update of our business performance, including recent highlights and milestones as well as our company's progress. I will then turn the call over to J.J., who will address property-level activity, including leasing performance. Finally, Larry will speak about our quarterly financial performance. We will then take your questions. We see positive operational trends as we look forward. Residential leasing activity is rapidly improving. Despite the recent headline news on inflation and interest rate increases, we expect rental demand to remain strong and pricing to improve. Now that New York City is largely reopened, people seek to relocate back to the city and employees increasingly return to their offices. At the end of the second quarter, our properties were 98% leased and new leases at our property are reaching or exceeding prepandemic levels, including our Tribeca House property, where new lease rates in the second quarter exceeded $80 per square foot, more than 30% better than the previous rents. And June average rent per square foot increased to $67 per foot from $65 per foot at the end of March and $63 per square foot end of December. With respect to interest rate increases, we believe we are buttressed by relatively long duration of our debt, of which 95% is fixed at 3.76% at an average duration of 7.13 years and is not a recourse subject to limited standard carve-outs not cross-collateralized. With respect to inflation, we looked at the short duration of our residential leases to allow us to cover increased expenses on a substantial number of our leases and our major existing construction projects, our contracts were all bought out in 2021. Our balance sheet continues to be well positioned from a liquidity perspective. We have approximately $44 million, consisting of $29.5 million of unrestricted cash and $14.5 million of restricted cash. We financed our portfolio on an asset-by-asset basis. Turning to recent developments. The essentially ground-up development of our 1010 Pacific acquisition is moving along very well, and we are targeting substantial completion in the fourth quarter. The property is located in Prospect Heights, Brooklyn, a mile from the Atlantic Terminal, Barclays Center Hub. As previously discussed, we estimate the project to cost $85 million and developed to a 6.5% stabilized cap rate. J.J. will provide further update on the project shortly. At the end of the year, we also bought another property in the same area of Brooklyn at 953 Dean Street that we will -- that we intend to redevelop from the ground up. In April, we completed the incremental purchase of land and financing to bring the initial purchase to total cost of approximately $48 million with the acquisition financing of $37 million. We expect to build a 9-story fully amenitized residential building with 160,000 residential rentable square feet, 240 units, 70% free market, 30% affordable, which is under the 421a program, which is tax stop for 35 years with 8,500 commercial rental square feet. With regard to our second quarter results, we are reporting quarterly revenue of $31.9 million, NOI of $17.2 million and AFFO of $5.1 million as a result of the improved leasing I mentioned above. These results represent significant improvements over the second quarter last year as J.J. and Larry will give further detail. I will now turn the call over to J.J., who will provide an update on operations.

Thank you. New residential leasing activities that began towards the last year continues to improve. At the end of the second quarter, all our residential properties were leased in the high 90% range and new rental rates per square foot in the second quarter are reaching or exceeding prepandemic levels, and all exceeding present average rent rates. As I will detail shortly, combined for all our properties, new lease rental rates in the second quarter exceeded previous rents by over 20% and renewal rental rates exceeded previous rents by over 10%. We are experiencing strong rental demand at our Tribeca House property. While leased occupancy has averaged 98% over the last 12 months, we have increased average rent per square foot to $67 per square foot from $60 over that same period. In the last 6 months, rent on new leases have risen to over $80 per square foot, representing an increase of 30% over previous rents and rents on renewals have increased 18% over previous rents. Further, we expect rent per square foot to continue to grow steadily through next year as a result of turnover of our 1- and 2-year leases entered into last year in response to pandemic conditions. We also continue to make progress on new leases at retail properties at the Tribeca House property. We have entered into 4 new smaller leases this year at substantially higher rates, renewed our and firmed up our . At the Flatbush Gardens complex in Brooklyn, in the second quarter, we are focused on leasing the units vacated in pandemics since mid-2020. Since the beginning of the year, we have increased leased occupancy to nearly 98%, while new leases averaged nearly $33 per square foot, approximately 8% higher than the units previously rented. Overall, average rents for the property have begun to increase again, rising to $25.59 per square foot at the end of the quarter versus $25.12 at the end of the last year. Looking forward, we also -- we should also benefit from the new guidelines put forth by the rent stabilization board, which beginning October 1, which will allow increases on rent stabilized units of 3.25% for 1-year leases and 5% for 2-year leases. Such increases have been limited to 0% and 2% for the last couple of years. These increases will help offset our continued investment in the property, which has amounted to nearly $2 million this year. Lastly, we continue to benefit from the 2020 reorganization of the property's operations that created nearly $800,000 in savings. Our other residential properties, Clover House, 10 West 65th Street, Aspen and 250 Livingston Street continued to perform well. Leased occupancy has remained high, all above 95%. While average overall rental rates with the exception of Aspen have increased 5% to 8% since the beginning of the year, increases on both new leases and renewals have averaged over 20%. Aspen has been stable with very little turnover. Rent collections across our portfolio remained strong despite the residual challenges of the pandemic. The overall collection rate in the second quarter was over 97%. We have continued to benefit from remittance under the New York Emergency Rental Assistance Program or ERAP and the Landlord Rental Assistance Program or LRAP, which we received $1.4 million in the second quarter, $600,000 in the first quarter and $2.5 million in the fourth quarter of 2021. On the development side, we are moving well on construction at 1010 Pacific Street and are on target to substantial position by the fourth quarter. We have nearly completed facade work, sheetrocking and window installation and have begun installing finishes. Costs are as expected as we bought out -- reaching all our construction contracts last year before the recent spike occurred. We have financed our construction fully through our $52.5 million construction loan. Development of the 9-story of 119,000 rentable square foot, fully amenitized and multifamily rental building, with underground single parking. The property is expected to have 175 total units, 70% of which will be free market and 30% affordable and is eligible for a 35-year 421a tax abatement. Looking ahead, we remain focused on optimizing occupancy, pricing and expenses across the business to best position ourselves for growth. I will now turn the call over to Larry, who will discuss our financial results.

Thank you, J.J. For the second quarter, revenues increased by $1.2 million to $31.9 million from $30.7 million last year's second quarter. NOI this quarter increased by $1.1 million to $17.2 million from $16.1 million last year's second quarter. AFFO increased by $1 million to $5.1 million this quarter from $4.1 million last year's second quarter. As I discussed last quarter, adoption of a new accounting standard, ASC 842, shifted the classification of bad debt expense from expense to revenue and accelerated the recognition of bad debt expense on accounts that are not fully collectible. As a result, we have deducted bad debt expense from revenue in 2022 versus adding to expense in 2021 and earlier. To record the effect of the acceleration of bad debt expense -- bad debt expense recognition from the new accounting standard, we recorded a $5.8 million charge to retained earnings in the first quarter and then a $1.1 million credit to revenue for improved prospects of a commercial tenant at the Tribeca House property. As a result, excluding the impact of the new accounting standard, revenue at the end of the second quarter increased by $1.9 million to $32.6 million from $30.7 million last year primarily due, as J.J. detailed, to increased occupancy at the Flatbush Gardens property, higher residential rental rates at the Tribeca House, Clover House, 10 West 65th Street and Flatbush Gardens properties, new commercial tenants at the Tribeca House property and increased billings at the 141 Livingston Street property. These increases were partially offset by $700,000 of bad debt expense this quarter versus a $900,000 charge through operating expenses last year. On the expense side, the key year-over-year changes were as follows: property operating expenses were $600,000 higher than last year, excluding the $900,000 charge for bad debt expense in last year's second quarter. This was due primarily to increased prices of heating oil and gas and increased expenses to make vacant units at the Flatbush Gardens property ready for improved leasing this year. Real estate taxes and insurance increased by approximately $500,000 in the second quarter year-on-year due to increased insurance costs across the portfolio for arrangements began in the third quarter last year. Interest expense decreased by $360,000 in the second quarter year-on-year due to additional capitalization of interest associated with the 1010 Pacific Street and 953 Dean Street development projects. With regard to our balance sheet, as David mentioned, we have $29.4 million of unrestricted cash and $14.5 million of restricted cash. We are funding our development of our 1010 Pacific Street and Dean Street acquisitions substantially with construction financing. We finance our portfolio on an asset-by-asset basis, and our debt is nonrecourse, subject to limited standard carve-outs and is not cross-collateralized. We have no debt maturities on any properties until 2022, with average -- '27, with -- excuse me, with average overall duration of 7.13 years. Today, we are announcing a dividend of $0.095 per share for the second quarter, the same amount as last quarter. The dividend will be paid on August 26 to shareholders of record on August 19. Let me now turn the call back over to David for concluding remarks.

Thank you, Larry. We remain focus on efficiency, operating our portfolio. We look to current operating improvements to continue to accelerate through 2022 and beyond. We look forward to capitalizing on a myriad of growth opportunities, including the 1010 Pacific and 953 Dean Street developments and other possibilities that may present themselves. I would now like to open up the line for questions.

[Operator Instructions]. And we do have a question coming from Buck Horne from Raymond James.

Just curious with completion of 1010 Pacific coming into visibility here, what the time frame would be for putting in some sort of permanent financing on that property or taking out the construction loan. And what kind of costs you see in the market in terms of like what do you think you can go to market at in the next few months and price that loan out at?

We haven't yet gone to the market. We are starting to speak to the lender itself who has a program for permanent financing and we're starting to make such applications. It's a little bit early because it's not rented yet. And we think that jumping the gun before it's rented will hurt us in the interest rate and other terms of the loan. But we're very focused on it, and we know that's one of the things that we'll be doing more towards the fourth quarter of this year, where we'll engage with different lenders on it.

Okay. Okay. Appreciate that. And on the Dean Street redevelopment, so what's the projected time line for completion on that? If you have any idea on what pro forma stabilized yield on cost might look like there.

This is something we'd have to get back to. I don't have that number here. We actually have it, but I don't have it in front of me. We'll get back to you after the call.

[Operator Instructions]. And there are no further questions in queue at this time. I would now like to pass the floor back to the management team for closing remarks.

Thank you for joining us today. We look forward to speaking with you again soon. Have a happy, healthy summer.