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Good day, and welcome to the Clipper Realty Second Quarter 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. The floor is yours.

Thank you, and good afternoon. Thank you for joining us for the second quarter of 2023 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 2022 annual report on Form 10-K and updated in the 2023 second quarter 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, August 3, 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 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. 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 2023 earnings call for Clipper Realty. I will provide an update to our business performance and some exciting new developments. I will then turn the call over to J.J, who will discuss property level activity, including leasing performance. Finally, Larry will speak about our quarterly financial performance. We will then take your questions. Our operating results continue with the positive trends we have reported in prior quarters. We continue to see strong rental demand at all our properties. In the second quarter, our properties were 99% leased, and new leases exceeded prior rents by 15% across the entire market-based portfolio. At Tribeca House in Manhattan and a Clover House property in Brooklyn, new leases were $83 a foot, and overall rental levels reached a record $76 per foot, 21% better than $63 at the end of December '22. At Flatbush Gardens, we have entered into a transformative new phase of the property with completion in the quarter for 40-year agreement with New York City Housing and Preservation Department under Article 11, which is available to all New Yorkers, of the private housing finance laws under which we have committed to maintain current rents as adjusted for annual rent guidelines based on RGB increases, and make capital improvements over a three-year period that will address many of the issues expected of a large 70-plus-year-old property. As a part of the agreement with HPD to receive the Article 11 tax exemption, Flatbush Gardens has committed to a three-year capital improvement plan at the property. Maintenance of rents within current categories based on the area median income set aside vacant units for formerly homeless households, and an increase in pay rates for the nine-year employees at the property to prevailing wage guidelines. The three-year capital improvement commitment could amount to $27 million, and follows improvements over the last three years of about the same amount. Operationally, we are pleased that a ground-up development at 1010 Pacific and Pacific House, now branded as Pacific House, has come online this quarter on schedule and on budget. The property is located in Prospect Heights, Brooklyn, about one mile from the Atlantic Terminal Barclays Center Hub. This thing is progressing well and will lease up to a cap rate of above 7%. The property has 175 units, 70% free market, 30% affordable, and it has a tax abatement for 35 years. As previously reported in the first quarter, we replaced the property's construction loan ahead of schedule, a five-year $80 million loan, $60 million loan, and closing $20 million available upon achievement of financial targets after full lease-up. Initial interest of 5.7% was reduced 15 bibs due to issuance of Pacific Abacus, and will be reduced by further 25 bibs upon full lease-up. Next door, at 953 D Street, we have begun the ground-up development of the land parcels we bought in 2021 and 2022 into a non-story, fully amenitized residential building with 160,000 rentable square feet of residential space, 240 total units, 70% free market, 30% affordable, and a 35-year tax abatement, and an 8,500 square foot commercial space. We paid $56 million for all the parcels, partially funded with acquisition financing of $37 million, which we are scheduled to convert into a construction loan shortly to take us through the completion of the construction. As to the continued interest rate of alignment, we believe we are buttressed by a relatively long duration of debt on all our operating properties, of which 94% is fixed and an average rate of 3.82%, with an average duration of 6.23 years. Our debt is non-recost, subject to limited standard carve-outs, and is not cross-collar-wise. We financed our portfolio on a massive by asset basis. With respect to the inflation, we look to a short duration of high demand of our residential leases to allow us to cover increased expenses on our operation needs of the properties of a high construction cost, offset by high rents. With regard to our record second quarter results, we are reporting record quarterly revenue of $34.5 million, record NOI of $19.2 million, and AFFO $5.4 million as the result of improved leasing, as I just mentioned. These results represent significant improvements over the second quarter last year, and J.J and I will further detail. I will now turn over the call to J.J who will provide an update on operations.

Thank you. I am pleased to report that our residential leasing performance at all our properties continues to improve. At the end of the second quarter, all our residential properties' occupancy remained very high, above 96% and rents are at record levels. Overall new lease rental rates in the second quarter exceeded previous rents by over 15% and renewal rental rates by over 8% at our free market properties. We continue to see particularly strong rental demand at our Tribeca House and Clover house properties, both free market buildings. Our least occupancy has averaged 97% to 99% over the last 12 months. We have steadily increased average rent per square foot to $76 from $63 over the same period. In the second quarter, rents on new leases were $83 per foot, a 14% increase over previous rents and rents on renewals were $76 per foot and an 8% increase over previous rents. We expect rent per square foot to continue to grow for at least another quarter as a result of continued strong overall demand. Leasing at Pacific House is progressing well. The 70% free market and 30% affordable property came online at the beginning of the second quarter and was 77% leased at the end of the quarter. We expect full lease up in the third and fourth quarters to a cap rate of over 7% in 2024 when initial leasing concessions run off. At the Flatbush Gardens property, we are also very excited to begin operating under the new Article 11 agreement made with HPD of New York City that we completed on June 29 as just described. We think this agreement will help us continue making the needed infrastructure improvements expected of a large 21-acre 59-building 73-year-old large complex. At the leasing at Flatbush Gardens, we expect overall rents to continue to increase modestly as before under the rent guideline board limits. These have now recommenced over the last two years to allow annual increases of roughly 3% per annum. These are more stringent than the more generous 5.8% increases in area median incomes for 2023 provided by the Article 11 agreement. Overall we are looking for our leasing activities to proceed smoothly under the modestly changed guidelines of the Article 11 agreement including incorporating the 249 new subsidized residents as vacancies arise. Most importantly, we will seek to maintain full occupancy at the property which was nearly 100% leased in the second quarter just completed. In the quarter, new leases averaged $32 per foot, 9% higher than the previous rents and renewals averaged $29 per foot, 3% higher than previous rents. As a result, overall average rents for the property have begun to increase again rising to $26.17 per foot at the end of the quarter versus $25.12 at the end of last year. Our other residential properties, 10 West 65th Street, Aspen and 250 Livingston Street continue to perform well. While average leased occupancy for these properties has been above 96%, average rental rates have increased 11% from a year ago. Rent collections across the portfolio remain strong despite the lingering challenges of the pandemic. The overall collection rate in the second quarter was over 96% and 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 which totaled $400,000 this quarter versus $500,000 last quarter. Looking ahead, we remain focused on optimizing occupancy, pricing and expenses across the business and fully implementing the Article 11 transaction to best position ourselves for growth. I will now turn over the call to Larry who will discuss our financial results.

Thank you, J.J. For the second quarter, reported revenues increased to a record $34.5 million from $31.9 million last year second quarter by $2.7 million or excluding the impact of Pacific House that came online in the second quarter and increased to $1.9 million. NOI this quarter was $17.1 million and increased to $1.0 million from last year or $0.5 million excluding the Pacific House. AFFO this year was $5.5 million and increased to $0.4 million from last year or $0.7 million excluding the impact of Pacific House which reflected full interest expense but only partial initial lease up. The $1.9 million six percent revenue increase excluding the impact of 1010 Pacific was primarily due to the higher residential rates for all properties from continued strong leasing as mentioned by J.J and slightly higher occupancy of Flatbush Gardens. Bad debt expense was substantially the same as last year reflecting high and stabilized collections as J.J discussed. On the expense side, key year over year changes were as follows. Property operating expenses were $300,000 lower than last year excluding the impact of Pacific House primarily due to repairs and maintenance and fees at the Flatbush Gardens and 141 Livingston Street properties partially offset by annual increases in payroll costs. We expect Flatbush Gardens payroll and other expenses to increase by approximately $250,000 quarterly as a result of our commitment to pay prevailing wages under the Article 11 agreement. Real estate taxes and insurance increased by approximately $700,000 in the second quarter year on year excluding the impact of Pacific House, $500,000 due to the regular increase in real estate taxes mid-year last year and $200,000 due to insurance cost increases. Future real estate taxes will not include those from Flatbush Gardens as a result of the Article 11 transaction which were otherwise projected at approximately $1.9 million for the third quarter this year. Payroll and administrative costs increased by $100,000 in the second quarter year on year primarily due to higher payroll and LTIP amortization. Interest expense increased by $600,000 in the second quarter year-on-year, net of exclusion of Pacific House due to conversion of the debt at the 10 West Street property in Manhattan to variable rate according to its terms and the elimination of capitalized interest for Pacific House partially offset by additional capitalization of interest associated with the 953 Dean Street development project and higher interest income on cash deposits. With regard to our balance sheet we have $16.3 million in unrestricted cash and $14.7 million in restricted cash. In February we refinanced the Pacific House construction loan with an $80 million mortgage loan as previously disclosed and the rate has since decreased from 5.7% to 5.55% based on issuance of certificate of occupancy. We expect to enter a construction loan for the 953 Dean Street property in the near future. We finance our portfolio on an asset-by-asset basis and our operating debt is non-recourse subject to limited standard car amounts and is not cross-collateralized. We have no debt maturities on any properties until 2027 with an average overall duration of 6.23 years. At the end of 2023, 94% of debt at our operating properties was fixed at an average rate of 3.82%. Today we are announcing a dividend of 9.5 cents per share for the second quarter the same amount as last quarter. The dividend will be paid on August 23rd to shareholders of record on August 15. Let me now turn the call back over to David for concluding remarks.

Thank you Larry. We remain focused on efficiently upgrading the portfolio. We look for operating improvements to continue to accelerate through the next quarter and into 2023. We look forward to capitalizing on a myriad of growth opportunities including optimizing established gardens, the Pacific House and these three developments and other possibilities that may present themselves. I would now like to open the line for questions.

Thank you. The floor is now open for questions. [Operator Instructions] The first question is from Buck Horne with Raymond James. Please proceed.

Hey, good afternoon guys and again congratulations on the new Article 11 deals, a big, big achievement for the property and I think for the company as well. I was just going to ask maybe to start with maybe could just give us a little more background on how the Article 11 negotiation kind of came together, how you guys proceeded from that and also just a little detail on how you think the revenue reimbursement program for where you're getting some rental assistance from tenants but you'll get those enhanced reimbursements. How does that get a feather into the revenue over the next couple of years if you can just give us a little more color on that?

Okay, nice to speak to you again, Buck. It's David. The transaction is not new, Article 11 has been available in New York City for quite some time. In fact, in June HPD closed on many Article 11 transactions so we're just one of many and it's something that came to our attention, we applied for it and the HPD came, they inspected the property, they were particularly I think impressed by the investment that the company has made over the last decade in this property, multi millions of dollars were spent and they were impressed by the management of the property and J.J spent a lot of time talking to them and showing them how we run the property and that gave them comfort that this was a good property for them to approve an application such as Article 11. The rents themselves, the subsidized rents, it's a very different program, some of them is quite new so it's going to take the city some time to get it implemented but they gave us a reassurance that this is a real program, it's going to be implemented, take some time but it's definitely an income to balance out what the investments that the company has to make and back into the infrastructure.

All right, fantastic and as part of the 27 million projected CapEx over three year period, should we think that that level of spending is going to, how quickly will that spending ramp up over the next, really over the back after this year and into 2024, will it be kind of a pro-rata 9 million per year kind of CapEx spend on Flatbush or how should we think about the timing of that?

So I think too early to get into that. J.J do want to?

Hi Buck, it's J.J here, I'll try to give you some more clarity so you understand it and now just to add to what my dad said just a few minutes ago, the reason why the city likes this Article 11 for Flatbush garden specifically is because the city has made it very clear that their mandate is to achieve as much affordable housing that is maintainable especially you know the housing stock of generally rent stabilized units are 70 years plus and they are reaching a certain shelf life that they need to be upgraded and there is some restrictions on the income side or a lot of restrictions. So this is a creative way for the city to work with owners of properties so that they could keep these properties in good shape, comply with all the codes and all the other elements that go on in New York City and therefore not hurt the tenants in the process So it's a win-win situation for everyone, that's how we look at it and that's why we applied for it and HPD liked it because this is 2,500 units that's the size that they're benefiting from and the mayor has made it clear and again City Hall has made it clear that they want to do I think they said around 18,000 units so 2,500 helped them a lot in this quarter to get there so that's the reason for it. Now in terms of the expenditure of the CapEx the way it works is we hired an engineer and that was done through a very deliberate process with HPD's oversight to demonstrate what are the things that need to be upgraded and repaired whether replaced or repaired depending on each individual item and there is a timeline for them that they have to be done within a period of time of three years. Some of them are let's call it more pressing and they're going to be done in the first year and the less pressing ones, less critical ones are going to be done over the remaining two years. So we have a three-year program to get this done we could estimate that it's approximately somewhere between eight and ten million dollars a year on average that's what we estimate t to be obviously that's not exactly the value but it's pretty much what it's been based on the estimates and the engineering that was done to reach these numbers and that HPD approved. So if you're looking for an approximation it's around ten million per annum that's how we're looking at it.

Got it. All right very helpful.

And once again this happened in June so it's a happy year so we're adjusting to that as well.

Got it, got it, got it. One last one for me looks like there were some transaction pursuit costs written off in the quarter just serious is that potentially a new deal that you guys are looking at or is that just related to pulling Flatbush off market in related to completing the Article 11 deal?

Hey Buck, it's Larry. Yes. Those transaction costs were exclusively related to the Article 11 deal. We had to write some of those expenses off and you know it's our attorneys and some fees paid to housing preservation who was our nominal owner nominal sponsor.

Got it. All right very, very helpful, very clear thank you guys congratulations.

Thank you.

The next question is from Aaron [indiscernible] with JMP Securities. Aaron your line is live.

Hey guys on net agreement at Flatbush Gardens wondering if you have to finish the capital spend requirements before you start being able to benefit from some of the components like the tax changes and the reimbursement rates for tenants receiving government assistance.

Hi Aron. It's actually the opposite. The tax benefit or the tax abatement is immediate in other words the July 1 bill was not paid because it's no longer owed. We have to do the work and we are starting to do the work already but the abatement is immediate. The section 610 benefits which is the benefits that you get from having the subsidized tenancies and what the city is calling a rent standard which is an increase in the rent above even the legal rent that you can charge if you are on a regulatory agreement that is something that's going to phase in as we either renew the existing tenants with subsidies or as we bring in new tenants with subsidies that are part of the regulatory requirement.

Right and then are the benefits of the Article 11 transferable to a new owner if you ever decide to dispose of the asset?

Only if the city agrees to it meaning it transfers yes it stays with the property but a new owner would have to get approved by HPD.

Right and how long did that process take you guys to execute on if you thought about it from beginning to end?

January to June.

Got you. Okay and then at 1010 Pacific what are you guys looking for on the yield of stabilization?

Well I said roughly 7% we think it might be a little higher but that's the cap rate that we think we're building to as it all shook out.

Do you have enough transparency now to give a projection on Dean Street as well or too early to tell?

I would estimate, it's only an estimate because we're just getting started that's going to be about the same as Pacific Street.

All right. Well results also is really good it's nice to see earnings going in the right direction and that agreement with the city looks to be significantly in the company so appreciate your time guys.

Thank you.

Thank you very much. Thanks.

The next question is from Craig Kucera with B. Riley Securities. Craig please proceed.

Good afternoon guys. You go back a few years ago and you were excited about potentially expanding Flatbush Gardens by possibly going vertical. I know the last couple of years you've been focused on other developments like 1010 and 953 but but does this Article 11 agreement does that impact that process either way if you were to decide to go in that direction again?

We don't think that we're going to be doing that kind of work there at the moment. We think that this Article 11 you know we have a lot of work to do implementing how we just spoke about for the moment that's that's what we're going to be doing.

Okay, fair enough and you know obviously a really rapid lease up at Pacific House, I guess when do you expect that to be fully leased and once that occurs you know how close does that bring you to to get into some of those financial targets where you're able to draw down you know an additional 20 million and see a reduction in rate?

I think the market is very strong as you've seen we've gotten to this point and our best estimate in the next 60 days will be there.

You'll be there on being fully leased or I guess at what point you know you'll be able to draw it on an extra 20 million?

Well within 60 days we should be able to draw it down and we should be you know way up in the 90% lease at that time.

Okay thanks that's it for me appreciate it.

Sure. Thank you.

This concludes the question and answer session. I would now like to turn the floor back to management for any closing remarks.

Thank you very much for joining us with this call and I wish everybody a good pleasant evening and hope to see you next quarter again. Thank you.