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Edited Transcript of CLPR.N earnings conference call or presentation 1-Aug-19 9:00pm GMT

Q2 2019 Clipper Realty Inc Earnings Call

BROOKLYN Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Clipper Realty Inc earnings conference call or presentation Thursday, August 1, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Bistricer

Clipper Realty Inc. - Co-Chairman & CEO

* Jacob Joseph Bistricer

Clipper Realty Inc. - COO

* Michael Charles Frenz

Clipper Realty Inc. - CFO

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Conference Call Participants

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* Craig Gerald Kucera

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty 2Q 2019 Earnings Call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Michael Frenz, CFO of Clipper Realty. Sir, the floor is yours.

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Michael Charles Frenz, Clipper Realty Inc. - CFO [2]

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Good afternoon, and thank you for joining us for the Second quarter 2019 Clipper Realty Inc. Earnings Conference Call. Participating with me on today's call will be 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 2018 annual report on Form 10-K, which is accessible at www.sec.gov and the company's website. As a reminder, the forward-looking statements speak only as of the date of this call, August 1, 2019, 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 quarterly report on 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.

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David Bistricer, Clipper Realty Inc. - Co-Chairman & CEO [3]

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Thank you, Michael. Good afternoon, and welcome to the Second Quarter 2019 Earnings Call for Clipper Realty. I'm pleased to provide an update on our business, including recent highlights and milestones. I will then turn the call over to J.J., who will discuss property-level activity, including leasing performance and renovation projects. Finally, Michael will speak about our quarterly financial performance. We will then take your questions.

I want to congratulate the entire team for an exceptional quarter. We are announcing record results today, a meaningful accomplishment and significant achievement considering some of the recent industry headwinds, our portfolio is 99% leased.

Turning to some recent developments in this past quarter. We are extremely pleased to announce that we are currently bringing our 107 Columbia Heights property in Brooklyn, rebranded as Clover House, online. This fully amenitized residential building has 158 free-market studio, 1- and 2-bedroom apartments plus an indoor parking garage. As J.J. will describe in detail shortly, the building was just about 40% pre-leased. The first tenants are moving in this week. We anticipate the attractiveness of the property, its amenities, its location as one of the most desirable neighborhoods in all of New York City, and its proximity to Manhattan continues to drive strong resident demand.

Opening up 107 Columbia Heights is a significant milestone, and we are thrilled to welcome tenants into the Clover House community. We are also proud to report that we have completed ahead of scheduled the extensive unit renovation and re-leasing of 40 units at 10 West 65th Street property in Manhattan, which we received back from Touro College at the end of January. This rapid turnaround is a significant operational achievement for the company and position's the property well for the future.

I would like to turn to our office portfolio for a moment. As we discussed on our prior earnings call, we have fully executed lease with the City of New York, for the renewal of commercial lease at 250 Livingston Street. We expect the lease, which has a 10-year term commencing August 2020, to initially add approximately $5 million to the property's annual NOI. In connection with the lease renewal, we refinanced the property at the end of May, drawing down an additional $50 million in a new 10-year loan at a very attractive 3.63% fixed rate interest only for 10 years.

At the neighboring 141 Livingston property, leased to the City, we're moving closer to a potential 25% rent increase in the lease at the end of 2020, which will add $2.1 million to the property's annual NOI when effective. To summarize, these 2 upcoming office lease rolls will add an additional $7.1 million of NOI to our portfolio, representing a 12% increase on our portfolio runway. We are proud of our longstanding and productive relationship with the City and look forward to continuing to work with them in the years ahead.

We are pleased to announce that we have filed a Uniform Land Use Review Procedure, or ULURP, application with the City. The filing is a key step in our efforts to add a significant additional FAR ratio to the Flatbush Gardens complex, which would meaningfully expand the size of the property and add significant value. This milestone is a combination of efforts and planning with the New York City zoning office, demonstrates another mutually beneficial partnership in the City. We anticipate the ULURP process taking approximately 9 to 12 months, at which point, we will begin development. There is no assurance, however, that the application will be fully or partially approved as submitted.

I would now like to discuss the rent stabilization law enacted in June, which affects rent-stabilized apartments in New York City. The legislation took effect immediately. It does not reduce in any way current revenues. It does reduce our ability to increase revenue in the future on rent-stabilized units primarily by eliminating vacancy bonuses, limiting rent increases on preferential unit renewals and limiting increases associated with capital expenditures. [As properties] go on, the rent growth trajectory for our legacy tenants was rarely at the maximum legal rent and not affected by the rent law. These tenants have been and will continue to be subject to rent guidelines and annual renewal increases.

Our legacy unit turns are now allowed to charge the in-place legal rent plus the restricted amount of renovation CapEx, although we note that such turnover represents a limited shrinking portion of the overall property. In addition, our preferential rent renewal growth will slow somewhat from prior quarters. However, when a preferential unit becomes vacant, the new rent may go to the higher legal rent. Overall, we believe that our portfolio profile and history of measured rent increases should help mitigate the new law's impact on rent growth of our rent-stabilized units.

Secondly, I'd like to address the Tribeca House 421G litigation. As previously disclosed, the New York Court of Appeals ruled in June that apartments and buildings receiving 421-g tax benefits are now subject to luxury deregulation, issuing an order that overturned the previous unanimous Appellate Division decision. We do not believe that the order will have a material impact on our business. We filed the motion last week for reargument in the Court of Appeals.

Lastly, I would like to comment on second quarter results. We are proud to report record revenue of $28.4 million, record NOI of $15.9 million and record AFFO of $6.1 million, all of which reflect continued strong revenue performance and expense management. We are excited to add 107 Columbia Heights to our operating portfolio. Michael will provide further detail on our financial performance, shortly. I will now turn the call over to J.J., who will provide an operations update for the properties.

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Jacob Joseph Bistricer, Clipper Realty Inc. - COO [4]

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Thank you. We continue to perform well operationally, driving ongoing cash flows to efficiently seeing focused expense management and targeted capital investment. Clover House is now open for business. The property enjoyed strong pre-leasing with 61 apartments or just about 40% of the building leased before the first tenant started moving in this week. This is a testament to our leasing team's efforts and inherent appeal of the fully renovated property and neighborhood. Initial rents are averaging low $70 per square foot. We currently expect that the building will approach 85% to 90% occupancy by year-end.

Separately, we are excited to have completed extensive unit renovation and full lease up of the 40 units a 10 West 65th Street. We significantly outperformed our initial project time line, having received the units back from Touro College just in January. Since the beginning of the year, we have brought 51 total apartments online, representing over 60% of the building. The property is now fully leased.

Tribeca House perform -- continues to perform very well. The property is over 99% leased, continuing its full occupancy trend that we saw last quarter. Tribeca House remains a go-to destination for young professionals and families who want to live in Downtown Manhattan. With full amenities and a more attractive price point dictated the surrounding neighborhood, our blended $69 per square foot rent has remained steady as we have bought the building to full occupancy over the last few quarters and also a significant upside potential relative to the neighborhood comparable $80 per square foot rents.

We have completed numerous major capital projects at the property, bringing it up to market standard to serve as the catalyst in the future and further closing the rent gap. Importantly, we have reduced the apartment turnover downtime from 3 months to less than 3 weeks, helping us maintain this exceptional occupancy and providing additional leverage in rent discussions.

Turning to Flatbush Gardens in Brooklyn, the complex continues to benefit from high demand and strong cash collections, running at a 99% lease rate in the last few quarters with a company -- with accompanying rent growth. It has been incredibly satisfying that the company's methodical multiyear efforts to upgrade the property and create a sustainable community feel have positioned Flatbush Gardens as an attractive housing option with a wide spectrum of residents. The new rent stabilization rule will slow the rate of future overall rent growth at the property, primarily by curtailing rent increases on legacy unit turns and limiting increases on preferential unit renewals.

However, I would like to reiterate 4 key points as it relates to the law. One, our current in-place rents are not negatively impacted. Two, the limitation of preferential rent increases apply to renewals only. Upon a preferential vacancy, we still have the ability to increase the rents up to the maximum legal limit to help temper the slow preferential rent growth and renewal growth. Three, our renewal growth on legacy units is not impacted by the law, as these renewals were already subject to the rent guideline board increases. And four, the law's repeal of vacancy decontrol on high income deregulation does not really impact Flatbush Gardens, given our tenant profile, neighborhood rent levels and our prior history of not decontrolling or re-regulating at the property.

As a result of the new limitations on rent increases associated with capital expenditures, we are currently reviewing our entire CapEx budget accordingly. In summary, while the new law will slow the rate of our future rent growth trajectory, Flatbush Gardens should and will remain a very significant part of our portfolio and growth story, with the FAR expansion project and incremental value opportunity. I will now turn over the call to Michael, who will discuss our financial results.

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Michael Charles Frenz, Clipper Realty Inc. - CFO [5]

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Thank you, J.J. Our second quarter results clearly reflect the strong leasing trends and operational efficiencies highlighted by David and J.J.

For the second quarter, we achieved record revenues of $28.4 million, an increase of $1.1 million or 4.2% compared to the same period in 2018. We achieved record NOI of $15.9 million, a 4.2% increase compared to the same period in 2018. We also achieved record AFFO of $6.1 million or $0.14 per share, an 11.9% increase over last year. The year-over-year total revenue increase was primarily attributable to improvements at Flatbush Gardens and Tribeca House. Flatbush and Tribeca residential revenues grew 8.6% and 6.7% year-on-year, respectively, reflecting increases in both rental rates and occupancy. Both properties are currently 99% plus leased. These increases were partially offset by a nonrecurring $350,000 decrease in revenue at 10 West 65th Street year-over-year, in connection with the 40-unit renovation project discussed earlier that is now complete.

As we bring 107 Columbia Heights online during the third quarter, we will record revenue as earned and expenses on a phase basis as sections become available for leasing. We will provide a further update next quarter as we progress the stabilization of the property.

On the expense side, key year-over-year changes were as follows: Property operating expenses increased by $166,000 in the second quarter year-over-year, primarily driven by a higher provision for receivables collection at Flatbush, offset by lower utility and legal expenses at the property. Real estate taxes and insurance increased by $345,000 in the second quarter, primarily due to property tax increases across the portfolio over the prior year, and insurance cost increases resulting from higher loss experience.

Cash, general and administrative expenses were essentially flat in the second quarter, with lower executive cash bonus costs and public company professional fees offset by an increase in legal expenses related to the 421-g litigation of Tribeca House. Interest expense increased marginally in the second quarter as higher interest costs on the 250 Livingston Street refinancings, which includes noncash loan cost amortization were partially offset by increased interest expense capitalization in connection with property development.

Separately, we incurred a noncash $1.8 million loss on extinguishment of debt in the second quarter related to the 250 Livingston Street refinancing at the end of May. Turning to CapEx, we incurred $12.8 million of capital expenditures in the second quarter, the majority of which were related to the 107 Columbia Heights renovation. Other capital projects included elevator upgrades at Tribeca House, apartment upgrades at Tribeca House and 10 West 65th Street, and expenditures to comply with various New York City local laws.

Finally, today we are announcing a dividend of $0.095 per share for the second quarter. The dividend will be paid on August 21 to shareholders of record on August 13. Let me now turn the call back over to David for concluding remarks.

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David Bistricer, Clipper Realty Inc. - Co-Chairman & CEO [6]

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Thank you, Michael. We're extremely pleased with our current results. Our portfolio continues to perform very well and bringing Columbia Heights online is significant. Looking forward, we are positioned to continue to execute on our strategic initiatives and drive value to our shareholders. With that, I would like to open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is coming from Craig Kucera.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [2]

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I wanted to circle back to Touro. I think before you had taken the units off-line, it was generating about $1.9 million in annual NOI. Based on the current rents that you're getting, I think you mentioned about $70. Can you give us a sense of what would the improvement to NOI might be on that? Or alternatively, what it might be on a cap rate basis?

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Michael Charles Frenz, Clipper Realty Inc. - CFO [3]

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Look, I would like to say couple of things. Number one, the rental increase is slightly over time here based on the prior numbers. A key situation here is that, as you know, when we initially took the building or purchased the building from Touro, these units that we're talking about were effectively used for a college situation, dorm-style units, right? What we've done with this renovation is to turn these units into a full-scale apartments that will appeal to a broader range of folks. So again, we have the initial rents, which are -- generate similar to what we had before. But I think the key point is moving forward, given what we've done to the apartments and the location of the building, this sets us up really well to start to accelerate rent growth. So it's a good start for us to be good renovation, and we're happy to get it done quickly, so we can start moving the ball forward.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [4]

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All right. You took the $50 million loan in the second quarter. Have you identified a use of proceeds for that? Is that just for general working capital? Or are you looking to continue to grow the portfolio?

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David Bistricer, Clipper Realty Inc. - Co-Chairman & CEO [5]

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We're looking to grow the portfolio, obviously, constantly looking at different suggestions. And it's for general funds, with no specific fund for it. It was a good rate. It was a good considerable loan and that we look to do that from time to time.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [6]

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Got it. And one more for me, I guess, with the ULURP that was filed, was that filed ahead of the legislation? And if so, does it change the way you think about potentially going down the path with expanding FAR at Flatbush Gardens?

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David Bistricer, Clipper Realty Inc. - Co-Chairman & CEO [7]

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As -- the legislation and the FAR really are 2 different things. Because legislation is to rent-stabilized units, this ULURP will probably have an affordable portion to it. Any ULURP that you do with the City has a 30% affordable unit component to it, as this will have. So those will actually be regulated by various different levels of income by AMIs. It's subject to obviously negotiations with the City. But the rest of the units will not be themselves stabilized because the building will be new. And obviously, we have still a lot to be negotiated with the City on it. My take on it is, it's going -- when it all gets done, it will be a brand-new project. So it'll be a much more -- much larger and much nicer place to be, and the City is being very cooperative right now. This is the first step in the process, a lot of discussions have been going on heretofore, but we still have a lot of wood to chop yet to get it done.

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Operator [8]

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You have no further questions in queue at this time.

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David Bistricer, Clipper Realty Inc. - Co-Chairman & CEO [9]

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

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Operator [10]

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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.