Clipper Realty, Inc. (NYSE:CLPR) Q3 2022 Earnings Conference Call November 11, 2022 5:00 PM ET
Company Participants
Lawrence Kreider – CFO & Secretary
David Bistricer – Co-Chairman & Chief Executive Officer
Jacob Bistricer – Chief Operating Officer
Conference Call Participants
Craig Kucera – B. Riley Securities
Operator
Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty Third Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Larry Kreider. Sir, the floor is yours.
Lawrence Kreider
Good afternoon, and thank you for joining us for the third 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, November 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 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.
David Bistricer
Thank you, Larry. Good afternoon, and welcome to the third quarter 2022 earnings call for Clipper Realty. I will provide an update on 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 discuss property-level activity, including leasing performance. Finally, Larry will speak about our quarterly performance, financial performance. We will then take your questions.
We see positive operational trends as we look forward. Residential leasing activity continues to rapidly improve despite the recent headline news on inflation and interest rate increases. Rental demand on our properties has been very strong all year, as New York City has largely reopened, people seek to relocate back to the city and employees increasingly return to their offices.
At the end of the third quarter, our properties were 99% leased and new leases at all our properties are exceeding pre-pandemic levels.
At the Tribeca House property, where new leases in the third quarter exceeded $83 per square foot, more than 23% better than the previous rents consistent with our trend in the previous quarter, causing the average of all leases to increase to a record $71 per square foot from $67 per square foot at the end of June, $65 per square foot at the end of March and $63 per square foot at the end of December.
As Flatbush Gardens, new leases on units not yet at the legal limit averaged $39 per foot versus an overall lease rate of $25.66 at the end of September.
With respect to interest rate increases, we believe we are buttressed by the relatively strong duration of debt on our operating properties, of which 95% is fixed at 3.72% with an average duration of 6.87 years and is non-recourse subject to limited standard carve-outs and is not cross-collateralized.
With respect to inflation, we look to the short duration of our residential leases to allow us to cover increased expenses on our operating properties and higher construction cost on our development properties. Although I should note that we bought out all the contracts on our newly completed 1010 Pacific construction projects in 2021 before the inflation increase.
Our balance sheet continues to be well positioned from a liquidity perspective. We have approximately $34.5 million of cash, consisting of $20 million of unrestricted cash and $15.5 million of restricted cash. We finance our portfolio on an asset-by-asset basis.
Turning to ongoing developments. The essentially ground-up development of our 1010 Pacific acquisition is moving along very well. We are targeting substantial completion in the fourth quarter and completion of long-term financing in the first quarter of 2023.
The properties located in Prospect Heights, Brooklyn, about one mile from the Atlantic Terminal, Barclay’s Center Hub, we estimate the project to cost $85 million, which is on budget and developed to a 7.2% stabilized cap rate and improved leasing environment. 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 in Brooklyn, 953 Dean Street, that we also intend to develop from the ground up in April. In August, we completed the increase incremental purchases of land and financing to bring the initial purchase to total cost of approximately $56.5 million with acquisition financing of $37 million.
We expect to build a nine-story fully amenitized residential building, the 167,000 residential rentable square feet, 240 units, 70 free market – 70% free market and 30% affordable along with 8,500 commercial rental square feet.
With regard to our third quarter results, we are reporting record quarterly revenue of $32.8 million, net operating income of $17.4 million, both exceeding pre-pandemic levels and AFFO of $5 million as a result of improved leasing I mentioned above. These results represent significant improvements over the third quarter of last year, as J.J. and Larry will further detail.
I will now turn over the call to J.J., who will provide an update on operations.
Jacob Bistricer
Thank you. New residential leasing activity that began towards last year continues to improve. At the end of the third quarter, all our residential properties, occupancy and rent levels per square foot are exceeding pre-pandemic levels.
As I will detail shortly, combined for all properties, new lease rental rates in the third quarter exceeded previous rent by over 23% and renewal rental rate exceeded previous rent by over 9%. We are experiencing strong rental demand at our Tribeca House property, while lease occupancy has averaged 98%. Over the last 12 months, we have increased average rent per square foot to $71 per square foot from $60 over that same period.
In the last nine months, rents on new leases have risen to over $83 per square foot, representing an increase of 27% over previous rents and rents on renewals have increased 16% over previous rents. Further, we expect rent per square foot to continue to grow steadily through next year as a result of turnover of one – our one and two year leases entered into last year in response to pandemic conditions.
We also continue to make progress on new leases and retail properties at the Tribeca House property. We have entered into four new smaller leases this year at substantially higher rates, renewed our garage lease and firmed up our gym lease. We are also moving ahead to lease up the last remaining retail spaces vacated during the pandemic.
At the Flatbush Gardens complex in Brooklyn, in the third quarter, we are focused on leasing the units vacated in the pandemics since mid-2020. Since the beginning of the year, we have increased leased occupancy to nearly 99%, while new leases averaged nearly $32 per square foot, approximately 7% higher than the units previously rented and $38 per square foot to units not yet at the legal range, which were 40% higher than previous rents.
As a result, overall average rents for the property has begun to increase again, rising to $25.66 per square foot at the end of the quarter versus $25.12 at the end of last year.
Looking forward, 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 one year leases and 5% for two year leases. Such increases have been limited to 0% and 2% from – 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 for these properties averaged 99% and average overall rental rate with the exception of Aspen has increased 10% since the beginning of the year.
Aspen, which has little turnover up to June is now up 3% in September alone. For the whole group, average increases on new leases for the year exceeded 28% and average increases on our renewals exceeded 15%.
Rent collection across our portfolio remains strong despite the residual challenges of the pandemic. The overall collection rate in the third quarter was over 97%. We have continued to benefit from remittances under the New York Emergency Rental Assistance Program or ERAP and the Landlord Rental Assistance Program or LRAP, by which we received $1.2 million in the third quarter, $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 for substantial completion by the fourth quarter. We have nearly completed facade work, sheetrocking and window installation and have begun installing finishes.
Costs are on budget, and we bought out virtually all our construction contracts last year before the recent spike in costs. We have financed our construction fully through our $52.5 million construction loan and expect to refinance on a long-term basis soon after completion.
The development of the nine story, 119,000 foot rentable square foot, fully amenitized multi-family 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 it’s 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.
Lawrence Kreider
Thank you, J.J. For the third quarter, revenues increased by $2.2 million to a record $32.8 million from $30.6 million last year third quarter. On a comparable basis, revenue from actual billings increased by $3 million to $33 million, excluding the bad debt expense, which is now deducted directly from revenue this year due to our adoption of a new leasing accounting standard as explained in our 10-Q.
NOI this quarter increased $1.4 million to another record $17.4 million from $16.1 million last year third quarter. AFFO increased by $1 million to $5.0 million this quarter from $4.0 million last year third quarter.
The revenue increase was primarily due to higher residential rental rates in all properties, higher occupancy at all properties, especially at the Flatbush Gardens property, new commercial tenants at the Tribeca House property and increased escalation billings at the 141 Livingston Street property. Bad debt expense netted against revenue this year was $800,000 versus $200,000 last year where it was added and included to operating expenses.
On the expense side, key year-over-year changes were as follows: property operating expenses were $800,000 higher than last year, excluding the $200,000 charge for bad debt expense in last year’s third quarter. This was due primarily to increased utility, repairs and supplies cost at the Flatbush Gardens property.
Real estate taxes and insurance increased by approximately $400,000 in the third quarter year-on-year due to increased real estate taxes of $600,000, partially offset by reduced insurance cost of $200,000. Interest expense decreased $300,000 in the third quarter year-on-year due to additional capitalization of interest associated with the 1010 Pacific Street and 953 Dean Street development properties.
With regard to the balance sheet, as David mentioned earlier, we have $20 million of unrestricted cash and $15 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 non-recourse, subject to limited standard carve-outs and is not cross-collateralized. We have no debt maturities on any operating properties until 2027 with an average overall duration of 6.87 years.
Today, we are announcing a dividend of $0.095 per share for the third quarter, the same amount as last quarter. The dividend will be paid on November 25 to shareholders of record on November 21.
Let me now turn the call back over to David for concluding remarks.
David Bistricer
Thank you, Larry. We remain focused on efficiently operating our portfolio. We look to our current operating improvements to continue to accelerate to the next quarter and into 2023. We look forward to capitalizing on a myriad of growth opportunities, including 1010 Pacific and 953 Dean Street, developments and other possibilities that may present themselves.
I will now open the line for questions.
Question-And-Answer Session
Operator
[Operator Instructions] And the first question is coming from Craig Kucera with B. Riley Securities. Craig, your line is live.
Craig Kucera
Yeah. Thanks guys. Most of my questions were covered in your opening commentary. So thank you for that. But I do want to follow up that I did see a news story that you had listed Flatbush Gardens for sale. Can you comment on that and your expectations there? And if that’s true, kind of what your expected use of proceeds would be?
David Bistricer
We can really not comment on it. It’s too early to tell. We will keep the market posted as it develops. Right now, there is nothing really to report other than we’ve listed the property and attempt to see what is there. We said that we believe that we have a focus now on newer developments. We think our talents and experience in the market can do us better in that environment. And that’s what we’re segueing into.
And as of now, there’s nothing more to report, that there’s no news about that effort yet.
Craig Kucera
Fair enough. And are you looking to potentially dispose of any other assets or just that?
David Bistricer
That’s the one that we’re looking to trade at the moment.
Craig Kucera
Okay. Thanks. Appreciate your time.
David Bistricer
Sure.
Operator
[Operator Instructions] Okay. We currently have no questions in queue.
David Bistricer
Thank you for joining us today. We look forward to speaking with you again soon. Stay well. Have a good evening, pleasant 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.
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