Clipper Realty Inc (CLPR) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty 3QQ '17 earnings conference call. (Operator Instructions.] It is now my pleasure to turn the floor over to your host, Steve Swett. Sir, the floor is yours.

Good afternoon and thank you for joining for the third quarter 2017 Clipper Realty earnings conference call. Participating in today's call will be David Bistricer, co-Chairman of the Board and Chief Executive Officer; Lawrence Kreider, Chief Financial Officer, and J.J. Bistricer, Chief Operating Officer.

Before we begin, 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 these indicated by such forward-looking statements. These statements are subject to numerous risks and uncertainties, including those disclosed in the company's 2016 annual report on Form 10-K and the company's quarterly report for the period ending September 30, 2017, when filed, all 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, October 26, 2017, 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 and depreciation, or EBITDA; and net operating income, or LOI. Please see corporate's press release and supplemental financial information 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 David Bistricer.

Thank you, Steve. Good afternoon, everyone. Welcome to the third quarter 217 earnings call for Clipper Realty. I'm pleased to discuss with you today the state of affairs at Clipper. I will provide a few highlights of our recent activities and then turn the call over to J.J., who will update you on our portfolio, including lasing and ongoing repositioning projects. Finally, Larry will discuss our quarterly results and our balance sheet, and we'll then take your questions.

Regarding our most recent acquisition activity, we are in the process today of closing our previously announced acquisition of 10 West 65th Street, which is one building off Central Park West, for $79 million or $585 per foot, including the air rights, the as-of-right air rights. This property comprises 82,000 feet of existing residential feet plus, as I said, 53,000 square feet of additional as-of-right air rights. The 82-unit building is located near Lincoln Center, less than a block from Central Park on the Upper West Side. We expect to finance this acquisition with a local savings and loan bank with a $34,350,000 property level mortgage loan at 3.35% fixed-rate interest and the cash on hand that we have. We plan to invest incremental capital to enhance the property.

In May we completed the acquisition of 107 Columbia Heights in the historic district of Brooklyn Heights for $87.5 million or $569 per square foot. The property is near various subway lines and bus lines and the famous promenade overlooking the waterway. It comprises 154,000 square feet. Renovations are well underway to create 159 well-appointed studio 1- and 2-bnedroom apartments with parking for 68 cars. We are funding the acquisition of that property plus the improvements with a $14.7 million construction loan and expect to be on target to complete our work in 2018.

As mentioned on previous earnings calls, we continue to make progress on our plan to build out 500,000 square feet of potential air rights to the Flatbush Gardens complex. We are working diligently to obtain required regulatory approvals to expand the property on top of existing buildings in an attractive and most effective manner, which will provide additional rental units without using any additional land, thus preserving the ultimate physical layout of our complex while enhancing its cash flows. We are pleased with our progress to date on the project. We will continue to provide updates of the progress as it moves forward. We have most recently retained the services by [Linda Bell], the famous architectural renovation architect. We are presently reviewing their first elevations of design of that building and hope to be able to report to you much more progress in the coming year. Overall, we continue to be very pleased with the performance of our portfolio, which has delivered NOI of $14 million in the third quarter, consistent with the second quarter.

I will now turn over the call to J.J., who will give you an update.

Thank you. We continue to make excellent progress in improving operations at all of our properties as we seek to drive long-term cash flow growth through targeted capital investment and strong property management. At the Flatbush Gardens workforce housing property, we continue to experience high demand for our units and solid revenue growth. Our efforts to reposition the property are focused on improving the physical appearance and function of the 59 buildings as well as the overall living environment. We have completed several important capital projects: a beautiful new 40,000-square-foot landscaped terrace that fronts several buildings which enhance the overall community feel of the complex and allows reutilization of 100 self-parking spots. Installation of over 1,500 security cameras and improved outdoor lighting fixtures, which significantly enhanced the safety of our residents. Hiring convenient new decentralized laundry, storage and mailboxes that will provide additional revenue.

Ongoing capital projects include modernization of individual building lobbies and front entrances. We remain extremely pleased with the recent demand in cash collections at the property. The complex was 97% leased at the end of September, and during the quarter we signed new leases on average at $29 per square foot. As a result, rent per square foot for the entire property continues to steadily increase.

At Tribeca House in downtown Manhattan, catering to working professionals, our leasing team continues to make excellent progress. Occupancy and rents have maintained their upward trend as we continue to close the gap between the approximate $60 per square foot average in-place rent when we purchased the property less than 3 years ago and the above $80 per square foot prevailing rent in the neighborhood. During the quarter we achieved average rents on movements of $74 per square foot and renewals of approximately $70 per square foot, and the property was 94% leased at the end of September. We continue to selectively renovate and upgrade apartment units and common areas to further drive rent growth and improve the look and feel of the property.

Our Aspen property located on the Upper East Side of Manhattan continues to be a strong performer. The building is almost fully leased with the rents per square foot trending higher. We continue to see he benefit of the recently completed Second Avenue subway line on the neighborhood and expect to selectively make prudent capital improvements to the building over time to further enhance revenue growth.

At the 141 Livingston Street commercial property in downtown Brooklyn, we are nearing completion of the capital improvements required under our lease with the New York City. These have included modernizing elevators, replacing the boiler and the restoring a modern building management system.

I will now turn over the call to Larry, who will discuss our financial results.

Thank you, J.J. Our third quarter results demonstrate our steady operating results, as David and J.J. just described. For the third quarter we reported total revenues of $26 million, up approximately $1.2 million or 5% from the third quarter last year. Net loss for the third quarter was $1.6 million or $0.04 per share compared to a net loss of $2.5 million or $0.07 share recorded in the third quarter last year.

For the third quarter we reported AFFO of $4 million as compared to AFFO at $3.3 million recorded in the third quarter last year. To detail the revenue increase of 5%, at the 250 Livingston Street property revenues increased 28% year-on-year as a result of the new lease with the City of New York, covering approximately one-third of the building that commenced in January. The next leasing milestone is the August 2020, when we have an opportunity to renegotiate both this lease and the lease covering the remaining office space in the building with the City.

At Flatbush Gardens, revenues increased 5% year-on-year after adjusting for the change in billing practice for air conditioning charges to monthly as opposed to historically a one-time annual charge that we did in 2016. The increase was due to high occupancy in the 96% to 97% range and steadily growing rents.

At Tribeca House, revenues increase 2% year-on-year, primarily driven by rent per square foot gains.

At the Aspen property purchased in late June 2016, revenues increased 13% as compared to last year's first reporting quarter following acquisition. Following that, revenues have remained consistently strong based on near-100% occupancy and increasing rents.

Operating expenses increased $981,000 in the quarter year-on-year, due primarily to higher property taxes at Flatbush Gardens and Tribeca House based on the cessation of long-term abatements at each property and increases in assessed values. Expenses also reflect the cost of increased collection activities and staffing levels at Flatbush Gardens.

General and administrative expenses increased 4% for the quarter year-on-year due to higher noncash amortization of LTIP awards and some higher public company costs. Interest expense, which includes both cash expense and amortization of loan costs, decreased by $1 million for the quarter year-on-year. This decreased was driven by the refinancing of the 141 Livingston Street property in May 2016 and the Tribeca House property in November 2016.

As a result of all this, for the quarter year-on-year, net loss improved to $1.6 million or 4% per share, an increase of 38%. AFO improved to $4 million, an increase of 21% and consistent with the last 2 quarters. NOI has remained steady at $14 million, consistent with the last 2 quarters.

Lastly, today we are announcing a distribution of $0.095 per share and unit for the third quarter 2017, equal to the first and second quarters of this year, and an increase of 46% over the quarterly rate of $0.065 for the third quarter of last year. This dividend will be paid on November 13, 2017, to shareholders of record on November 6, 2017.

Let me now turn the call back to David for concluding remarks.

Thank you, Larry. We are extremely pleased with our results. As you've heard, so far in 2017 our portfolio is performing well and as expected. We continue to grow our company with new acquisitions and new and better services to our existing tenants that add to our platform often meaningful upside through capital enhancements and focused management. As we look forward to the rest of 2017 and beyond, we are well positioned to continue to execute on strategic growth initiatives and drive value for our shareholders.

With that, I'd like to open up the line for any questions.

[Operator Instructions.] Your first question is coming from David Corak. Sir, your line is live.

I want to start just focusing on expense growth a little bit. The same-store operating expense growth, as kind of Larry went through was just below 9%, and Flatbush and Tribeca, obviously, were driving some of that. But I realize on one key you had some one-time items, and you mentioned a couple of culprits including taxes and abatements. So I'm hoping you could maybe elaborate on those things a little bit, Larry. It's just interesting. You guys are really hitting the initial projections handily on the revenue growth side but going over on expenses, and there are some things that maybe we weren't expecting. So just trying to figure out the drivers there and what's the right run rate going forward for expense growth?

The driver, as Larry said, is mostly from the taxes and they're expected taxes. Our abatements in Flatbush Gardens and Tribeca House are running off. These are well expected and that's driving up those expense lines of the taxes. That's the biggest expense uptick that we have in the entire portfolio, and they are totally expected.

Yes, we also hit the next fiscal year in the third quarter. Property taxes begin the new fiscal year on July 1. So that had an impact, too.

We also had, which is not in the numbers yet, but we had an offer from the city to actually reduce taxes on Tribeca about $4 million, which we haven't decided on whether we're taking it. But as everybody knows, in New York we have--we protest the taxes every single year. And while we got a small offer now from the City with several million dollars, we may continue to see that in the future. But I think, to answer your question, mostly the majority, overall majority of those increases are coming from the taxes.

So is the tax--were the taxes above or below kind of your--what I'm trying to get at is, are the taxes above your initial expectations when you guys came public?

We expected these increases from the burning off of the abatements. They're baked into our numbers, and so that was totally expected.

Okay, and then in terms of next year, what kind of growth rate would you kind of expect? Give me maybe a range based on whether you do or do not accept kind of the $4 million offer.

As far as taxes are concerned?

Yes, sir.

Well, they're going to remain steady for the next 3 quarters, we think roughly pretty steady. And then we should see a ratcheting up somewhat in the third quarter of 2018.

Okay, that's helpful. And then just turning to Columbia Heights, I appreciate some of the commentary. But can you update us on maybe some of the time line and yield assumptions there?

We believe that we will be able to start seeing income from that property towards mid-2018. Our projection is for before that, but I think realistically, we're talking about mid-2018, and we're well underway. The building is under construction right now, and we're very pleased with how it's going, and we think it's going to be just a very, very handsome and enjoyable place for people to live.

Your next question is coming from Buck Horne. Sir, your line is live.

Just wondering if you could give us a quick update on the case for the 421g issue, just any changes, if there have been any updates on that case and how--if it's affecting your--how you're pricing any rents at Tribeca House.

No, it's not. There's nothing really new to report other than we expect the case to be argued at the end of this year. [Radney] has joined us on our side of the fence as amicus ciurae, so we feel very good about our legal arguments in the case, and the case is what it is in 421g. But we think, going forward, the outcome of that legal case doesn't really have a material effect on us one way or the other, just because of the way the building was rented when it was converted from a commercial building into a residential building. But nonetheless, we have very good representation and we hope to prevail.

Okay, that's helpful.

The other thing is I should mention also that 421g in the smaller building is no longer in effect and it's running out on the larger building very, very shortly. So this thing is going to be a thing of history for us.

Okay. Also thinking about Tribeca here, just how would you describe just the competitive leasing dynamic in the neighborhood around Tribeca House? Are there any buildings nearby that are running significant rent concessions at the moment?

I think that in the markets--I've said it before--I think in the markets that we're in, I think we are very well positioned with our cost basis and with the types of amenities that we offer for this particular building. I think that there's nobody in the marketplace that's giving anything away. Everybody's charging according to what type of quality they have. The neighborhood is only getting better and as you can see from our numbers, the numbers are continually improving as we are continuing to polish the rough diamond that we bought.

Okay. And my last one for you is just same about the West 65th asset, if you can just give us an update on how rent growth trends and what you're expecting for initial yield expectations out of West 65th when it comes on.

So West 65th, as I think you're aware, we have a leaseback with the seller. That leaseback is 40 units of leaseback to the seller through the end of 2019and have to rent the $65. That was bought at a deal. It allows us to continue to collect that income stream on a positive basis. We were allowed in our negotiations with that lease with the seller to give us back 1 unit at a time as they free up the units from their operations. And we'll absorb that over the 2-year period. There are `0 vacant units that we are closing on, so we'll have, at the end of this thing, about 50 units that we can sort of rehab, completely rehab, out of the 80 units, 88--82 units--which is another one of the positive reasons why we bought the product. So going forward, most of the units will be paying $65. We think that's much closer to a $75 to $80 marketplace for these units. They're not very large and we plan on doing a nice job on the renovations to them. The location is fantastic. All in price, as I said before, is about $600. It's hard to find in that neighborhood land a that price. So we think that we did very well on the buy here, and we're going to be enhancing this investment over time.

Great. Just want to work one up. Paul Pulyear's in the office and would like to chime in for just a second.

Yes, hey, good afternoon. Just one question. At the top of the IPO, you were working on a refinancing at Tribeca House. Just curious where you are with that.

Well, as you may know, we already did some of that. We paid down a substantial amount of that on Tribeca House. And so that, we talked about the IPO was already accomplished and we reduced our borrowing costs quite a bit there. We were at the time of IPO, I think we were close to 8% on some of the debt there, and now we're much closer to, I think, a 5% range. We continue to explore different options of that of how to do that, and there are some other opportunities in some other of our assets now for refinancing that we're going to be discussing in the next quarter.

Yes, I guess I thought you were looking to fix the rates there. Is that not accurate?

That's very much accurate. That's something that, it's definitely something on our to-do list for the next balance of the year.

Yes, okay, thank you.

There are no further questions in queue.

Thank you for joining us. We look forward to speaking with you again in the future and report to you on the fourth quarter results. Thank you. Have a good, pleasant evening.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this, and have a wonderful day. Thank you for your participation.