Clipper Realty Inc (CLPR) 2018 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Clipper Reality first quarter earnings call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Michael Frenz, Head of Capital Markets. Sir, the floors is yours.

Good afternoon, and thank you for joining us for the First Quarter 2018 Clipper Realty Inc. 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 those indicated by such forward-looking statements. These statements are subject to numerous risks and uncertainties, including those disclosed in the company's 2017 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, May 10, 2018, 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 NOI. Please see Clipper's press release and supplemental financial information 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 David Bistricer.

Thank you, Michael. Good afternoon. Welcome to the first quarter 2018 earnings call for Clipper Realty. I'm pleased to discuss with you the state of affairs at Clipper. I will provide a few highlights of our recent activity and then turn the call over to J.J., who will update you on our portfolio, including leasing and ongoing repositioning projects. Finally, Larry will discuss our quarterly results and our balance sheet, and we will then take your questions.

Regarding our most recent activity. In February 2018, we are pleased to announce the company completed refinancings of existing debt at Flatbush Gardens and Tribeca House that lowered the interest rates on both loans, fixed almost all the company's variable rate debt, reduced annual debt service and provide additional liquidity that will allow us to execute our value-added strategic plan. These transactions demonstrate the confidence that our lenders continue to have in our business and our outlook moving forward.

As to 107 Columbia Heights. Renovations are well underway to complete 159 well-appointed studios 1- and 2-bedroom units with an indoor parking for 68 cars. We are funding the improvements with largely a $14 million construction loan, and we expect to complete that work in the latter part of 2018. As a reminder, we bought the property for $87.5 million, or $469 (sic) [$596] a foot in May of 2017. The property is very well located near various subway and bus lines and the famous Promenade in Brooklyn and comprises approximately 154,000 square feet.

At 10 West 65th Street in Manhattan, we are currently creating an additional 14 units from existing space, rentable space at market rate rents. As a reminder, we purchased this property October last year for $79 million or $585 a foot. It comprises 82 units, approximately 82,000 residential square feet plus 53,000 square feet of air rights. It's located in Lincoln Square, less than a block from Central Park, west on the Upper West Side. We financed the acquisition with a $34.5 million property-level mortgage with cash on hand at fixed rates.

At the Flatbush Gardens property, as mentioned on previous earnings call, we have been working on a master plan to add additional floor-area ratio to the building. The plan has been changed now at the urging of the New York City zoning office which has encouraged us to present the master plan, which will add substantially more FAR than was original plan. Our architects will present, in the very near future this new master plan.

As to operating results, overall, we continue to be very pleased with the performance of our portfolio. We delivered quarterly revenue of $26.9 million, representing approximately 6% growth over last year and NOI of $14.3 million, approximately 6% growth over last year.

Looking forward to rest of the year, we should experience lower interest expense because of the refinancing [incurred] during the summer months, and general and admin-related expenses that should boost our net results. And Larry will go through the detail in a few minutes.

I will now turn over the call over to J.J., who'll update you on our recent operations.

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 investments and strong property management.

At the Flatbush Gardens workforce housing property, we continue to expense high demand for our units and solid revenue growth, as we continue to reposition the property and overall living environment. We have completed several important capital projects: a beautiful new 40,000-square-foot landscape terrace that fronts several buildings, which enhances the overall community feel of the complex and allows reutilization of approximately 100 self-parking car spots. Installation of over 1,500 security cameras and improved outdoor lighting fixtures, which significantly enhance the safety of our residents, highly convenient newly decentralized laundry, storage and mailboxes that are beginning to provide additional revenue.

We remain extremely pleased with the recent demand and cash collections at the property. The complex was 97% leased at the end of March. And during the quarter, we signed new leases at $36 per square foot. These rates were more than 30% higher than the previous rates for the same units. As a result of this and nearly 5% increase in the renewals, rents 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 is a strong 96% leased, and we are well positioned going into the traditional high rental season. Rents remain high in the $69 per square foot range. And in the quarter, we experienced renewals above $7 per square foot. We continue to selectively renovate and upgrade apartment units and common areas, including a new leasing office and children's playroom 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 was 96% leased at March 31, 2018, with rents per square foot trending higher. We continue to see the benefit of the recently completed Second Avenue subway line on the neighborhood.

At the 141 Livingston Street commercial property in downtown Brooklyn, we have substantially completed the capital improvements required under our lease with New York City. These have included modernizing elevators, replacing the boilers and installing a modern building management system.

At the 107 Columbia Heights property in Brooklyn Heights, renovations are well underway to create 159 well-appointed studio 1- and 2-bedroom units with parking for 68 cars. Our renovations comprised the bulk of our capital spending in the quarter.

Lastly, at 10 West 65th Street property we own, we are underway making selective improvements to enhance value, including bringing online 14 units.

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

Thank you, J.J. Our first quarter results demonstrate improvements in operations that David and J.J. described. For the first quarter, we reported revenues of $26.9 million, up approximately $1.6 million or 6.4% from the first quarter last year. Excluding the $7 million of refinancing-related charges related to the February refinancing, net loss was $2 million or $0.11 per share compared to net loss of $1.3 million or $0.03 per share recorded in the first quarter last year.

AFFO in the first quarter was $3.2 million or $0.07 per share compared to AFFO of $4 million or $0.10 per share in the first quarter last year.

As more fully detailed in my following remarks, the net results in this quarter include higher cash interest expense on the LIBOR-based loans before the refinancing, higher utility costs from colder weather this year than last and higher public company costs following our IPO last February and timing of executive cash bonuses this year. We expect these high charges to reduce for the remainder of the year.

As compared to this quarter, we expect quarterly cash interest expense to decrease by approximately $400,000 per quarter as a result of the fixed rates we achieved in the February refinancing. We expect utility cost to drop significantly as a result of warmer weather. And lastly, we expect G&A to drop from the absence of the cash bonuses incurred this quarter.

To detail the quarterly revenue of 6.4% increase. At Flatbush Gardens, revenues increased 6% year-on-year, reflecting steadily increasing average rents as described by J.J., continuously high occupancy in the 97% range and the presence of air conditioning charges billed monthly beginning August 2017. At Tribeca House, revenues before noncash straight-line rent adjustments increased 3.5% year-on-year, primarily driven by gains in occupancy and rent per square foot.

At the Aspen property purchased in late June 2016, revenues increased 4.6% compared to last year based on increasing rents and continuously high occupancy. At the 250 Livingston Street and 141 Livingston Street office properties leased to departments of New York City, revenues increased a little over 1% as compared to last year. The next leasing milestone with New York City is August 2020 at 250 Livingston when we have an opportunity to renegotiate the leases for the whole building and December 2020 at 141 Livingston Street where New York City has the option to renew for an increase in $10 per square foot.

Operating expenses increased by $847,000 in the quarter year-on-year, due primarily to $691,000 of higher property taxes at Tribeca House, Flatbush Gardens and Aspen based on increases in assessed values and scheduled gradual reductions of long-term abatements at the Aspen property. Remaining operating expenses increased $156,000, primarily due to the above mentioned higher utility costs from colder weather and higher fuel prices, partially offset by reduced bad debt expense from excellent collection experience.

General and administrative expenses increased $942,000 for the quarter year-on-year, primarily due to the above mentioned cash bonuses paid to senior executives, higher public company costs and the cost of litigating the Tribeca House tenant law suit.

Interest expense, which includes both cash expense and amortization of loan costs, decreased by $109,000 for the quarter year-on-year. The decrease was primarily due to the lower amortization of loan costs of $564,000, partially offset by higher cash interest expense of $456,000 before the February refinancing where the old Tribeca House variable rate loans were subject to higher LIBOR rates.

Going forward, the February 2018 refinancing should cause cash interest expense to decrease by $400,000 as compared to this quarter, which included a partial benefit of the refinancing. The aggregate decrease compared to interest before the refinancing, however, is $900,000 per quarter.

Additionally, scheduled principal amortization will decrease by approximately $800,000 per quarter. And lastly, noncash amortization of debt costs will decrease by approximately $500,000 per quarter offset in part by the favorable interest rate cap adjustment this quarter.

Depreciation and amortization expense increased by $661,000, half from fixed asset additions and half from accelerated purchase accounting amortization related to the 10 West 65th Street acquisition that won't continue past this quarter.

Lastly, today, we announced a distribution of $0.095 per share and unit for the first quarter of 2018 equal to the last 3 quarters of 2017. This dividend will be paid on May 29, 2018, to shareholders of record on May 22, 2018.

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

Thank you, Larry. We are pleased with our results this quarter and with the February 2018 refinancings. Our portfolio is performing well. We continue to grow our company with new acquisitions that add to our platform and then also meaningful upside through capital enhancements and focused management. As we look forward, we are well positioned to continue to execute on our strategic growth initiatives and drive value for our shareholders.

With that, I would like to open up the line for questions.

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

Appreciate the color on the G&A this quarter. But would it be possible to get a little bit more granular as far as what you see a more normalized run rate for the rest of the year, whether that's cash or noncash?

Well, I'd say -- what I would suggest is just remove $400,000 for the executive bonuses.

Okay. That's helpful. Your CapEx this quarter was about $12 million. I think we were looking at something close to $20 million for the year. Has the timing or budget changed for either 107 Columbia or 10 West? And can you give us some update there?

We think that 107, which is now the main driver of the CapEx, which we will now bring it basically from, at the moment, from cash. We believe that will be completed in the third quarter this year. That's our best look now for that.

And when we think about...

Of the $12 million, $8 million-or-so was from 107 Columbia Heights.

And within that $8 million, some of that is carrying cost related to the property, so interest on the mortgage, et cetera, that gets capitalized into real estate under development. So in terms of actual renovation CapEx, specific renovation CapEx, it's not the full $8 million at 107 Columbia.

And so what do you guys think you'll have to spend to complete that project by third quarter?

Probably another $12 million.

Okay. And what's the total expected spend at 10 West?

$1.2 million.

$1.2 million, okay. Your rents, since you've been public have actually been steadily increasing at virtually all your assets. But this quarter, on the residential side, we did see a step back, I think, at 250 Livingston and Tribeca.

How are they trending this quarter? And were there any mix issues? I know that Tribeca's occupancy increased quite a bit from fourth quarter to this quarter. Did you lease up a lot more studios? Or can you just give us some additional color on that? Or is that really just more a function of where the submarkets are?

Well, just a couple of thoughts. Just to get the facts straight, at 250 Livingston, we have a decrease because in the fourth quarter we had an unusual $600,000 billing to New York City that we announced at that time would not repeat. And secondly, at Tribeca House -- no, sorry...

You're right.

Yes, yes. That is 141. That was 141 I was referring.

The question I think was on the residential property. At 250 on the residential side, Craig, there was a temporary decrease. There was a couple of free months in there. As you can imagine, 1 or 2 free months of rent would dip the number a little bit.

But yes, so it went from $51 to $47 or $48 a foot. But that should pop right back up. We expect it to in the second quarter. It's just a timing issue of when the free rent took place.

Yes. I'll speak to Tribeca for a minute. This is J.J. We -- what we're seeing at Tribeca is something really phenomenal. And I'll answer your question, but I just want to give the overview.

Well, we're going into the busy season, where we're at 96%, almost 97% leased and occupied. We're a little bit behind that. And the reason for that is, we felt very strongly that we should occupy -- have the highest occupancy possible so that now over the summer months when there's traditionally a considerable amount of leasing, we have a better negotiating power to start pushing the rents even higher.

But in order to do that, you need to have a stronger occupancy so that when it does get busy with the leasing season, you are in a better position to generate better rent per square foot on the unit that will become available over the summer time.

Your next question is coming from Paul Puryear.

Buck is out traveling. But a couple of questions for us. So Larry, as you -- obviously, you're comfortable paying the dividend at $0.095 against a $0.07 AFFO. Just -- could you just talk about that a little bit? As you think about the rest of the year, the discussions with the board and what you're looking for, for free cash flow here?

Well, I took some pains to outline why we expect this sort of a -- the wins to come in our favor in the rest of the year, and I think the interest expense is a big one. I think the G&A was a onetime item. And our utility cost at particularly Flatbush Gardens was just really -- just significantly higher than the -- even last year, which was high. So we think -- when we look forward to the rest of the year, we think our projection covers the dividend for AFFO.

More than covers the dividend.

Yes, more than cover, right.

Okay. So going back to operating expenses, what was the surprise -- dollar amount of surprise in utility expenses for the quarter?

Well, it's always higher in the first quarter, obviously. And last year, it was high. Last year, it was almost $300,000 higher than last year, which itself was high. I think if you go back to our call then...

January was a very, very cold month. It was probably the coldest month in the history in probably almost 85 years in New York City, and Flatbush Gardens experienced the brunt of it. There was also a charge of about $120,000 that back-filled us for 2017. The national grid data, also an increase in the rate increase.

So it was a combination of a couple different factors that caused the first quarter of 2018 for Flatbush Gardens' utility cost was much higher than it was first quarter 2017. So some of that is not going to continue. And -- so we think that the AFFO, our projections is, it's going to exceed what we plan on paying out for the rest of the year by more than $2 million.

It looks like 250 Livingston spiked up quite a bit. Was that mostly utilities also?

Yes, the oil deliveries, yes.

Oil has gone up, and it has gone up a little bit.

Okay. And then on the leasing front, as you look at 107, I guess, specifically with the supply coming into Brooklyn, you still feel as good about leasing those units and at the same rate that you did when you bought the property or pro forma...?

We feel it's an unusual property. It's an unusual location. It's a very desirable location. There's very little new product in that location right now. So this is going to be a brand-new addition to the housing stock in a very seasoned neighborhood.

Advantage that we have is we have -- the top of the building has excellent views, some of them are water views, indoor parking is a premium in the neighborhood. It's a corner, it has a tremendous amount of light there. There's terraces on the top of the building, and the rooftop of this building has a, I think, an excellent position coming into this market. So we feel very good. It's not a lot of units. So we feel very good about where the pricing is going to be.

And the CapEx budget is pretty much what you've expected?

Yes, there's no surprise.

There appear to be no further questions in queue. Do have any closing comments you'd like to finish with?

Thank you very much for joining us today. We look forward to speaking with you again when we report our next quarter results. And have a wonderful evening.

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.