Clipper Realty Inc (CLPR) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Clipper Realty 2Q 2018 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 floor is yours.

Good morning, and thank you for joining us for the second 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. Both J.J. Bistricer, our Chief Operating Officer, and Larry Kreider, our Chief Financial Officer, will not be joining the call today due to temporary personal matters.

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, August 9, 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 adjusted EBITDA; and net operating income or NOI.

Please see our press release and supplemental financial information posted yesterday 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, and welcome to the second 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 back to Michael, who will discuss our quarterly results and our balance sheet. We will then take your questions.

Regarding our recent activity at our 107 Columbia Heights property in Brooklyn, we are steadily approaching completion of renovations to create a fully amortized residential building with 159 market rate studios, 1 to 2 bedrooms, indoor parking for 68 cars.

We are funding the improvements in part with a $14.7 million construction loan. We expect to complete our work in 2018, and begin lease up. Property is located in the historic Brooklyn Heights neighborhood with unobstructed rooftop views of lower Manhattan and near various subway and bus lines and the famous promenade.

At our 250 Livingston Street property, we are in active discussions with City of New York, regarding renewal of the commercial lease at the 250 Livingston Street property, which terminates in August 2020 in the low to mid-$40 rent per square foot range, which is similar to the terms currently in place with approximately 30% of the commercial space in the building that was leased on January 2017.

And for the 141 Livingston Street property, it represents a substantial increase over the current blended $27.71 per foot. We look forward to reaching an agreement with the city on this important lease renewal and hope to provide an update in the near future.

As for 10 West 65th Street in Manhattan, which we purchased on October, we are on the process of creating 40 units from existing vacant space, which we'll rent at market rates. The building currently contains 82 units, approximately 76,000 residential rental square foot plus 53,000 square feet of air rights. Property is attractively located in the upper west side near Lincoln Center and less than a block from Central Park.

As for Flatbush Gardens property, as mentioned in our last earnings call, we have been working with the city on an updated plan to add additional floor area to the complex. The New York City zoning office recently encouraged us to present a new master plan that would add substantially more FAR than originally envisioned, which will add significant value to the property. Our architects are currently working on the plan, and we will provide an update in near future.

Importantly, both Flatbush Gardens and 107 Columbia Heights properties are located in the newly designated qualified opportunity zones in connection with this opportunity zone community development program offered through the Tax Cuts and Jobs Act of 2017. This federal program encourages private investments in lower income urban and rural areas.

Opportunities on the -- design to spur economic development and job creation in specified communities by providing tax benefits to investors, including the potential deferral and exclusions of prior capital gains from taxable income. As a result, properties such as Flatbush Gardens and 107 Columbia Heights, that are located in the opportunity zone, stand to benefit from increased investor attention and interest.

As a reminder, we completed significant refinancing of our Flatbush Gardens and Tribeca House debt in February, that lowered the interest rates on both loans, fixed almost all the company's variable rate debt, reduced annual debt service and provided additional liquidity that will allow us to execute on our value-added strategic plan. These transactions demonstrate the confidence that our lenders continue to have in our business and our outlook moving forward. Our second quarter results fully reflect the interest expense savings associated with these refinancings.

As to operating results, overall, we're extremely pleased with the performance of our portfolio, which delivered near-record quarterly revenue of $27.3 million, an approximate 8% increase over last year, record quarterly NOI of $15.3 million, an approximate 9% increase over last year, and a record quarterly AFFO of $5.4 million, an approximate 33% increase over last year. We expect to continue to benefit from lower interest expense, lower overall utility cost and lower general and administrative expenses in the upcoming quarters as Michael will further detail in a few minutes.

We continue to make excellent progress in improving operations at all of our properties, as we seek to drive long-term capital -- cash flow growth through, some targeted capital investments and strong property management.

We're getting closer to completing the renovation at 107 Columbia Heights and plan to begin leasing at year-end. This will comprise the bulk of our overall capital spending during the quarter. We are very excited to get the building operational.

At the Flatbush Gardens workforce housing property in Brooklyn, we continue to experience high demand for our units, solid revenue growth. We have been reaping the benefits of our effort to reposition the property and the overall lending environment, including the previously discussed landscape terrace, enhanced security, lighting throughout the complex and revenue has added a decentralized laundry and storage.

We remain extremely pleased with leasing demand and cash collection at the property. The complex was 97.5% leased at the end of June, and during the quarter, we signed new leases averaging $30 per foot. These rates are approximately 40% higher than previous rents from same units. Combined with an approximate 6% increase on renewals, the property's rental per square foot continues to slightly increase.

At Tribeca House, in downtown Manhattan, which caters to working professionals, our leasing team continues to make excellent progress. The property was 97.6% leased at the end of June, continuing a robust recent upward trend, and we were well-positioned in the traditional high-rental season. Rents remain strong in the $68 per square foot range, and during the quarter we experienced renewals approximating $72 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 rental growth and enhance the overall look and feel of the property.

Our Aspen property, located in the upper east side of Manhattan, continues to be a strong performer. The building was 99.1% leased at the end of June, with rents per square foot continuing to trend higher during the quarter. The neighborhood continues to enjoy the renaissance driven by the Second Avenue subway completion, which is located a few blocks from the property.

Lastly, as we discussed, we are making selective improvements to enhance value of 10 West 65th Street property, including bringing online 40 market rate units.

I will now turn over the call to Michael, who will discuss with you our financial results.

Thank you, David. Our second quarter results clearly demonstrate the operational improvements that David just described. For the second quarter, we achieved the near record revenues of $27.3 million, an increase of approximately $1.9 million or 7.7% over the same quarter last year. We achieved record NOI in the second quarter of $15.3 million, an 8% increase year-over-year.

Also we achieved record AFFO in the second quarter of $5.4 million or $0.12 per share, an approximate 33% increase over AFFO of $4.1 million or $0.09 a share for the second quarter last year. Our strong results this quarter versus last year reflect overall higher revenue, flat operating expenses, flat G&A expenses and lower interest expenses, as David mentioned, slightly offset by higher real estate taxes.

Some additional detail on the 7.7% year-over-year increase in revenue. At Flatbush Gardens, revenue was up 8.2% year-on-year, reflecting the steadily increasing rents that David just described, continued strong occupancy in the 97% plus range and increased air conditioning charges.

At Tribeca House, revenues, excluding the impact of noncash straight-line rent adjustments, increased 3.8% year-on-year, primarily driven by gains in occupancy and to a lesser extent rent per square foot. At the Aspen property revenues increased 5% year-on-year reflecting increasing rents and continuously high occupancy in the 99% range.

At the 250 Livingston Street and 141 Livingston Street office properties, both leased to departments of New York City, revenues increased 2.7% year-on-year primarily due to higher expense reimbursements. As David mentioned earlier, the next leasing milestone with New York City is in August of 2020 for both leases at the 250 Livingston Street property. We are currently in active discussions with the City regarding renewal.

At 141 Livingston Street, we have a contracted upcoming 25% rent increase to $50 per square foot, which is equal to a $2.1 million annual rent increase at the end of 2020, and we feel confident that the city will continue in the building at that time. The 10 West 65th Street property acquired in October contributed approximately $764,000 of revenue in the second quarter.

Looking at the expense side year-on-year. Property operating expenses increased by approximately 563,000 year-over-year, about half that increase was due to the 10 West 65th Street acquisition at the end of last year.

The remaining increase reflected higher property taxes at Tribeca House, Flatbush Gardens and Aspen, which were based on increases in assessed property values plus scheduled gradual reductions of long-term abatements at Aspen, and somewhat higher utility costs related to a colder spring in the New York City area, partially offset by reduced bad debt expense as the result of improved rent collection experience at Flatbush Gardens.

Note that operating expenses decreased by approximately $600,000 -- or $660,000 from the first quarter this year, primarily due to a seasonal reduction in utilities costs.

General and administrative expenses were essentially flat year-on-year. G&A did decrease by $532,000 from the first quarter this year primarily due to lower bonus expenses and lower legal expenses. Interest expense, which includes both cash expense and amortization of loan costs, decreased by approximately $923,000 year-on-year, primarily due to the refinancings in February.

Excluding 10 West 65th Street, cash interest expense was lower by $409,000 year-over-year in the quarter, and amortization of loan costs and interest rate cap mark-to-market was lower by approximately $714,000. Overall cash interest income was lower by approximately $160,000. Depreciation and amortization expense increased by approximately $372,000 year-on-year, primarily due to fixed asset additions and the 10 West 65th Street acquisition.

Lastly, yesterday we announced a dividend of $0.095 per share in unit for the second quarter of 2018. This dividend will be paid on August 27, 2018, to shareholders of record on August 20.

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

Thank you, Michael. We are very pleased with our results this quarter, our portfolio is performing well. We are continuing to grow our company with recent acquisitions that add to our platform, and 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 Buck Horne from Raymond James.

I wanted to dig a little bit deeper on the margin improvement or the -- maybe the expense improvements you achieved at Flatbush Gardens, just the NOI growth there. And maybe you addressed this in the comments, but was that driven by the reductions in bad debt expense or was that the utilities costs? Help me understand a little bit how you achieved the upside at Flatbush?

The occupancy as you see is trending higher. The renewals and the rentals are trending higher. As I said in my remarks, I think this is a result of enhancements that we've done to the property from the infrastructure and also from the cosmetic side we implemented the outside terrace, which fronts on about 650 apartments of the unit.

And the overall market in Brooklyn has strengthened, and rents have steadily gone up in Brooklyn downtown area, which is not that far away from us. I think that the spillover of that is what's helping Flatbush Gardens.

And on the expense side, Buck, and if you're comparing it to the first quarter as well, yes, we had a pretty meaningful drop in OpEx, it's a combination of primarily lower utility costs, as you remember as we discussed on the last call in the first quarter.

The winter was pretty tough here in the city. So we had higher utility costs in the first quarter. And we've been steadily implementing improvements to our utility system here to make sure we'll be as efficient as possible on that. So I think we saw the benefit there in this current quarter on utilities.

Again as you think about the second quarter versus first quarter, the second quarter is kind of like the bridge, right? In the first quarter you have high heating costs, and then in the third quarter you get higher air-conditioning costs. So sort of in the middle of the second quarter you sort of have a bridge, so you expect to see the utility costs come down, so we're enjoying that, as we would expect to.

And that is the key driver. I think again we've seen improved rent collection experience at Flatbush Gardens, similar to the first quarter as well, and versus year-over-year, it has gotten better. So I think on the bad debt side we're taking a smaller provision to reflect the operating improvement on the collection experience.

Great. That's helpful. And it seems like you all are having a lot of success, obviously, with the occupancy. And I'm curious to what extent you're seeing just lower levels of resident turnover within the portfolio, I guess, stickier tenants. And to what extent do you think that may be able to lower your recurring CapEx or your turn cost going forward?

As -- this is really math, I mean as your occupancy rates go up, there's less turnover. There's more demand for the units and that drives less turnover. The turnover, of course, automatically go down because you are not turning over units, and you're not doing the kind of work you normally do on the lease renewal. So that's -- one drives the next, and we're enjoying that. So that's what you're going to see. And I think that with -- God willing, that will continue to happen.

And I think also, Buck, that's the benefit of the CapEx that we have put in since this company went public, especially at Flatbush Gardens and Tribeca with the targeted improvements we made, the modernization. I think people are enjoying living where they are. I think we're seeing the benefit of that.

And you make them want to say, the rents are still below market as we continually discuss, and we slowly move them up. But I think we're getting a lot of increased stickiness, as David said, and it's sort of self-perpetuating. So we enjoy seeing our occupancy in the high 90s, and again, I think it reduces our capital spending going forward, we've done what we need to do, and we feel like we're in a good spot.

Yes. That's perfect. And one last quick one if I can. You guys have a rough timetable perhaps on kind of when the architectural work will go to the City for review? Or how long does that process take (multiple speakers) for air rights for Flatbush?

Yes, as I said on the previous call that the Flatbush, which is known as in the nomenclature by [Europe]. It's generally a process for a project like ours, which is encouraged by the City, it should take about 9 months.

We recently sent into the city a revised master plan, which enhances the property by putting up new buildings rather than adding to the buildings. And at this point, we received some comments from the City, are waiting for some more comments on city planning, and once we receive those, we'll make whatever refinements we need to make. And if we get the sign-ups from city planning then we'll start with the official Europe process.

Your next question is coming from Craig Kucera from FBR Riley.

I wanted to ask, what is left to spend on your construction budget at 107 Columbia Heights?

Basically, we're up to sheetrocking the building. So what's left to do is the taping and various painting and finishing. So all the punch systems of the property. So we feel by the end of the year we'll be finished with that construction job.

I think Craig, it's under $10 million. I think the last quarter it was, yes, a couple of million dollars higher what David mentioned, but yes we're under $10 million now left to go.

I got it. And kind of what are your expectations at Tribeca and Flatbush for incremental redevelopment spending there?

Basically, on Tribeca, what we're doing, I mean all the public areas are just about finished right now. And then as I've said on the call, we're doing selective apartment improvements as those apartments turn.

I think the property is at a very good spot with high occupancy. We're getting -- steadily, we're getting increase in rents in both increases on the new rentals and also on the renewals. And so I think that's most of the capital expenditures other than selectively choosing apartments, as they come vacant, if they haven't received any new kitchens or things like that, we'll be doing them on a selective basis.

And at Flatbush, there's really nothing much -- or we don't anticipate a whole lot of capital spending. Obviously the FAR down the road, we'll deal with. But as we said before, all the key projects are done in terms of the tariffs and the garages and the mailboxes, the decentralized laundry, all that kind of stuff. So at this point at Flatbush, it's primarily also targeted apartment renovations as people turn over.

And the decline in occupancy on the residential side at 250 Livingston, was that just some noise related to some of the free rent that, I think, you had previously given in the first quarter and then was maybe burning off here in the second quarter? Or any other color there?

I don't think so. We have -- we don't have a lot of apartments there in 250 Livingston Street. So the percentages look -- the couple of units have vacated, it looks a lot bigger than on the percentage side than it is. So I don't -- it should there to -- we're doing a couple other things in certain various units. We're doing some renovations, we took some units offline there purposely for repairs. But it's not -- definitely not anything to do with the market, the market is very strong in that neighborhood.

As you know, Craig, there's only 36 units residential there, so that slight drop in occupancy just represented an additional 2 units, which David said have come offline to do some renovations. But on a per square foot basis, as you saw on the supplemental, we're back up above $50 a foot. So I think that free rent burned off, that was a onetime thing in March just on timing, but we're back to where we were on a per square foot basis.

I'm not showing any more questions in queue.

Thank you very much for your interest, and thanks for listening. And have a great day.

Thanks, everyone.

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.