Clipper Realty Inc (CLPR) 2018 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty Third Quarter 2018 Earnings Conference 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 afternoon, and thank you for joining us for the Third Quarter 2018 Clipper Realty Earnings Conference Call. Participating in today's call will be David Bistricer, Co-Chairman of the Board and Chief Executive Officer; JJ Bistricer, Chief Operating Officer; and Larry Kreider, Chief Financial 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 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, November 1, 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 interests, taxes, and depreciation, or adjusted EBITDA; and net operating income, or NOI. Please see Clipper'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, Michael. Good afternoon, and welcome to the third quarter 2018 earnings call for Clipper Realty. I'm pleased to discuss with you the state affairs at Clipper. I will provide a few highlights of our recent activity and then turn the call over to JJ, who will update you on our portfolio, including leasing and ongoing repositioning projects. Finally, Larry will discuss our quarterly results on our balance sheets. We will then take your questions.

Regarding our recent activity, at 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 and 1 and 2 bedroom units with indoor parking for 68 cars. We are funding the improvements in apartments with a $14.7 million construction loan. We expect to complete our work in 2018 and begin leasing out the property. The property's located in the historic Brooklyn Heights neighborhood with unobstructed rooftop views of lower Manhattan and is nearby various subway and bus lines in the famous Brooklyn promenade.

At our 250 Livingston property, we continue to make progress on our discussion with the City the New York regarding renewal of its commercial leases which terminate in August of 2020 in the low to mid-$40 rent per square foot range.

At the 10 West 65th Street property in Manhattan, which we purchased last October, we are in the process of creating 11 units from existing vacant space which will rent at market rates. Effective February 1, 2019, we will commence renovations of 40 additional units and lease them at fair market rates. The building currently contains 82 units, approximately 76,000 residential square feet, plus an additional 53,000 square feet of air rights. Property is located in the upper west side near Lincoln Center and less than a block from Central Park.

At the Flatbush Gardens property, as mentioned in our last earnings call, we have been working diligently with the city on an updated to utilize the additional FAR for the entire project. In our discussion with the New York City zoning office, we are preparing 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 as the information progresses.

Importantly, both the Flatbush Gardens and the 107 Columbia Heights properties are located in the newly designated qualified opportunity zones in connection with the opportunity zone community development program offered through the Tax Cuts and Jobs Act of 2017. This federal program encourages private investment in low income urban and rural communities. Opportunities zones are designed to spur economic development and job creation in specified communities by providing tax benefits to investors, including the potential deferral and exclusion 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 the operating results, overall, we are extremely pleased with the performance of our portfolio, which delivered record quarterly revenue of $27.9 million, an increase of 8% over last year; near-record quarterly NOI of $15.2 million, an increase of 9% over last year; and record quarterly AFFO of $5.8 million, an increase of 43% over last year. We expect to continue to benefit in the upcoming quarter from steady revenue increases, the low interest expense we achieved in the February refinancings and controlled operation and general administrative expenses as Larry will further detail in a few minutes.

I will now turn the call over to JJ, who will update you on 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 investment and strong property management. First, as mentioned earlier, we are getting closer to completing the renovation of the 107 Columbia Heights property and plan to begin leasing in the first quarter of 2019. This work comprised 60% 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 and solid revenue growth. We have been reaping the benefits of our efforts to reposition the property and the overall living environment, including the previously discussed landscape terrace, enhanced security and lighting throughout the complex and revenue additives to centralized laundry and storage. We remain extremely pleased with leasing demand and cash collections at the property. The complex was 98.6% leased at the end of September, and during the quarter we signed new leases averaging $32 per square foot. These rates were approximately 28% higher than the previous rates for the same units. Combined with an 5% increase on renewals, the property's rent per square foot continues to steadily increase.

At Tribeca House in downtown Manhattan, which caters to working professionals, our leasing team continues to make excellent progress. Overall revenue is increasing steadily and rents remain strong in the $69 per square foot range. During the quarter, we experienced renewals and new leases in the $72 per square foot range. For the 9 months of 2018 versus 2017, we have reduced by 40% the days on market. We are increasing our focus on improving turnover downtime to better deal with our residents' mobile profile at this property. We continue to renovate and upgrade the apartments, the units and common areas, including a new leasing office and children's room, and continue to mitigate the effects of neighboring construction, all to further drive rent growth and enhance the overall attractiveness of the property.

Our Aspen property located on the upper east side of Manhattan continues to be a strong performer. The building was 97% leased at the end of September with rents per square foot continuing to trend during the quarter. The neighborhood continues to enjoy a renaissance driven by the 2nd Avenue subway line, which is located a few blocks from the property.

Lastly, as also previously discussed, we are making selective improvements to enhance value at the 10 West 65th Street property, including bringing online 11 market rate units. And as just mentioned, early next year we will have an opportunity to bring to market an additional 40 units that will come back to us from the sale of the property, Touro College, to whom we now lease the units in their present dormitory room configuration under a short-term arrangement.

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

Thank you, JJ. Our third quarter results clearly demonstrate the operational improvements that David and JJ have described. For the third quarter, we achieved revenues of $27.9 million, an increase of $1.9 million, or 7.5% over the third quarter last year. We achieved near-record NOI in the third quarter of $15.2 million, an increase of 9.8% over the third quarter last year. We achieved record AFFO in the third quarter of $5.8 million, or $0.13 per share, an approximate 43% increase over AFFO of $4 million and $0.09 per share for the third quarter last year. Our strong results this quarter versus last year reflect higher revenue, flat operating expenses, with lower G&A and interest expenses shyly offset by higher real estate taxes.

Some additional detail on the 7.5% year-over-year revenue increase. At Flatbush Gardens, revenue increased 7% year-on-year, reflecting the steady increasing rents described by JJ, continued strong occupancy in the 97%-plus range and increased air-conditioning charges.

At Tribeca house, revenues, excluding the impact of certain noncash straight-line rent adjustments, increased 4.8% year-on-year, primarily driven by gains in occupancy and to a lesser extent rent per square foot. At the Aspen property, revenues increased 4.8% year on year, reflecting increasing rents and continuously high occupancy in the 97% range.

At the 250 Livingston Street and 141 Livingston Street office properties leased to department of New York City, revenues increased 2.5% year-on-year primarily due to higher expense reimbursements. As David mentioned earlier, the next leasing milestone with New York City is August 2020 for both leases at the 250 Livingston Street property, and we are currently in active discussions. At 141 Livingston Street, we have contracted -- we have a contracted upcoming 25% rent increase to $50 per square foot, equal to $2.1 million annual rent increase at the end of 2020 assuming the city remains in the building at that time. The 10 West 65th Street property acquired in October contributed approximately $760,000 of revenue in the third quarter.

Looking at the expense side year-on-year, property operating expenses increased by approximately $575,000. About half of the increase was due to the 10 West 65th Street acquisition at the end of last year. The remaining increase reflected higher property taxes and other expenses at the Tribeca house, Flatbush Gardens, 250 Livingston Street and 140 Livingston Street properties based on increases in assessed property values. General and administrative expenses decreased year-on-year by $649,000, $430,000 due to the lower LTIP amortization expense, and the remainder due to compensation of miscellaneous costs.

Interest expense, excluding the 10 West 65th Street acquisition, decreased by approximately $1.2 million year-on-year primarily due to the refinancings in February. Excluding 10 West 65th Street, cash interest expense was lower by $785,000. Amortization of loan cost and interest rate mark to market was lower by approximately $541,000, all partially offset by lower cash interest income of approximately $140,000. Depreciation and amortization expense increased by approximately $264,000 year-on-year, primarily due to fixed asset additions in the 10 West 65th Street acquisition.

Lastly, today we are announcing a dividend of $0.095 cents per share and unit for the third quarter of 2018. This dividend will be paid on November 20, 2018 to shareholders of record on November 14, 2018.

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

Thank you, Larry. We are pleased with our results this quarter. Our portfolio's performing well. We continue to grow our company with recent acquisitions that add to our platform and open 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.

Wanted to start with your commentary on 250 Livingston. Do you still believe that you're on track to get something worked out by year end?

We believe so.

Okay, terrific. And based on your commentary, it sounds like you're on track to finish development here at 107 Columbia Heights in fairly short order and open for leasing next year. How long are you anticipating lease-up will take at that property?

Probably 3/4 of a year.

About 3/4, okay. Got it. You mentioned the opportunity zones around 107 and Flatbush. Are you seeing any early indications of new development going on where you think people might be taking advantage of that program, or is it still too early to tell?

I can tell you that in Flatbush Gardens, we've seen new development before the zone was enacted, and it's continuing, which is neighboring our property. I don't see anything which in particular is linked to the opportunity zone. I think it's a little bit early. It was just enacted, as you know, at the end of last year, so it's a bit early. There are quite a number of real estate funds that are opening up to specifically take advantage of the opportunity zone, and there's a lot of activity going on in the planning stages, I could tell you.

Got it. I wanted to circle to your G&A, which there was a significant drop, and I appreciate the color on that. But I guess as we look forward, is that, with the decline in the LTIPs and just sort of overall cash G&A, is that a fairly decent run rate going into 2019? Or how should we think about that? Is that low or high or about where it should be?

Yes, so I think it's a good run rate, although I'd target it more in the $2 million range. In the fourth quarter we'll probably have a few more expenses relating to closing the books and that sort of thing, but that should be a good run rate.

Okay. One more from me and I'll jump back in the queue. You've grown NOI pretty steadily, very healthily, in New York. You got pretty good dividend coverage now. How do you guys think about the dividend sort of from a payout perspective? Are you still of the mindset that you want to continue to reinvest any excess cash flow in the company in the assets you have, or do you look down the line and look to potentially raise the dividend?

Well, there's a reason we're governed by the rules of distribution of 95%, and we have to abide by those rules. So at the moment, that's what we're going to abide by.

There are no further questions in queue at this time.

Thank you very much. Thanks for coming. See you next quarter.

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.