Clipper Realty Inc (CLPR) 2018 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty 4Q '18 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to turn the floor over to your, Mike Frenz. Sir, the floor is yours.

Good afternoon, and thank you for joining us for the Fourth 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; J.J. 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 2018 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, March 7, 2019, 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 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 fourth quarter 2018 earnings call for Clipper Realty. I'm pleased to discuss with you the state of affairs of Clipper. I will provide a few highlights of our recent activity, then turn over the call to J.J. who will update you on our portfolio, including leasing and ongoing requisition projects. Finally, Larry will discuss our quarterly results and our balance sheet. We'll then take your questions.

Regarding our recent activity. At our 250 Livingston property, we continue to make progress on discussions with the city of New York regarding the renewal of its commercial leases, which terminate in August 2020 in the low to mid-$40 rent per square foot range. In December, we also refinanced our $33.5 million (sic) [$33.6 million] mortgage on the property bearing a 4% interest rate due in 2023 with a $75 million 2-year loan bearing interest at LIBOR plus 2.15%.

At our 107 Columbia Heights property in Brooklyn -- downtown Brooklyn, we are steadily approaching completion of renovations to create a fully amenitized residential building with 159 market rate studio, 1- and 2-bedroom units with indoor parking for 68 cars. We are funding the improvement of apartments with a $14.7 million construction loan, and proceeds from our new mortgage at 250 Livingston Street. We expect to complete our work in 2019 and begin lease-up. The property is located in the historic Brooklyn Heights neighborhood with unobstructed rooftop views of lower Manhattan and its various subway and bus lines and the famous Promenade.

At 10 West 65th Street in Manhattan, which we purchased last October, we completed the renovations of 10 units from existing vacant space and are presently leasing them at market rates. In addition, the previous owner, our subtenant, returned 40 units effective February 1, 2019, per our agreement with them. We have commenced renovation of these units and intend to lease them at market rates. The building currently contains 82 units, approximately 76,000 residential rental square feet plus 53,000 square feet of air rights. The property is attractively located on the Upper West Side near Lincoln Center and less than a block from Central Park.

At the Flatbush Gardens property, as mentioned on the last earnings call, we have been working with the city -- with city planning on an updated plan to add additional floor-area ratio to the complex. 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 and add significant value to the property. We expect to file the ULURP application in the second quarter, beginning a 9- to 12-month process to completion of the approval process.

Importantly, both the Flatbush Gardens and 107 Columbia Heights properties are located in newly designated, qualified Opportunity Zones in connection with the Opportunity Zone community development program afforded through the Jobs Tax Cut Act of 2017. The federal program encourages private investment in low-income urban and rural communities. Opportunity Zones are designated to spur economic development, job creation in specified communities by providing tax benefits to its 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 Opportunity Zones stand to benefit from increased investor attention and interest.

As to overall operating results, we are extremely pleased with the performance of our portfolio, which, in the fourth quarter, delivered near record quarterly revenue of $27.9 million, record quarterly NOI of $15.4 million, an increase of 9% over last year, excluding a nonrecurring collection and quarterly AFFO of $5.4 million, an increase of 37% increase over last year, also excluding the nonrecurring collection.

Looking ahead to 2019. We expect to continue to benefit from steady revenue increases at most of our properties, low interest expense on the February refinancing, now partially offset by additional interest in the February -- for the December refinancing, and controlled operating and general administrative expenses. Additionally, at 10 West 65th Street, we are refurbishing and leasing up the 40 units we took back from the seller. And further, our overall results later in the year will begin to reflect leasing revenue and expense at 107 Columbia Heights property as we bring it online. Larry will further detail this in a few minutes.

I will now turn the call over to J.J., who will 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 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 second quarter of 2019. This work comprised over 70% 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. We remain extremely pleased with leasing demand and cash collections at the property. The complex was 98.4% leased at the end of December, and during the quarter, we signed new leases at an average of $35 per square foot. These rates were approximately 29% higher than previous rates for the same units. Combined with an approximate 6.5% 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 remained strong in the $69 to $70 per square foot range. During the quarter, we experienced renewals and new leases in the $72 per square foot range. 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 update apartment units and common areas.

Our Aspen property located on the Upper East Side of Manhattan continues to be a strong performer. The building was nearly 100% leased at the end of December with the rents per square foot continuing to trend higher during the quarter. The neighborhood continues to enjoy a renaissance driven by the Second Avenue subway line, which is located a few blocks from the property.

Lastly, as also previously discussed, we are making selective improvements to common areas to enhance value at the 10 West 65th Street property. And as just mentioned, we are renovating an additional 40 units that came back to us recently from the seller of the property, Touro College, to whom we previously leased the units in the original dormitory room configuration.

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

Thank you, J.J. Our fourth quarter results clearly demonstrate the operational improvements that David and J.J. described. For the fourth quarter, we achieved revenues of $27.9 million, an increase of $1.2 million or 4.3% over the fourth quarter last year, excluding a nonrecurring revenue item of approximately $600,000 that we recorded last year relating to prior year. We achieved record NOI in the fourth quarter of $15.4 million, an 8.1% increase over the fourth quarter last year, excluding the nonrecurring revenue item. We achieved excellent AFFO in the fourth quarter of $5.4 million or $0.12 per share, an approximate 37% increase over AFFO for the fourth quarter last year, excluding the nonrecurring revenue item. Our strong results this quarter versus last year reflects higher revenue, flat operating expenses and real estate taxes and insurance, lower G&A, and lower interest expense.

Some additional detail in the 4.3% year-on-year revenue increase. At Flatbush Gardens, revenue -- at Flatbush Gardens, revenues increased 7.5% year-on-year, reflecting the steadily increasing rents described by J.J., continued strong occupancy in the 98% plus range. At Tribeca House, revenues, excluding the impact of noncash straight-line rent adjustments, increased 4.7% year-on-year, primarily driven by gains in occupancy and, to a lesser extent, rents per square feet. At the Aspen property, revenues increased 3.8% 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 leased to departments of New York City, revenues, excluding the prior year nonrecurring revenue item, were slightly lower, reflecting a year-end adjustment to expense reimbursements. As David mentioned earlier, the next leasing milestone with New York City is in August 2020 at the 250 Livingston Street property, and we are currently in active discussions with the city regarding lease renewals. At 141 Livingston Street, we have a contracted upcoming 25% rent increase to $50 per square foot at the end of 2020, assuming the city remains in the building at that time, equal to a $2.1 million annual rent increase.

At 10 West 65th Street property acquired in October 2018, we contributed -- that contributed approximately $735,000 of revenue in the fourth quarter. As mentioned earlier, we took back 40 units previously leased to the prior owner, Touro College, on February 1, 2019, representing approximately $580,000 of leasing revenue quarterly. We intend to lease up these 40 units at market rates later in the year following a period of refurbishment.

Lastly, at 107 Columbia Heights, we expect to begin recording leasing revenue during the year as we bring the property online. We will also begin recording expenses on a phased basis as sections become available for leasing. We will report the effectiveness on overall results as we progress during the year to stabilization and gain more clarity.

Looking at the expense side year-on-year. Property operating expenses decreased by approximately $217,000 year-on-year in the fourth quarter or $285,000 excluding the effect of the 10 West 65th Street acquisition at the end of last year. The decrease was primarily due to lower collection expense at the Flatbush Gardens property as a result of our excellent collection experience. Partially offsetting this, we experienced higher gas costs at Flatbush Gardens as a result of the colder winter -- as a result of colder winter weather in the fourth quarter in 2018.

Real estate taxes and insurance were flat in the quarter after taking into account the effects of the 10 West 65th Street acquisition in late 2017. The property tax component was lower by $187,000 as a result of the cessation of purchase accounting expense in 2017. Conversely, the insurance cost component increased by approximately the same amount at Flatbush Gardens as a result of loss experienced.

General and administrative expenses decreased in the quarter year-on-year by $388,000 due primarily to lower LTIP amortization expense, partially offset by timing of recording compensation cost estimates. Interest expense increased by approximately $818,000 in the quarter year-on-year, $304,000 due to lower amortization of debt costs and $515,000 due to lower cash interest expense. Both were primarily due to the financings in February at Tribeca House and Flatbush Gardens in February 2018. These reductions were partially offset by a full quarter of interest expense from the 10 West 65th Street property brought in late 2017 and 1 month of additional interest expense from the December refinancing of the 250 Livingston Street property. On a 4-quarter basis, the 250 Livingston Street financing will add approximately $220,000 of loan cost amortization per quarter and $500,000 of cash interest expense per quarter.

Depreciation and amortization expense was flat in the quarter year-on-year, reflecting an increase in the depreciation component from fixed asset additions during the year, offset by a decrease in the amortization component due to cessation of purchase accounting cost amortization from the 10 West 65th Street acquisition in mid-2018.

During the fourth quarter 2018, we incurred approximately $8.6 million of capital spending, over 70% of which related to the 107 Columbia Heights -- bringing 107 Columbia Heights online. The remaining amounts were primarily for apartment renovations at Tribeca House and Flatbush Gardens and New York City building renovation requirements at Tribeca House and 250 Livingston. Other financing costs in the fourth quarter of 2018 were approximately $1.9 million, all related to the 250 Livingston Street.

Lastly, today, we are announcing a dividend of $0.095 per share and unit for the fourth quarter of 2018. This dividend will be paid on March 26, 2019, to shareholders of record on March 18, 2019.

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

Thank you, Larry. We are very pleased with our results this quarter. Our portfolio is performing well, and we have continued to grow our company with recent acquisitions that add to our platform and offer 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 to any questions.

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

I wanted to talk about your 2019 CapEx expectations. With the 40 units coming back, kind of what is the expected spend there? And can you comment on kind of where you see rents going relative to the current $43 -- $43, $44 $45 rents?

We think that, that rent should be in approximately the upper $50s, low $60 range on those units [getting by] and we think we're going to spend about -- in the neighborhood of about $60,000 a unit. That's what we think it's going to be based upon previous experience with the 10 units that we've just renovated.

Got it. And I guess, based on that and what's left with 107, does the cash proceeds from the recent refinancing kind of -- do you see a need to have to do any other refinancing this year? Is there enough cash on the balance sheet to kind of tide you over through the year? To complete the projects.

There's ample cash. There's more than ample cash to do that.

Got it. And I guess, it sounds like 107 is nearly complete. Are you still expecting that it will probably take, call it, 3 quarters to get that leased-up, something along those lines?

Fully leased up, I think we should be enough to end the year to fully lease that up, maybe even sooner. But it's hard to tell exactly how long it takes, but that's what we think it's going to be.

Got it. And I appreciate the commentary with the city of New York. Is there -- do you foresee any sort of catalyst to get that deal done? Or is it just a matter of just continuing kind of a back and forth for the next -- for the future?

Which deal are you referring to?

The deal at 250 Livingston.

250, we're very close. We're exchanging drafts with them, so we don't think you need any catalyst. It's just going to [glory] now, and we're very close to getting that done.

Your next question is coming from Paul Puryear.

A couple of questions. David, could you talk some more about the master plan at Flatbush and sort of -- I know you've mentioned some numbers as far as the upzoning before, but we'd really like to hear some more about that.

Well, what I can tell you about it is that up until this quarter, what we were doing is due diligence, touching base, refining the plan. We started out with a more modest plan, and we were encouraged by the city to consider a more aggressive plan. We took that plan back to all the stakeholders, the elected officials and the tenants' association. And in February, we discussed it internally. We think we're know -- have one more meeting with the city planning, and then if that goes well, as I hope it will go, we'll probably then start and file the formal application or ULURP.

And what are some of the expected dates there?

I think the ULURP, with the support that we have, I think I would budget -- it's hard to tell exactly how it winds up, but probably 9 to 12 months to get that ULURP approved.

Okay. Are you still optimistic you're going to get sort of the upzoning you talked about earlier?

So -- well, we wouldn't go through this exercise and the effort and expense of preparing the master plan and getting lawyers involved if we didn't have the buy in for all the -- from all the important people that have to approve this plan. If we saw any opposition, we'd probably go do something else at that time. So far, we're encouraged from everybody. Everybody likes it. They like the affordability portion of it. They like the look and the feel of how this project will eventually look if -- once it's fully in place. So it seems to be the plan that's well supported, and so we're proceeding.

Okay, sounds good. Turning to 107. It's terrific that you're getting that close to leasing. I guess, the question is, are you hitting your pro formas in terms of costs. And do you expect to hit your pro formas in terms of lease rates and lease-up?

We think so. It's an excellent location. I think it's unusual for the neighborhood because it's very well-established neighborhood. Parking is not easy to come by within the building that you live in. It's very unusual. So the fact that we're doing that, I think that's a huge amenity for that particular building. The way it's situated in Columbia Heights with views of the river, The Promenade access, it's just a very nice part of the city to live in. So I think we're going to be pleasantly surprised when we go into leasing. And it's not large units, so the dollar per foot I think is going to come out very nicely.

We're hearing so much about the escalation in cost, especially in certain markets. Are you experiencing that? And is it -- again, is it in line with what you expected?

I think construction cost in that particular project, already booked and locked and loaded. I mean, we bought this project many months ago, so we're not -- I don't think we're affected by any inflationary costs of construction there. And again, in the scheme of things, it's not a large project. So I think -- we don't anticipate any surprises there.

Okay. One more question for me and maybe this is for J.J. But of course, there's pressure on prices and rents in the Manhattan market. I just wondered -- and maybe especially at 10 65, are you seeing that? And really the same question, I guess, is are the trends surprising you either direction?

So to answer your question in a more specific fashion, I'll use the Tribeca House as a reference to 65th Street. The pricing, the way we look at each property, and we have unique different types of rental products within each neighborhood. In the Tribeca House component, we are in the high 90s occupied right now, going -- coming out of the winter, going into the spring, which makes it more -- when you get into the high leasing season, you're in a much better negotiating position. And that helps you drive the price per foot in addition to maintaining occupancy. And that is what our -- that is our mission across the portfolio. And we do that at Flatbush, and now we do it at Tribeca House and we plan to do the same at 65th Street. We are currently in the midst of a conversion, if you will, not to the extent of, let's say, 107, which was down to the bare walls. But at 65th Street, we were in a conversion from a dormitory-style type of building, which was what we bought from Touro, into a pleasant, nice and well-appointed residential property with strictly rental apartments. So there's going to be some transitioning pressure, but it's not the best indication of what the rents are going to be. It's just a matter of repositioning the building in the marketplace to be identified as a nice and comfortable rental property in a very, very exclusive neighborhood. So to answer the question specifically to what you asked, I think we don't have yet the maturity of the rents at 65th Street. I think there's a lot of upside here, and we're going to be taking certain strategic appointments to the common areas in addition to the apartments themselves to make the property stand out for its own unique attributes. And to, therefore, get the highest rents possible in that neighborhood for that type of rental product.

And Paul, I think you see that across our portfolio, as J.J. said, with Flatbush and Tribeca, Aspen as well. Quarter by quarter, you can see it in our information, and as we talk about it, our rents keep ticking up, again, the value adds, things we're doing with it, the strong management and operational overview we provide with it. You see it in our results. The rents keep ticking up, and I think we expect the same at 10 West and when 107 Columbia Heights comes online as well.

We have no further questions in queue at this time.

We'd like to thank everybody for joining us on the call today. We look forward to catching up in the coming months. Thank you.

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.