Clipper Realty Inc (CLPR) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Clipper Realty 4Q 2020 Earnings Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Michael Frenz. Sir, the floor is yours.

Good morning, and thank you for joining us for the fourth quarter 2020 Clipper Realty Inc. Earnings Conference Call. Participating with me on today's call are David Bistricer, Co-Chairman of the Board and Chief Executive Officer; and J.J. Bistricer, Chief Operating 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 2020 annual report on Form 10-K posted yesterday, which is accessible at www.sec.gov and our website.

As a reminder, the forward-looking statements speak only as of the date of this call, March 17, 2021, 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, depreciation and amortization or adjusted EBITDA and net operating income or NOI. Please see our press release, supplemental financial information and Form 10-K 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 our Co-Chairman and CEO, David Bistricer.

Thank you, Michael. Good morning, and welcome to the fourth quarter 2020 Earnings Call for Clipper Realty. I will provide an update to our business performance, including recent highlights and milestones, as well as how our company continues to respond to the COVID-19 pandemic. I will then turn the call over to J.J., who will discuss property level activity, including leasing performance and measures taken in light of the pandemic. Finally, Michael will speak about our quarterly financial performance. We will then take your questions.

I will begin by thanking the entire Clipper Realty team for their continued hard work and perseverance during these unprecedented times. We are grateful for their efforts over the past year on the very challenging circumstances, are proud of their ongoing dedication to our shareholders, residents, communities and our business. Our properties have remained open and operational throughout the pandemic. We continue to take the necessary steps to make our tenants safe and in compliance with state and local orders.

During the fourth quarter and into the beginning of 2021, we have seen an increase in residential leasing activity as New York City and the economy in general continues to strengthen from the depth of the pandemic. We expect demand to accelerate, pricing continue to improve as New York City continues to open up and vaccinations proliferate.

At year-end, our properties were 95% leased, and approximate 200 basis point increase versus the end of the third quarter. We are confident in the resiliency of New York City. We expect our properties in the city to remain desirable to a broad range of tenants, and operations continue to return to a more normal state over time.

Last month, we refinanced our 141 Livingston Street property with $100 million 10-year secured first mortgage loan with Citi Real Estate Funding Inc. The loan bears interest at 3.21%, interest-only for the entire term, which is expected to reduce annual debt service by $1.3 million. We repaid the existing $74 million amortizing loan on the property that was due in 2028, and bore interest at 3.875% through May 2023. Net proceeds of approximately $23 million increased our cash position.

We financed our portfolio on an asset-by-asset basis, no cost collateralization, and our debt is nonrecourse and noncourse collateralized, except for standard carve-outs. We have no debt maturities on any of our operating properties until 2027. Our property is well positioned from a liquidity perspective.

During the fourth quarter, we repurchased approximately 1.7 million shares of common stock at an average price of $5.70 per share under our $10 million repurchase program announced in August of 2020. We completed the repurchase program in November of last year.

Moving to our recent developments, we continue to proceed with the redevelopment of our 1010 Pacific Street acquisition located in Prospect Heights, Brooklyn, about 1 mile from the Atlantic Terminal Barclays Center Hub. As previously discussed, we estimate the project will cost $85 million in total, take 2 years to complete and develop to 6.5% stabilized cap rate. J.J. will provide a further update on the project shortly. Permits to commence construction are in hand and construction has commenced.

In our office portfolio, the city rent at 141 Livingston Street property increased 25% by the end of December 2020, and will add $2.1 million to the property annual NOI. Together with the expected additional $5 million of annual NOI resulting in the city's new lease at 250 Livingston Street property that commenced in August of 2020. These [growths] are expected to add an increased -- incremental $7.1 million of annual NOI to our portfolio, representing an approximate 10% increase on our normalized run rate.

I would like to provide an update on Tribeca House 421-g Kuzmich litigation. As previously disclosed on October 29, 2020, the Appellate Division applied, the Court of Appeals Regina ruling to this case, holding at the base date for the determination of rent overcharges is 4 years prior to 2016 filing of the Kuzmich complaint and overcharges. If any of it is determined by comparing the rents actually charged during the 4-year period, to the rent increase submitted by New York City rent guideline book, although not eliminating rent overcharges liability altogether, this ruling is expected to limit our financial exposure in this regard. The case will be remanded back to the lower court, which will determine the amount of liability of rent overcharge and attorney's fees, no court dates have been scheduled yet.

We do not believe that this litigation will have a material impact on our business as it pertains to a limited subset of previous and existing tenants at the property. The vast majority of current tenants and all future movements are not impacted by the litigation as those units are free market.

Lastly, I'd like to comment on the fourth quarter results. We are reporting quarterly revenue of $30.3 million, NOI of $14.7 million, and AFFO of $3 million. Michael will provide further details on our financial performance.

I will now turn the call over to J.J., who will provide an update on our operations and our response to the pandemic.

Thank you. I begin by again extending our gratitude to the company's employees for their tireless efforts throughout this unprecedented period. We remain inspired by the ongoing commitment to our tenants and communities.

We continue to rigorously maintain protocols to keep our residents and employees safe in compliance with COVID-related government-mandated orders and to provide permitted regular services to our tenants. We have seen a marked increase in residential leasing activity beginning in the fourth quarter and continuing today.

At year-end, most of our properties were leased in the mid- to high 90s percent range, a strong uptick from the approximate 90% level at the end of the third quarter. This rental demand strength has solidified in 2021 as New York City continues to emerge from the challenges of the pandemic.

Occupancy at Tribeca House increased to 90% at year-end from 80% at the end of the third quarter. We have seen further strengthening in the first few months of 2021. We are working diligently to manage revenue at the property. Longer term, we believe that occupancy and rental rates at Tribeca House will return to pre-COVID levels given the assets quality and attractiveness from a pricing standpoint compared to the other luxury buildings in the surrounding neighborhood.

The Flatbush Gardens complex in Brooklyn held up well in the fourth quarter from a revenue standpoint. As it has throughout the pandemic, the property maintained high occupancy ending the quarter 95% leased. Rent per square foot was a record $25.14 at the end of the quarter. As noted previously, we have reorganized certain operations at the property as part of our ongoing efforts to manage our expense base, which is expected to result in annual cost savings in excess of $800,000. Flatbush Gardens is a key element of our portfolio and growth story with the FAR expansion project and incremental value opportunity.

Rent collections have continued to remain strong during the pandemic. Our collection rate in the fourth quarter was over 95%. We continue to work with tenants on a case-by-case basis. If they notify us that they cannot meet their rent obligations as a result of the pandemic, including reviewing potential alternative payment arrangements.

On the development side, we are completing the necessary regulatory processes at 1010 Pacific Street to construct a 9-story, 119,000-rentable square foot, fully amenitized multifamily rental building with underground indoor parking. The property is expected to have 175 total units, 70% of which will be free market and 30% affordable and is eligible for a 35-year 421(a) tax abatement. We are in the process of negotiating a construction loan for the project.

Looking ahead, we remain focused on optimizing occupancy, pricing and expenses across the business to best position ourselves as New York City continues to emerge from the pandemic.

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

Thank you, J.J. For the fourth quarter, we achieved revenues of $30.3 million compared to $30.6 million for the fourth quarter of 2019. We achieved NOI of $14.7 million, and AFFO of $3 million. The slight year-over-year revenue change was primarily attributable to a decline in lease occupancy and residential rental rate at the Tribeca House property, partially offset by the commencement of the new office lease at the 250 Livingston Street property during the third quarter of 2020.

On the expense side, key year-over-year changes were as follows: property operating expenses increased by $0.8 million in the fourth quarter year-on-year, primarily driven by an increase in the provision for bad debt due to the impact of COVID-19.

Real estate taxes and insurance increased by $0.4 million in the fourth quarter year-on-year due to property tax increases across the portfolio and general insurance industry cost increases. Interest expense increased by $0.2 million in the fourth quarter year-on-year, primarily due to the refinancing of the Flatbush Gardens property in May 2020.

As David mentioned earlier, we are well positioned from a liquidity perspective. Pro forma for the 141 Livingston Street refinancing last month, we have $107 million of cash, consisting of $88 million of unrestricted cash and $19 million of restricted cash. We finance our portfolio on an asset-by-asset basis. Our debt is not cost collateralized and is nonrecourse, subject to standard limited carve-outs. We have no debt maturities on any operating properties until 2027.

Today, we are announcing a dividend of $0.095 per share for the fourth quarter, the same amount as last quarter. The dividend will be paid on March 31 to shareholders of record on March 26.

Lastly, as previously disclosed, our previously issued unaudited consolidated financial statements covering each of the first 3 quarters of 2020 require restatement. Our previously reported AFFO, adjusted EBITDA and NOI for each of the first 3 quarters of 2020 will not be impacted by the restatement. Our liquidity, cash flows and cash position will also not be impacted by the restatement. We will file amended quarterly reports on Form 10-Q for each of the first 3 quarters of 2020.

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

Thank you, Michael. We have remained focused on efficiency, operating our portfolio throughout the pandemic, with the safety of our tenants and employees, our highest priority. We continue to take necessary steps to navigate through the current challenges, buttressed by a strong balance sheet.

New York City has survived in its ride through challenging circumstances throughout its history, and we expect the city's recovery from the pandemic to accelerate in 2021 and beyond. We enthusiastically look forward to capitalizing on a myriad of growth opportunities including 1010 Pacific Street development and other developments that will present itself. We hope everyone stays safe and healthy.

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

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

This is Craig Kucera with B. Riley Securities. I'd like to talk about the refinance you completed earlier this quarter. You have now about $95 million in cash. You still got your restricted cash on top of that. Can you give us a sense of what you plan on doing with the excess cash you have after this refinance? And I know you had the excess cash from last year's refinance as Flatbush as well. Just some thoughts there would be helpful.

We don't have any specific plans at this moment in time. We continue to be on the lookout for opportunities as they present themselves. The company took advantage of these refinancing opportunities to extend the maturity days on an interest-only basis. And we thought that it was a low interest environment, prudent to do it at the time and we are pretty confident that the overtime opportunities that meet our investment criteria will present itself.

Got it. And now that you completed the $10 million share repurchase in the fourth quarter, is the Board revisiting another authorization?

It's not been discussed yet. As you know, the stock has gone up to $8 from $5 where we purchased the shares. We haven't had any discussions yet about that. If we do and we make any decisions, obviously, we'll announce it.

Got it. And can you give me some color on the refinance at 141 Livingston? What was the LTV? Was that done on trailing or forward-looking NOI? And any color there would be helpful.

I think it was approximately about 60% or 65% LTV was the CMBS loan.

And was that done on the revised lease?

Yes, sorry, go ahead, David.

Yes, it was.

Okay. Great. And you had a -- did a very good job of getting occupancy up very quickly from third quarter to fourth quarter at a number of your properties. But at some you had to really reduce rents, particularly like at Clover House. And this is a 2-part question. I guess, a, is the $50 or so that Clover House is at now, is that now market? Or did you kind of take some short-term pain to get that back up to 99% occupancy? And b, what are your expectations to begin pushing rents now that you have occupancy much closer to kind of traditionally where you operated with the exception of a Tribeca?

It's a great question. The latter is true. We obviously -- our strategy is, as my father always says, lost rent is a smoke up a chimney. Can now we get that back? So our position and strategy has always been to try to maximize the occupancy. It's great for when the time changes, as it has, to be able to increase rents slowly over time. And we've got the occupancy high. And now we're going to start seeing, I think the rents will slowly creep back to where they were before this pandemic hit us. There's a less amount of product around. There was a lot of cessation of construction going on and plans for construction. I think that will help us. And the properties are well maintained, well positioned. And during the pandemic, we did lower the prices to capture the occupancy that we enjoyed, but now we'll turn towards slowly starting to see those rents get back to where they were.

Craig, I can let J.J. speak as well, but in particular as it relates to Clover House, as David said, we took the opportunity to fill up the building into the fourth quarter there. In the first couple of months of this year, we started to see a creep back up. I think Clover House is in the mid-50s already on rent per square foot. So again, we'll know more in the next kind of couple of weeks here. And as we come around to Q1, we'll obviously give you updated information, but we already see the tick back up into the mid- to higher 50s at Clover House.

Great. And as far as 1010 Pacific, I know in your opening commentary, you said that you thought it would take about 2 years. Is that 2 years from when you first began that project, so we'll see that completed at some point in 2022? Or is that 2 years from today? Just given that things have optically appeared to have slowed down a bit from spending on that project?

I think it's more like it's hard to predict precisely. But erring on the side of conservatism, it's probably 2 years from today.

Got it. And it looks like you didn't take a whole lot of bad debt expense here in the fourth quarter, just looking at your K versus prior Qs. Mike, do you feel like that's been largely washed out of tenancy as we sit here in the first quarter?

No. I think -- and again, we can go into more detail off-line, if you like, but we actually did take a decent amount of bad debt expense in the fourth quarter. It was roughly $1 million of bad debt in Q4 versus Q3 of mid- 600s, $600,000. So again, we continue to analyze it. We can sort of talk off-line, if you'd like, about the calculation. But look we're seeing strong rent collections, as we said. We're still in the mid-90s, but just examining certain leases and whatnot. And yes, we did take $1 million in the fourth quarter, and we expect that to start to creep down here as stimulus payments come through and the economy continues to rebound. So hopefully, here, we're roughly at a peak level, and we'll hopefully start to tick back down.

(Operator Instructions) And there were no other questions from the queue at this time.

Thank you for joining us today. We look forward to speaking with you again soon. Stay safe.

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.

Bye.