Clipper Realty Inc (CLPR) 2020 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty 2Q 2020 Earnings Call. (Operator Instructions)

And it's now my pleasure to turn the floor over to your host, Michael Frenz, Chief Financial Officer. Sir, the floor is yours.

Good afternoon, and thank you for joining us for the Second 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 quarterly report on Form 10-Q posted today, the company's quarterly report on Form 10-Q for the first quarter of 2020 and the company's 2019 annual report on Form 10-K, which are both [accessible] at www.sec.gov and our website.

As a reminder, the forward-looking statements can speak only as of the date of this call, August 10, 2020, 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-Q 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 our Co-Chairman and CEO, David Bistricer.

Thank you, Michael, and good afternoon, and welcome to the second quarter 2020 earnings call for Clipper Realty. I will provide an update on our business, including recent highlights and milestones as well as how our company is responding to COVID-19 pandemic. I will then turn the call over to J.J., who will discuss property-level activity including leasing performance, capital projects and measures taken in light of the pandemic. Finally, Michael will speak about our quarterly financial performance. We will then take your questions.

Let me begin by saying how grateful we are to the entire Clipper team for the continued hard work and perseverance during these challenging times. Their dedication to our residents, our communities and our business have been inspiring during this time of unprecedented upheaval, and we thank them for their ongoing efforts. J.J. will address the initiatives we are taking to help our colleagues work through the crisis.

Our properties have remained open and operational throughout the pandemic. We continue to take the necessary steps to keep our tenants safe in compliance with safe and local -- state and local orders and are providing typical services to our residents. We saw a slight downtick in occupancy during the second quarter, driven by COVID-19. But at quarter end, our residential properties were still over 96% leased and has stabilized at that level through July. Under difficult circumstances, our business has remained strong. We expect our properties and the New York City market to remain desirable to a broad range of tenants and our operations to return to a more normal state over time.

Our balance sheet is well positioned from a liquidity perspective to manage through the pandemic. We have an excess of $116 million of cash, consisting of approximately $88 million of unrestricted cash and $28 million of restricted cash. We finance our portfolio on an asset-by-asset basis, and our debt is nonrecourse and is not cross-collateralized. Importantly, we have no debt maturities on any of our operating properties until 2027.

We are announcing today a new stock repurchase program, whereby we may repurchase up to $10 million of our common stock. We may repurchase shares in open market or private transactions through block trades or otherwise. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at our discretion, subject to availability of stock, general market conditions and trading price of the stock, alternative uses of capital and our financial performance. The repurchase program may be suspended, terminated or modified at any time for any reason and does not obligate us to repurchase any particular number of shares.

Turning to upcoming developments. We are proceeding with the redevelopment of 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 approximately $85 million in total, and take 2 years to complete and develop it to a 6.5% stabilized cap rate. J.J. will provide further update on the project shortly.

In our office portfolio, the new lease with the city at 250 Livingston Street property begins after this month and is expected to initially add approximately $5 million to the property's NOI. At the 141 Livingston Street, property and city net rent will increase 25% at the end of 2020, which will add $2.1 million to the property's total NOI. Together, these rolls are expected to add an incremental $7.1 million annual NOI to our portfolio, representing a 10% increase on our portfolio run rate. As our plan has gone through the company, we continue to progress on uniform land use review procedure, or ULURP, approval process for the city. We anticipate that approval will add significant [operating] ratio to the complex, meaningfully expanding the size of the property, adding significant value and allowing us to begin development. There is no insurance, however, that the application will be fully or partially approved as submitted.

I would like to provide an update to Tribeca House 421 litigation. As previously disclosed, the New York Court of Appeals ruled in 2019 that apartments in buildings receiving 421-g tax benefits are not subject to luxury deregulation, issuing that over time the previous unanimous Appellate Division decision on January 7 this year, the Appellate Division granted a full stay of the special referee's hearing regarding the calculation of potential rent overcharges in the Kumzich (sic) [Kuzmich] case pending appeal, which is currently expected to be argued during the October 2020 term. We do not believe that the order will have a material impact on our business.

Lastly, I'd like to comment on our second quarter results. We are reporting quarterly revenue of $30.7 million, record quarterly NOI of $17.3 million and AFFO of $5.5 million, a testament to the strength and durability of our business during the pandemic. Michael will provide further details on our financial performance shortly.

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

Thank you. I would like to begin by reiterating our deep gratitude to both our employees and residents during this challenging period. Our colleagues have continued to work tirelessly to assist our tenants and communities in maintaining as much of a sense of normality as possible throughout the pandemic. We continue to rigorously maintain protocols to keep our residents and employees safe in compliance with government-mandated orders, including requiring all of our employees and service providers who enter our buildings to wear compliant personal protective equipment and practice social distancing. Our properties remain open and operational, providing permitted regular services to our tenants. We continue to utilize technology as appropriate to conduct operations at all levels. Our collections have been strong during the pandemic.

During the second quarter, our rent collections rate was equal to 94% of our first quarter collection rate, prior to the impact of COVID-19, and our July collection rate improved to 98%. We continue to work with tenants on a case-by-case basis in situations where they notify us that they cannot meet their obligations as a result of the pandemic, including reviewing potential alternative payment arrangements.

Further demonstrating the resiliency of our business, second quarter revenue was down only 0.5% versus the first quarter prior to the pandemic. Our residential properties were still 96.2% leased at the end of the second quarter, down 150 basis points from 97.7% at the end of the first quarter and stabilized at that level in July. Our focus on expense management mitigated these pressures, resulting in an approximate 90 basis point improvement in NOI margin in the second quarter versus the first quarter.

Turning to the property level. At 1010 Pacific Street, we filed the plan for the new building and are working expeditiously to complete the associated regulatory processes. As previously disclosed, we expect to develop a 9-story fully amenitized multifamily rental building, including indoor parking, with approximately 119,000 rentable square feet and 175 total residential units, 70% of which will be free market and 30% affordable. Significantly, the property is eligible for a 35-year 421(a) tax abatement due to the affordable component. We will provide further updates as we get closer to the commencement -- commencing construction.

Our leasing performance at Clover House continues to be very strong. The property is 97.5% leased and the average $72 per square foot rent is a new record. The property is well positioned moving forward with exceptional occupancy continuing to provide leverage in future rent discussions.

Tribeca House has been the property in our portfolio most affected to date by the pandemic. The property was 91% leased at the end of the second quarter compared to being almost fully leased before COVID-19. We believe the decrease is temporary and that occupancy will return to its previous levels as Tribeca House continues to offer a luxury level experience at a more attractive price point compared to the surrounding neighborhood. The property's rent per square foot was essentially flat for the second quarter compared to the first quarter, a significant upside remaining between the current $70-plus per square foot rent and the neighborhood's comparable $80 per square foot rents.

At Flatbush Gardens in Brooklyn, the complex continues to benefit from extremely high demand and was 97.2% leased at the end of June, the same rate as before the pandemic. Rent per square foot of $25.05 at the end of the second quarter is a new record for the property. Importantly, our focus on expense management drove a 60 basis point improvement in NOI margin at the property during the second quarter versus the first quarter.

Flatbush Gardens remains a very significant part of our portfolio and growth story with FAR expansion project and incremental value opportunity.

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

Thank you, J.J. For the second quarter, we achieved revenues of $30.7 million, an increase of $2.3 million or 8% compared to the same period in 2019. We achieved record NOI of $17.3 million, an 8.7% increase compared to the same period in 2019 and AFFO of $5.5 million or $0.12 per share. The year-over-year total revenue increase was primarily attributable to bringing the Clover House property online during the third quarter of 2019 and completing renovation and releasing of approximately 50% of the units at the 10 West 65th Street property during the second quarter of 2019.

On the expense side, key year-over-year changes were as follows: property operating expenses increased by $0.1 million in the second 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 approximately $1.1 million in the second quarter due to property tax increases across the portfolio and general insurance industry cost increases. Cash, general and administrative costs, excluding nonrecurring litigation-related expenses, were flat in the second quarter year-on-year. Interest expense increased by $1.8 million in the second quarter year-on-year, primarily due to the recognition of interest expense in connection with bringing Clover House online and the refinancing of the Flatbush Gardens property in May.

As David mentioned earlier, we are well positioned from a liquidity perspective. As of June 30, we have an excess of $116 million of cash [consisting of $88 million of] unrestricted cash and $28 million of restricted cash. We finance our portfolio on an asset-by-asset basis, and our debt is non-recourse and not cross-collateralized. We have no debt maturities on any operating properties until 2027.

Lastly, today, we are announcing a dividend of $0.095 per share for the second quarter, the same amount as last quarter. The dividend will be paid on August 28 to shareholders of record on August 21.

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

Thank you, Michael. Our business has remained strong, durable throughout the pandemic, driven by the quality of the portfolio and the efforts of our team. We continue to take the necessary steps to navigate through the current challenges, buttressed by a strong balance sheet. New York City has demonstrated great resiliency over time, and we expect the city to emerge from the pandemic stronger than ever. We enthusiastically look forward to capitalizing on a myriad of growth opportunities, including the upcoming office lease rolls, the potential expansion of Flatbush Gardens and the 1010 Pacific Street redevelopment.

We hope everyone stay safe and healthy. With that, I would like to open up the line for questions.

(Operator Instructions) And your first question is coming from Buck Horne from Raymond James.

Congratulations on the very resilient results. Been a tough quarter for everyone. I think I'd like to start with bad debt and just your bad debt accounting policy, how you're treating any delinquencies now. What the accrual rate was in this quarter versus the first quarter? Could you just help us understand how you're planning for the current level of delinquency and for any future accruals that may be needed?

Sure. Good to talk to you, Buck. Yes, so I think the long story short is that, obviously, we've been looking at it this quarter. It was a little bit more urgency than perhaps in the past, just given the (inaudible) benefits and just the ability of people to stay current with their rents.

I think as a general matter, in the past, as we've looked over our tenant profile, I think in prior quarters before Q2, I think we generally look at Flatbush Gardens as the place where we mostly focus on a potential reserve prepared bad debt. And generally speaking, that's the property where we did take a provision previously.

In terms of order of growth magnitude, it was roughly $200,000 to $300,000 a quarter of Fed reserve for a place like Flatbush Gardens through Q1 of this year. Starting in Q2, again, given what's going on with the pandemic, we took a harder look at all of the properties on a case-by-case basis, looking at each of the different tenants, both residential and retail. And working through that analysis, we thought that was prudent, again, given the current uncertainty, to take an increased reserve. I think it makes the most sense. And looking at it relatively conservatively, we decided to take roughly an additional $300,000 in bad debt reserves this quarter. So in total, the bad debt reserve for Q2 was roughly $600,000 just across the different properties.

Again, we think -- again, looking at each tenant, any situation individually, we felt that was the best approach. The city is still paying its bills to us, as you expect. On the office side, retail tenants, we went sort of tenant by tenant and we're in negotiations with tenants kind of on a daily basis to make sure that we keep everything up to speed, and that was the general approach.

Okay. That's very helpful. As it relates to the Flatbush and just Flatbush's residents just being more sensitive to these economic pressures that are out there, if -- I don't know if you have any way of measuring or any way of determining the sensitivity level of whether or not supplemental -- the unemployment insurance benefits get approved. Or how do you think about the potential risks if more federal assistance is not forthcoming on a property like Flatbush?

Look, I think it's a good question. I'll start off by saying that across the board, or at least as I look at the Flatbush trajectory of rent collections over the last little bit here. Before COVID struck, we were very -- as you well know, Buck, we were in the high 90s collections even in a place like Flatbush Gardens, I think. Into the second quarter, as I think you've also seen with other REITs, April and May took a little bit of a dip as the initial impact of COVID hit. We were roughly sort of in the kind of low to mid-90s on the collections at Flatbush Gardens. Into June and then further into July, we've actually seen a significant uptick. June, we were basically -- almost basically at 100%. In July, we were in that sort of range as well.

So to answer your specific question, have we done an analysis of the impact of the potential loss of supplemental unemployment insurance. I don't have a sort of tenant by tenant analysis of that, but look, as I said before, it's a situation just given the lingering uncertainty, and while we still can't quite figure out an endpoint to this whole pandemic, it's something where we're going to continue to look at it. But in connection with putting a bad debt reserve on each of the other properties, we did look at Flatbush as we always do when we took a slightly higher reserve than the last quarter. But as I said, encouragingly, the collections for Flatbush in the last couple of months have been actually quite strong. So we'll continue to look at it, realizing that, going forward, we may have to adjust our thinking. But so far, so good, but we're clearly analyzing it on a day-by-day basis.

Yes. And one last, if I can sneak one in, just on the repurchase program. I think that's a great idea at these price levels. So congrats on that move. I'm just curious if -- when can the company first begin becoming active in the market, if you can -- when the window opens for the program?

48 hours. 48 hours after we release the earnings.

Your next question is coming from Craig Kucera.

Aside from the buyback, you're looking at $10 million there. You still have a pretty significant amount of cash on the balance sheet. Any updated thoughts on the use of that? Are you still looking for acquisitions? Or kind of what are your current thoughts there?

We just -- we are taking a look at the market, see what -- how the market is going to react to all this and how it's going to unfold. We don't have any specific plans yet on what to do. We're still cautiously reviewing everything that's going on.

Our focus right now is maintaining everything, provide, like we said in the prepared script, making sure that all the tenants receive the essential services, and everything goes as planned as we are obligated to do. And working with people who have issues about paying, working those things through and just being a good responsible landlord. And what we will do with the cash, I think it's going to be some time until we see how the market is unfolding.

Okay. I know you mentioned that you expect occupancy to improve at Tribeca. But was there anything specific at that property that -- to have the occupancy drop as much as it did from last quarter or even last year other than COVID?

No, not at all. I think it's really a -- people there in that particular property, more so than some of the other properties, have the wherewithal to move out of the city temporarily. Summer homes or different homes, or second homes, they're going into more rural places out in the suburbs. That was a trend that was going on in Manhattan. Manhattan more than the boroughs, as you can see from our portfolio, more than the boroughs, where people are opting to leave the city. And I think now with the opening -- the government announcing they'll be opening up -- the public schools are open, the private schools are opening up. I think we'll see that move stabilizing.

Okay. Great. I think in early June, you had a -- you had mentioned at least that a restaurant had closed at Tribeca. Are any other retail tenants not likely going to open up again?

Not to my knowledge. We have obviously a very small exposure to the retail space. But I don't know of anything at the moment that's not opening.

Okay. Great. And I'm curious to hear with the ULURP application, I'd imagine that things really slowed down in the second quarter. Have they picked back up here in third quarter? Or is that still sort of on hold in the near term?

They just opened up the public hearings that Europe is a public hearing process. Obviously, in the pandemic, they were not holding public hearings. They did not make that available through a remote Zoom process or things -- electronic processes. But now they've actually notified us that they're opening up the process again. It's going to be allowed to have, obviously, with the proper procedure, but they allowed this process to happen. So we're going to go back and try to get that going again.

(Operator Instructions) Okay. It looks like we have no further questions in queue.

Thank you very much. And everybody, please stay safe, and we look forward to speaking to you again soon. Thank you. Have a good day.

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.

Thank you.

Thank you.