Clipper Realty Inc . (NYSE: NYSE:CLPR) has announced record operating results for the second quarter of 2024, achieving all-time high revenue, net operating income (NOI), and adjusted funds from operations (AFFO). The company attributed these results to robust residential activity and strong rental demand, with occupancy rates soaring over 99%. The Pacific House property in Brooklyn is now fully stabilized and leased at a promising 7% cap rate. While general and administrative expenses saw a slight increase due to legal fees, and interest expenses rose with additional borrowings, the company reported a decrease in expenses year-on-year and declared a dividend of $0.095 per share to be paid in August 2024.
Key Takeaways
- Clipper Realty reports record revenue, NOI, and AFFO for Q2 2024.
- Rental demand remains high with occupancy rates over 99%.
- The Pacific House property in Brooklyn is fully leased at a 7% cap rate.
- Expenses decreased by $1.3 million year-on-year, primarily due to the elimination of real estate taxes at Flatbush Gardens.
- The company announced a dividend of $0.095 per share payable on August 22nd, 2024.
- Clipper Realty is exploring the sale of 10 West 65th and refinancing options for 1010 Pacific.
Company Outlook
- Clipper Realty is focused on operating its portfolio and seizing growth opportunities.
- The company is considering the sale of properties to improve cash flow and maximize portfolio performance.
Bearish Highlights
- There is uncertainty regarding the future revenue flow from 250 Livingston as it goes into an escrow account for the lender's benefit.
- General and administrative expenses have increased slightly due to higher legal fees.
- Interest expenses have risen because of additional borrowings.
Bullish Highlights
- Strong residential activity and high rental demand have led to record operating results.
- New leases are being signed at rates over 7% higher than prior rents.
- The company is actively developing new properties and has nearly fully leased its existing portfolio.
Misses
- The company is navigating potential risks with the 250 Livingston Street property as the city plans to vacate in August 2025.
Q&A Highlights
- Clipper Realty is negotiating a lease extension at 141 Livingston Street, with no formal notice from the city of any intention to leave.
- The city is actually seeking an extension for 141 Livingston Street, which would not require significant capital expenditures if granted.
- Refinancing options for 1010 Pacific will be considered closer to the mortgage's maturity, with discussions to include existing lenders or Freddie Mac.
Clipper Realty Inc. remains committed to maintaining strong occupancy rates and exploring strategic options to enhance its portfolio and shareholder value. The company expressed gratitude to call participants and looks forward to future discussions.
InvestingPro Insights
Clipper Realty Inc. (NYSE: CLPR) has demonstrated resilience with its record operating results, buoyed by strong residential activity and a robust rental market. Here are some InvestingPro Insights that provide a deeper understanding of the company's financial health and market performance:
- Clipper Realty's market capitalization stands at $182.72 million, reflecting the company's size and market value as of the second quarter of 2024. This metric is essential for investors to gauge the company's scale in the competitive real estate market.
- Despite not being profitable over the last twelve months, the company has a promising outlook with net income expected to grow this year, according to an InvestingPro Tip. This potential turnaround could be a significant driver for future financial stability and investor confidence.
- The company's dividend yield is notably high at 8.74%, which is particularly attractive to income-focused investors. This is consistent with the InvestingPro Tip highlighting that Clipper Realty pays a significant dividend to shareholders, reinforcing the company's commitment to returning value to its investors.
InvestingPro offers additional insights and tips for investors looking to delve deeper into Clipper Realty's financials and market positioning. For instance, there are currently 7 more InvestingPro Tips available that could provide further clarity on the company's performance and outlook, accessible through the dedicated InvestingPro product page for Clipper Realty at https://www.investing.com/pro/CLPR.
Full transcript - Clipper Realty Inc (CLPR) Q2 2024:
Operator: Good day, and welcome to the Clipper Realty Quarterly Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comment after the presentation. It’s now my pleasure to turn the floor over to your host, Larry Kreider. Sir, the floor is yours.
Larry Kreider: Thank you, John. Good afternoon and thank you for joining us for the second quarter 2024 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 JJ Bistricer, Chief Operating Officer. Please be aware the 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 2023 Annual Report on Form 10-K, 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, August 1, 2024, 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 in 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.
David Bistricer: Thank you, Larry. Good afternoon and welcome to the second quarter of 2024 earnings call for Clipper Realty. I will provide an update on our business performance and some new developments, after which JJ will discuss property-level activity, including leasing performance, and Larry will speak to our quarterly financial performance. We will then take your questions. I'm pleased to report that we are reporting record operating results, including record revenue, net operating income, and AFFO, based on excellent residential activity. Rental demand continues to be strong at all our properties. Overall rents are generally at all-time highs and continue to increase and we are nearly fully leased. In the second quarter, new leases exceeded prior rents by over 7% and crossed the entire market-based portfolio led by the Tribeca house property in Manhattan and the Clover House property in Brooklyn. There were new leases were over $84 and $90 per square foot, and overall rent levels were $81 and $84 per square foot, all compared to the $63 per square foot at the end of December 2021. The results of stabilized rent property at Flatbush Gardens, are also strong. Since last July, we have operated under the 40-year operating according to the Article 11 of the Private Housing Finance Law for New York City Housing Preservation Development, which eliminated real estate taxes at the property and provided for enhanced rental revenues, rental recovery use for assisted tenants, which are beginning to receive meaningful amounts. As a result, we are aggressively fulfilling our commitments for property improvements and assistance in higher wages. Operationally, we are very pleased with our new ground-up development at Pacific House, at 1010 Pacific’s in Brooklyn, after a year of full operation, it's fully stabilized and is contributing to cash flow. It is now 100% leased and yielding the projected 7% cap rate as projected. At the nearby 953 Dean Street ground-up construction is proceeding ahead of schedule. We completed the superstructure ahead of schedule. Expect to complete construction in time for 2025 leasing season, utilizing the $123 million construction loan we entered into last year. We bought the land in 2021-'22 on which to build a nice story, fully amenitized residential complex with 160,000 residential square feet, 240 total units, 77 free market and 30% affordable, 8500 commercial rental square feet. At 250 Livingston Street, where as we received the flow of New York City notified us of their intention to vacate in August of 2025, we are seeking solutions and pursuing up to opportunities supported by cash flows from other properties. Of course, we will keep informed as of our progress regularly. At our other New York City office property, 141 Livingston Street, we are actively negotiating a five-year extension to our current lease that expires in December 25, but we cannot assure that this will be completed favorably. Also, we have begun thinking about recycling properties at our portfolio to maximize performance and improve cash flow. As such, we have begun preliminary marketing activities for some of our other properties, including 10 West 62 Street, while potentially resulting in some loss compared to book value will allow us to achieve better overall returns going forward. We will announce any definitive arrangements promptly as they arise. As for the continuing high interest rate environment, we believe the higher rates make for higher tenant demand for our rental product versus the purchase option. We are also butchered by the relatively long duration of debt at our operating properties. Our operating debt is 91% fixed and average rate of 3.87% and average duration of 4.9 years is non-recourse, subject to limited standards of car amounts, and is not cross-collarized. We finance our properties on an asset-based basis and not cross-collarized. With regard to our second quarter results, we are reporting record quarterly revenue of $37.3 million NOI of $21.1 million. Today, we have a vote of $7.1 million as a result of a strong leasing and cost reductions I just mentioned. These results represent improvements over the second quarter last year as JJ and I will further detail. I will now turn the call over to JJ who provided an update on operation.
JJ Bistricer: Thank you. I'm pleased to report that our residential leasing at all our properties is very strong and continues to improve. At the end of the second quarter, our residential properties were over 99% leased and rents were at record levels and still recording increases over previous levels. Overall, new lease and renewal rental rates in the second quarter exceeded previous rent by over 7% at our residential properties. We expect leasing to remain strong in the foreseeable future as demand remains high and the overall rental housing supply remains constrained as widely publicized. As of the end of June, Tribeca House had leased occupancy of nearly 100% rent per square foot of $81 and new rent of $84 per square foot. The Clover House property had leased occupancy of 97% average rates of $84 a foot and new leases of $90 a foot. Our recently completed Pacific House property consisting of a blend of free market rent-stabilized tenants had leased occupancy of 97%, free market rents of $76 per square foot, and new free market rents of $76 per square foot. This property is now fully stabilized with operating cash flows achieving the projected 7% cap rate in the original underwriting. Our other residential properties at 10 West 65th Street, Aspen, and 250 Livingston Street continue to perform at record levels with average lease occupancy above 98% and new rents and renewals 11% higher compared to previous leases. Lastly, at the large Flatbush Gardens property, we continue to be pleased with our performance operating under the new Article 11 agreement made with the Housing Preservation Department of New York City in June of last year. Using the full abatement of real estate taxes beginning last July, we are completing the capital projects we committed, aggressively dealing with maintenance issues and placing formerly homeless residents. We have begun to meaningfully obtain the enhanced reimbursement under Section 610 of the Private Housing Finance Law for tenants receiving assistance as we fill vacancies with formerly homeless residents and renewal leases with assisted tenants. These benefits have amounted to nearly $500,000 so far this year and should steadily increase over the next couple of years and facilitate profitable improvements to the property. We are also getting increases for non-assisted tenants where increases have been permitted under the Rent Guidelines Board for the last couple of years at a 3% level per annum. As a result, together with the Section 610 benefits for assisted tenants, overall average rents for the property have risen to $28.10 per square foot at the end of the quarter versus $26.38 at the end of the second quarter last year. Rent collections across our portfolio remain strong. The overall collection rate in the second quarter on all residential properties was 98%. Collections at Flatbush Gardens have been at historically high 97% levels for the last two quarters without the benefit of the ERAP payments as in prior years. We are responsibly and steadily working through the court system to minimize arrears. Looking ahead, we remain focused on optimizing occupancy, pricing, and expense across the business, expeditiously completing our development projects and fully implementing the Article 11 transaction to best position ourselves for growth. I will now turn the call over to Larry who will discuss our financial results.
Larry Kreider: Thank you, JJ. For the second quarter, we achieved record results on three measures important to us. Revenues increased to $37.3 million from $34.5 million last year, an increase of $2.8 million or 8.1%. NOI increased to $21.1 million from $19.2 million last year, an increase of $1.9 million or 9.9% and AFFO increased to $7.1 million from $5.5 million, an increase of $1.6 million or 29%. For the second quarter, residential revenue increased to $27.7 million by $2.1 million. This increase was due to the strong leasing for all properties as previously discussed. Occupancy and rental rates were at all-time highs in the quarter. We further benefited in the quarter from $400,000 of Section 610 rents, which are now beginning to meaningfully contribute. We expect this revenue source to increase steadily over the next few years. Commercial revenue was flat in the quarter compared to last year. On the expense side, key year-over-year changes quarter-on-quarter were as follows: property operating expenses increased by $2.2 million year-on-year, $1.8 million at Flatbush Gardens working within the Article 11 agreement to fulfill so-called prevailing wage requirements to refurbish units for our new formerly homeless residents and to focus on general repairs and maintenance. Our utility gas expense also increased somewhat in the quarter from an underestimate in the first quarter. We expect expenses for refurbishment and repairs and maintenance expenses to decrease over time as we achieve the benefits of our capital spending. Real estate taxes and insurance decreased by $1.3 million in the second quarter year-on-year due to $1.8 million from the elimination of real estate taxes at Flatbush Gardens, partially off of a $400,000 for the routine increases in real estate taxes at the other properties and $100,000 for insurance cost increases. General and administrative expenses increased slightly by $63,000 in the second quarter year-on-year primarily due to higher legal fees. Interest expenses increased by $407,000 in the second quarter year on year due to the additional $20 million of borrowings at 1010 Pacific Street in the third quarter last year. With regard to our balance sheet, we have $20.3 million of unrestricted cash and $16.5 million of restricted cash. In the second quarter, we had no new debt activity other than draws under the Dean Street property construction loan, which closed in the third quarter of 2023. 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 22nd, 2024 to shareholders of record on August 15th, 2024. Let me now turn the call back to David for concluding remarks.
David Bistricer: Thank you, Larry. We remain focused on officially operating our portfolio. We look forward to the current operating improvements to continue to 2024 and '25. We look forward to optimizing Flatbush Gardens' Article 11 transaction on 953 Street developments and other growth opportunities. Managing the New York City leasing issues at Livingston Street properties and to capitalizing on other possibilities that may present themselves. I would now like to open the line for questions.
Operator: Thank you. The floor is now open for questions. [Operator Instructions]. And the first question comes from Buck Horne with Raymond James. Please proceed.
Buck Horne: Hi, good afternoon, guys. Just kind of want to start with the office properties and kind of the situation there with the leasing arrangement or I guess with the notices provided by the City of New York there that there. Maybe, start with 250 Livingston, is my understanding that the -- correct me if I'm wrong, if the revenue and the cash flows from 250 Livingston are those going directly into an escrow account for the lender's benefit at this?
David Bistricer: No, no, not at the closing plan.
Buck Horne: Not at the closing time. Okay. I'm sorry, I couldn't hear that. Is there a point at which if that leases, I mean -- well, is there a risk at the revenues from that building east to flow to the company?
A - David Bistrice: Yes.
Buck Horne: Okay. All right. And is there any notice of -- and I know you're in the process of negotiating or negotiating that at least at 141 Livingston, but that cities already given notice at 250 that they're leaving? Have they provided any formal notice of their intention to leave 141 at this point?
David Bistricer: Larry?
Larry Kreider: Well, no, the city -- well, maybe JJ, I'll take this one.
JJ Bistricer: Yes, I'll take on this. On the contrary, they're actually looking for an extension. So when the midst of negotiating an extension with them, that's what we mentioned in the call that there's a conversation around the five-year extension.
Buck Horne: Okay. If there is an extension, my understanding is that building may require some significant upgrades or CapEx to refurbish it for any potential new leasing or extension or a new tenant. What kind of CapEx requirements do you think would be needed to extend that lease?
JJ Bistricer: The extension that the city is looking for is not a CapEx type of extension. It's pretty much as is.
Buck Horne: Okay. And in terms of the thought process around marketing, 10 West 65th at this point, I guess, what is the need to sell that property at this point? Are you looking to raise liquidity for any other particular reasons?
David Bistricer: There might be some better opportunities for the value in that property that we could achieve by selling it. So something we're looking at right now. So we're testing the market to see what kind of a price we might be able to achieve. And so several interested approaches. Once that thing is crystallized, obviously, we'll come back and invite the market at that. Right now, it's just in the preliminary stages of testing the market.
Buck Horne: Okay. And is there any progress or thoughts on terms of extending or refinancing the mortgage on 1010 Pacific? I believe my notes are correct, that the mortgage is coming due in about a year's time. Any thoughts on refinancing 1010 Pacific?
David Bistricer: 1010 Pacific, I mean, when the mortgage is getting a little bit closer to maturity, obviously we would think about refinancing it and seeing what levels of interest are available at that time but I would say Freddie Mac or Freddie may mortgage or with existing lenders is something that we will look at a bit later on. As we do expect that the overall rental markets will fix as the fixed-term mortgages are about to decrease as is noted by the Fed.
Buck Horne: All right. Thanks, guys. Good luck.
David Bistricer: Thank you.
Larry Kreider: Thanks.
Operator: Okay. We have no further questions in queue. I'd like to turn the floor back to management for any closing remarks.
David Bistricer: Thank you for joining us today and we look forward to speaking with you again soon. Good night.
Operator: 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.
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