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Q1 2024 Clipper Realty Inc Earnings Call

Participants

Larry Kreider; Chief Financial Officer; Clipper Realty Inc

David Bistricer; Co-Chairman & Chief Executive Officer; Clipper Realty Inc

Jacob Bistricer; Chief Operating Officer; Clipper Realty Inc

Presentation

Operator

Good day, and welcome to the Clipper Realty Quarterly Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Larry Kreider. Sir, the floor is yours.

Larry Kreider

Thank you, John. And good afternoon, and thank you for joining us for the First 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 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 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, May 7, 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 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.

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David Bistricer

Thank you, Larry. Good afternoon. Welcome to the First Quarter 2024 Earnings Call for Clipper Realty. I will provide an update on our business performance and some new developments. After which, J.J. 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 revenue and net operating income, continuing the positive trend from previous quarters for our residential properties. Rental demand continues to be strong at all our properties and overall rents are stabilizing as COVID era rents are replaced with current rents. In the first quarter, new leases exceeded prior rents by 6% across the entire market-based portfolio, and our portfolio were 98% leased.
At Tribeca House in Manhattan and Clover House in Brooklyn, new leases were over $80 per square foot. Overall rental levels remained at record levels $78 at Tribeca, $81 in Clover House, 40% better than the $63 at the end of December 2021.
As Flatbush Gardens, we continue to be pleased by our results. Since last July, we have operated under the 40-year agreement according to the Article 11 of Private Housing Finance Law with New York City housing and preservation department, which eliminated with that property real estate taxes on the property and provide for enhanced rental recoveries for assisted tenants. This should allow us to profitably upgrade after providing our commitments for property improvements, tenant assistance and higher wages.
We are meeting all our commitments and beginning to meaningfully receive and enhance rental income for assisted tenants. Operationally, we are also very pleased with our new ground-up development known as Pacific House and -- at 1010 Pacific Street in Brooklyn is nearly fully stabilized and meaningfully contributing to cash flow. It is now 100% leased, yielding the projected 7% cap rate.
Properties located at Prospect Heights, about 1 mile from the Atlantic Barclays Center Hub, properties 175 units, 70% free market and 30% affordable, which allows us not to pay any taxes.
At nearby to 953 Dean Street ground-up development, construction is proceeding ahead of schedule. We completed the superstructure ahead of schedule and expect to complete construction in time for 2025 leasing season, utilizing the $12.3 million construction loan that we closed on last quarter. We bought the land in 2021 and '22 and wish to build the 9-story fully amenitized residential building with 160,000 square feet of rentable square feet, 240 units, 70% free market and 30% affordable and 8,500 square foot commercial center.
At 250 Livingston Street, we have previously disclosed New York City notified us of their intention to vacate the premises in August of 2025. We are seeking solutions and pursuing opportunities supported by cash flows from other properties. Of course, we will keep you informed of our progress regularly.
As the continued 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 buttressed by the relatively long duration of debt at our operating properties. Our operating debt is 92% fixed at an average of 3.87% interest rates. Average duration is 5.2 years, nonrecourse subject to limited standard carve-outs and is not cross-collateralized. We finance our portfolio on an asset-by-asset basis.
With respect to the operation, we looked at the short duration and high demand for our residential leases to allow us to cover increased operating expenses. With regard to our first quarter results, we are reporting record quarterly revenue $35.8 million, record of NOI at $20.2 million and AFFO of $5.9 million as a result of the strong leasing and cost reductions I just mentioned. These results represent improvements over the first quarter last year as J.J. and I will further detail.
I will now turn the call over to J.J., who will provide an update on operations.

Jacob Bistricer

Thank you. I am pleased to report that our residential leasing performance at all our properties continues to improve while rent approaches full stabilization and full recovery following the end of the COVID period.
At the end of the first quarter, all our residential properties had very high occupancy averaging 98%, and rents are continuing at record levels while still recording increases over previous levels. Overall, new lease and renewal rental rates in the first quarter exceeded previous rents by over 6% at our residential properties.
We expect leasing to remain very strong in the foreseeable future as demand remains high and the overall rental housing supply remains constrained as widely publicized. We are continuing to increase rents even after the COVID pandemic lower rates have turned over.
At Tribeca House, we have maintained leased occupancy at over 97% and increased overall average rent per square foot to $78 per foot versus $63 near the end of the pandemic.
At our Clover House property, leased occupancy is over 97% and average rents are $83 per square foot.
At our recently completed Pacific House property, we are 100% leased with a blend of free market and rent-stabilized tenants, and rents are now fully stabilized with free market rents above $78 per square foot and operating cash flows achieving the projected 7% cap rate in the original underwriting.
Similarly, our other residential properties at 10 West 65th Street, Aspen and 250 Livingston Street continues to perform well. Average lease occupancy for these properties has been above 98% and average rental rates have increased 6% from a year ago.
Lastly, at the large Flatbush Gardens property, we continue to be pleased with our performance offering under the new Article 11 agreements made with the housing preservation department of New York City on June 29 last year. We received the full rebate in our real estate taxes beginning last July, have begun completing the capital projects we committed and have begun placing formerly homeless residents.
We have also begun to meaningfully obtain the enhanced reimbursement on the Section 610 of the Private Housing Finance Law for tenants receiving assistance as we fill vacancies with formerly homeless residents and renewed leases with assisted tenants. These benefits should steadily increase over the next couple of years and allow us to profitably improve the property.
We are also getting increases for non-assisted tenants, where increases have been permitted on the rent guideline Board for the last couple of years at the 3% level per annum. As a result, overall average rents for the property are increasing, rising to $26.80 per square foot at the end of the quarter versus $26.17 at the end of the first quarter last year.
Rent collections across our portfolio remain as expected at seasonally high levels. The overall collection rate in the first quarter was over 100% bolstered by seasonally first quarter collections at Flatbush Gardens and month-end prepayments at Tribeca House.
Looking ahead, we remain focused on optimizing our occupancy, pricing and expenses 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, J.J. For the first quarter, revenues increased to a record $35.8 million from $33.7 million last year first quarter, increasing by $2.1 million or excluding the impact of Pacific House that came online in the second quarter, an increase of $0.4 million. NOI this quarter was $20.2 million, an increase of $3.1 million from last year or $1.5 million, excluding the impact of Pacific House. AFFO this year was $5.9 million, an increase of $1.4 million from last year or $0.9 million, excluding the impact of Pacific House.
For the first quarter, residential revenue increased to $26.1 million by $2.1 million or $0.4 million, excluding the impact of Pacific House. This increase was primarily due to the higher residential rental rates for all properties from continued strong leasing previously discussed, partially offset by some temporary concessions at Tribeca House.
Bad debt expense was $0.2 million better than last year, reflecting improved collections at all properties despite lower ERAP reimbursements at Flatbush Gardens.
The slightly lower commercial rental income was caused by a couple of leases at the Aspen property, one of which has been replaced.
On the expense side, key year-over-year changes quarter-on-quarter were as follows: property operating expenses increased by $0.5 million year-on-year or $0.3 million, excluding Pacific House, primarily due to higher payroll requirements at Flatbush Gardens to comply with wage requirements under the Article 11 transaction, partially offset by lower utility costs. Real estate taxes and insurance decreased by $1.4 million in the first quarter year-on-year or $1.2 million, excluding the impact of Pacific House, primarily due to $1.8 million from the elimination of real estate taxes at Flatbush Gardens, partially offset by $0.3 million of routine increases in real estate taxes at the other properties and $0.2 million of insurance cost increases.
General and administrative expenses increased by $0.3 million in the first quarter year-on-year, primarily due to higher compensation expenses taken as cash, partially offset by lower audit fees.
Interest expense increased by $1.6 million in the first quarter year-on-year or $0.4 million, excluding the impact of Pacific House due to elimination of capitalized interest for Pacific House, which came in service in the second quarter last year.
With regard to our balance sheet, we have $21.9 million of unrestricted cash and $18.3 million of restricted cash.
In the first quarter, we had no new debt activity other than draws under the Dean Street property construction loan we closed in the third quarter of 2023. Today, we are announcing a dividend of $0.095 per share in the first quarter, the same amount as last quarter. The dividend will be paid on May 30, 2024, to shareholders of record at May 21, 2024.
Let me now turn the call back over to David for concluding remarks.

David Bistricer

Thank you, Larry. We remain focused on efficiently operating our portfolio. We look for your current operating improvements to continue through 2024 and '25. We look forward to optimizing Flatbush Gardens Article 11 transaction, 953 Dean Street developments and other growth opportunities, managing the New York leasing issues at Livingston Street properties and capitalizing on other opportunities that may present itself.
I would now like to open the line for questions.

Operator

(Operator Instructions) We currently have no questions in queue.

David Bistricer

Thank you for joining us today and look forward to speaking with you again soon.

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.