Clipper Realty Inc. (NYSE:CLPR) Q3 2023 Earnings Call Transcript November 2, 2023
Clipper Realty Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.17.
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 comments after the presentation. 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. Good afternoon and thank you for joining us for the third quarter 2023 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 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 2022 annual report on Form 10-K and updated in the 2023 third quarter report on Form 10-Q which are accessible at www.sec.gov and our website.
As a reminder the forward-looking statements speak only as of the date of this call November 2, 2023 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.
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David Bistricer : Thank you, Larry. Good afternoon and welcome to the third quarter 2023 earnings call for Clipper Realty. I will provide an update of our business performance and some exciting new developments after which J.J. will discuss property level activity including leasing performance and I will speak to our quarterly financial performance. We will then take your questions. I am pleased to report that we have record operating results on most key metrics and continuing the positive trends from previous quarters. Rental demand has been very strong at all our properties. In the third quarter new leases exceeding prior rent by 12% across the entire market-based portfolio and our properties are 98% leased. At Tribeca House, Manhattan and Clover House in Brooklyn new leases were $91 per square foot and overall rent levels reached a record $78 per foot on average, 40% better than the $63 per foot at the end of 2021.
At Flatbush Gardens, we have begun operating as of July 1 under the previously announced 40-year agreement with the New York City’s Housing Preservation Department so-called Article 11 of the Private Housing Finance Law. Under this agreement, the elimination of real estate taxes and enhanced rental recoveries for assisted tenants will allow us to profitably provide for our commitment for property improvements, tenant assistance and higher wages for everyone’s benefits. Of course we are at the early stages and will report our progress as we move forward. Operationally, we are also very pleased with our new ground-up development project Pacific House, 1010 Pacific, which became online last quarter and budgeted and is 93% leased and on target to yield a 7% cap rate.
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Q&A Session
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Properties located in Prospect Heights, Brooklyn, 1 mile from the Atlantic Terminal Barclays Center. Property has a 175 units, 70% free market, 30% affordable. It also has a tax abatement for 30 years under the 421(a) program. In recognition of the property’s excellent prospects, we completed the final $20 million draw from our bank in the third quarter on the $80 million loan we entered earlier in the year. At the nearby 953 Dean Street ground-up development project, we have completed the foundation, bought out 80% of the vendors that are going to work on the project, finalized a $123 million construction loan which will enable us to complete the project on time as we did with the 1010 Pacific Street project. We purchased the land in 2021 and 2022 on which to build a nine-story fully amenitized residential building with 160,000 residential square feet, 240 units, 70% free market, 30% affordable which will again provide us with a 421(a) tax abatement for the next 30 years and 8,500 commercial square feet of rental space.
As to the continued higher interest rate environment, we believe the high rates make for high demand for our rental product, hence the higher rents that we’ll be reporting and it will be so for a longer duration. Most of our debt is fixed at — 94% of our debt is fixed at 3.82%, average duration of 6.25 years, non-recourse, subject to limited standard carve-outs and is not cross-collateralized, so each property stands on its own. We finance our portfolio on an asset-by-asset basis. With respect to inflation, we look to short duration and high demand for residential leases to allow us to cover increased expenses as we’re seeing the increases in the rents from a view of product inflation. With regard to our third quarter results, we are reporting record quarterly revenue, $35.1 million, record NOI of $20 million and AFFO of $6.3 million as a result of improved leasing I just mentioned.
These results represent significant improvements over the third quarter last year and J.J. and I will give you further details. I will now turn the call over to J.J. who will provide an update on operations.
J.J. Bistricer : Thank you. I am pleased to report that our residential leasing performance at all our properties continues to improve. At the end of the third quarter, all our residential properties had very high occupancy averaging 98% and rents are at record levels. Overall, new lease rental rates in the third quarter exceeded previous rents by over 12% and renewal rental rates by over 6% at our free market properties. We continue to see particularly strong rental demand at our Tribeca House and Clover House properties, both free market buildings. At Tribeca House, we have maintained lease occupancy between 97% to 99% and increased average rent per square foot to $78 per square foot from $71 over the last 12 months and $62 per square foot near the end of the pandemic.
In the third quarter, rents on new leases were $91 per square foot, a 13% increase over previous rents and rents on renewals were $87 per square foot, an 8% increase over previous rents. The rental rates have continued to increase even after the COVID pandemic lower rates turned over. Leasing at Pacific House almost fully stabilized. The 70% free market and 30% affordable property came online at the beginning of the second quarter and was 93% leased at the end of this quarter. We expect the property to achieve a cap rate of over 7% in 2024 in line with original underwriting. At the Flatbush Gardens property, we are also very excited to begin operating under the new Article 11 agreement made with the Housing Preservation Department of New York City that we completed on June 29th.
This agreement, as intended, will facilitate ongoing capital requirements and allow for much-needed affordable housing in New York City. We received the full abatement of real estate taxes beginning July 1 and have submitted initial planning for the capital projects we committed and are in the process of obtaining the enhanced reimbursements for tenants receiving assistance that were committed to us under the agreement. As to leasing at Flatbush Gardens, we expect overall rents to continue to increase modestly as before under the Rent Guideline Board’s limits. These have now recommenced over the last two years to allow annual increases of roughly 3% per annum. This compares to the more generous 5.8% increases in area median income, otherwise known as AMI, for 2023 provided by the Article 11 agreement.
