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CLIPPER Rlty  (NYSE:CLPR)
Q4 2018 Earnings Conference Call
March 07, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty 4Q '18 Earnings Conference Call.

At this time, all participants have been placed on listen-only mode and we will open the floor for your questions and comments after the presentation.

It is now my pleasure to turn the floor over to your host, Mike Frenz. Sir, the floor is yours.

Michael Frenz -- Head, Capital Markets

Good afternoon and thank you for joining us for the fourth quarter 2018 Clipper Realty Inc., earnings conference call. Participating in today's call will be David Bistricer, Co-Chairman of the Board and Chief Executive Officer; JJ Bistricer, Chief Operating Officer; and Larry Kreider, Chief Financial 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 2018 annual report on Form 10-K, which is accessible at www.sec.gov and the Company's website. As a reminder, the forward-looking statements speak only as of the date of this call, March 7, 2019, 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 interests, taxes and depreciation, or adjusted EBITDA; and net operating income, or NOI. Please see Clipper's press release and supplemental financial information posted today for 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 David Bistricer.

David Bistricer -- Co-Chairman and Chief Executive Officer

Thank you, Michael. Good afternoon and welcome to the fourth quarter 2018 earnings call for Clipper Realty. I'm pleased to discuss with you the state affairs at Clipper. I will provide a few highlights of our recent activity, then turn over the call to JJ, who will update you on our portfolio, including leasing and ongoing repositioning projects. Finally, Larry will discuss our quarterly results on our balance sheet. We will then take your questions.

Regarding our recent activity, at our 250 Livingston property, we continue to make progress on our discussions with the City of New York regarding renewal of its commercial leases, which terminated in August 2020 in the low-to-mid $40 rent per square foot range.

In December, we also refinanced our $33.5 million mortgage on the property bearing a 4% interest rate due in 2023, with a $75 million two-year loan bearing interest at LIBOR plus 2.15%. At our 107 Columbia Heights property in Brooklyn, Downtown Brooklyn, we are steadily approaching completion of renovations to create a fully amenitized residential building with 159 market rate studio one and two-bedroom units with indoor parking for 68 cars. We are funding the improvements in apartments with $14.7 million construction loan and proceeds from a new mortgage at 250 Livingston Street.

We expect to complete our work in 2019 and begin lease-up. Property is located in the historic Brooklyn Heights neighborhood with unobstructed rooftop views of lower Manhattan and it's various subway and bus lines in the famous promenade. At 10 West 65th Street in Manhattan, which we purchased last October, we completed renovations of 10 units from the existing vacant space and are presently leasing them at market rates.

In addition, the previous owner, our subtenant returned 40 units effective February 1, 2019 per our agreement with them. We have commenced renovation of these units and intend to lease them at market rates. The building currently contains 82 units, approximately 76,000 residential rental square feet, plus 53,000 square feet of air rights. Property is attractively located on the Upper West Side near Lincoln Center and less than a block from Central Park.

At the Flatbush Gardens property, as mentioned in our last earnings call, we have been working with the city planning on an updated plan to add additional floor area ratio to the complex. In our discussion with the New York City zoning office, we are preparing a new master plan that would add substantially more FAR than originally envisioned and add significant value to the property.

We expect to file the Europe application in the second quarter beginning at nine month-to 12-month process for completion of the approval process. Importantly, both the Flatbush Gardens and 107 Columbia Heights properties are located in the newly designated qualified opportunity zones. In connection with the opportunity zone community development program, offered through the Jobs Tax Cuts Act of 2017. The federal program encourages private investment and low-income urban and rural communities. Opportunity zones are designed to spur economic development and job creation in specified communities by providing tax benefits to it's investors, including the potential deferral and exclusion of prior capital gains from taxable income.

As a result, properties such as Flatbush Gardens and 107 Columbia Heights that are located in opportunity zones stand to benefit from increased investor attention and interest. As to overall operating results, we are extremely pleased with the performance of our portfolio, which in the fourth quarter delivered near record quarterly revenue of $27.9 million, record quarterly NOI of $15.4 million, an increase of 9% over last year, excluding a non-recurring collection in quarterly AFFO of $5.4 million, an increase of 37% increase over last year, also excluding the non-recurring collection.

Looking ahead to 2019, we expect to continue to benefit from steady revenue increases at most of our properties, lower interest expense from the February refinancing now partially offset by additional interest in the February -- for December refinancing and controlled operating and general administrative expense.

Additionally, at 10 West 65th Street, we are refurbishing and leasing up the 40 units that will come back from the seller and further, our overall results later in the year will begin to reflect leasing revenue and expense at 107 Columbia Heights property as we bring it online and I will further details this in a few minutes.

I will now turn the call over to JJ, who will update you on recent operations.

JJ Bistricer -- Chief Operations Officer

Thank you. We continue to make excellent progress in improving operations at all of our properties as we seek to drive long-term cash flow growth through targeted capital improved investment and strong property management. First, as mentioned earlier, we are getting closer to completing the renovation of the 107 Columbia Heights property and plan to begin leasing in the second quarter of 2019. This work comprised over 70% of our overall capital spending during the quarter. We are very excited to get the building operational.

At the Flatbush Gardens workforce housing property in Brooklyn, we continue to experience high demand for our units and solid revenue growth. We have been reaping the benefits of our efforts to reposition the property and the overall living environment. We remain extremely pleased with leasing demand and cash collections at the property. The complex was 98.4% leased at the end of December. And during the quarter, we signed new leases at an average of $35 per square foot. These rates were approximately 29% higher than previous rates for the same units. Combined with an approximate 6.5% increase on renewal, the property's rent per square foot continues to steadily increase.

At Tribeca House in downtown Manhattan, which caters to working professionals, our leasing team continues to make excellent progress. Overall revenue remained strong in the $69 to $70 per square foot range. During the quarter we experienced renewals and new leases in the $72 per square foot range. We are increasing our focus on improving turnover downtime to better deal with our residents' mobile profile at this property. We continue to renovate and upgrade apartment units in common areas.

Our Aspen property, located on the Upper East Side of Manhattan, continues to be a strong performer. The building was nearly 100% leased at the end of December with rents per square foot continuing to trend higher during the quarter. The neighborhood continues to enjoy a renaissance driven by the 2nd Avenue subway line, which is located a few blocks from the property.

Lastly, as also previously discussed, we are making selective improvements to common areas to enhance value at the 10 West 65th Street property and as just mentioned, we are renovating an additional 40 units that came back to us recently from the sale of the property, Touro College, to whom we previously leased the units in the original dormitory room configuration.

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

Lawrence Kreider Jr. -- Chief Financial Officer

Thank you, JJ. Our fourth quarter results clearly demonstrate the operational improvements that David and JJ described. For the fourth quarter, we achieved revenues of $47.9 million, an increase of $1.2 million or 4.3% over the fourth quarter of last year, excluding a non-recurring revenue item of approximately $600,000 that we recorded last year relating to prior year.

We achieved record NOI in the fourth quarter of $15.4 million, an 8.1% increase over the fourth quarter last year, excluding the non-recurring revenue item. We achieved excellent AFFO in the fourth quarter of $5.4 million or $0.12 per share, an approximate 37% increase over AFFO for the fourth quarter last year, excluding the non-recurring revenue item. Our strong results this quarter versus last year reflects higher revenue, flat operating expenses and real estate taxes and insurance, lower G&A and lower interest expense.

Some additional detail on the 4.3% year-on-year revenue increase. At Flatbush Gardens, revenues increased 7.5% year-on-year, reflecting a steadily increasing rents described by JJ, continued strong occupancy in the 98% plus range.

At Tribeca House, revenues excluding the impact of non-cash straight-line rent adjustments increased 4.7% year-on-year, primarily driven by gains in occupancy and to a lesser extent rents per square foot. At the Aspen property, revenues increased 3.8% year-on-year, reflecting increasing rents and continuously high occupancy in the 99% range. At the 250 Livingston Street and 141 Livingston Street, office properties leased to departments of New York City, revenues excluding the prior-year non-recurring revenue item were slightly lower, reflecting a year-on adjustment to expense reimbursements.

As David mentioned earlier, the next leasing milestone was New York City is in August 2020 at the 250 Livingston Street property and we are currently in active discussions with the City regarding lease renewals. At 141 Livingston Street, we have a contracted upcoming 25% rent increase to $50 per square foot at the end of 2020, assuming the city remains in the building at that time, equal to a $2.1 million annual rent increase.

At 10 West 65th Street property acquired in October 2018, we contributed -- it contributed approximately $735,000 of revenue in the fourth quarter. As mentioned earlier, we took back 40 units previously leased to the prior owner, Touro College, on February 1st, 2019, representing approximately $580,000 of leasing revenue quarterly. We intend to lease up these 40 units of market rates later in the year following a period of refurbishment.

Lastly at 107 Columbia Heights, we expect to begin recording leasing revenue during the year as we bring the property online. We will also begin recording expenses on a phased basis as sections become available for leasing. We will report the effect of this on overall results as we progress during the year to stabilization and gain more clarity.

Looking at the expense side year-on-year, property operating expenses decreased by approximately $217,000 year-on-year in the fourth quarter or $285,000, excluding the effect of the 10 West 65th Street acquisition at the end of last year. The decrease was primarily due to lower collection expense at the Flatbush Gardens property as a result of our excellent collection experience. Partially offsetting this, we experienced higher gas costs at Flatbush Gardens as a result of a colder winter -- as a result of colder winter weather in the fourth quarter of 2018.

Real estate taxes and insurance were flat in the quarter after taking into account the effect of the 10 West 65th Street acquisition in late 2017. The property tax component was lower by $187,000 as a result of the cessation of purchase accounting expense in 2017. Conversely, the insurance cost component increased by approximately the same amount at Flatbush Gardens as a result of loss experience.

General and administrative expenses decreased in the quarter year-on-year by $388,000, due primarily to lower LTIP amortization expense, partially offset by timing of recording compensation cost estimates. Interest expense decreased by approximately $818,000 in the quarter year-on-year, $304,000 due to lower amortization of debt costs and $515,000 due to lower cash interest expense. Both were primarily due to the financings in February at Tribeca House and Flatbush Gardens in February 2018. These reductions were partially offset by a full quarter of interest expense from the 10 West 65th Street property bought in late 2017 and one month of additional interest expense from the December refinancing of the 250 Livingston Street property.

On a full-quarter basis, the 250 Livingston Street financing will add approximately $220,000 of loan cost amortization per quarter and $500,000 of cash interest expense per quarter.

Depreciation and amortization expense was flat in the quarter year-on-year, reflecting an increase in the depreciation component from fixed asset additions during the year, offset by a decrease in the amortization component to cessation of purchase accounting cost amortization from the 10 West 65th Street acquisition in mid-2018.

During the fourth quarter 2018, we incurred approximately $8.6 million of capital spending, over 70% of which related to the 107 Columbia Heights -- bringing 107 Columbia Heights online. The remaining amounts were primarily for apartment renovations at Tribeca House and Flatbush Gardens, and New York City building renovation requirements at Tribeca House in 250 Livingston.

Other financing costs in the fourth quarter of 2018 were approximately $1.9 million, all related to the 250 Livingston Street. Lastly, today we are announcing a dividend of $0.095 cents per share and unit for the fourth quarter of 2018. This dividend will be paid on March 26, 2019 to shareholders of record on March 18, 2019.

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

David Bistricer -- Co-Chairman and Chief Executive Officer

Thank you, Larry. We are very pleased with our results this quarter. Our portfolio is performing well and we've continued to grow our company with recent acquisitions that add to our platform and also meaningful upside through capital enhancements and focused management. As we look forward, we are well positioned to continue to execute on our strategic growth initiatives and drive value for our shareholders.

With that, I would like to open up the line for any questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. (Operator Instructions) Your first question is coming from Craig Kucera. Your line is live.

Craig Kucera -- FBR Riley -- Analyst

Yeah hey, guys. I wanted to talk about your 2019 CapEx expectations. With the 40 units coming back kind of, what is the expected spend there? And can you comment on, kind of, where you see rents going relative to the current $43, $44, $45 rents?

David Bistricer -- Co-Chairman and Chief Executive Officer

We think that rent should be in approximately the upper $50s, low $60 range in those units. We think we're going to spend about in the neighborhood of about $60,000 a unit, is what we think it's going to be based upon previous experience with the 10 units that we just rented.

Craig Kucera -- FBR Riley -- Analyst

Got it. And I guess based on that and what's left with 107, does the cash proceeds from the recent refinancing, kind of -- do you see a need to you have to do with the other refinancing this year? Is there enough cash on the balance sheet to, kind of, tide you over through the year to complete.

David Bistricer -- Co-Chairman and Chief Executive Officer

There is ample cash. There is more than ample cash to do that.

Craig Kucera -- FBR Riley -- Analyst

Got it. And I guess it sounds like 107 is nearly complete. Are you still expecting that it will probably take -- call it three quarters to get that leased up, something to that point.

David Bistricer -- Co-Chairman and Chief Executive Officer

It will be leased up. I think, and we should (inaudible) to fully lease that up. We may do it sooner, but it's hard to tell you exactly how long it takes, but that's what we think it's going to be.

Craig Kucera -- FBR Riley -- Analyst

Got it. I appreciate the commentary with the City of New York. Is there -- do you foresee any sort of catalyst to get that deal done? Or is it just a matter of just continuing, kind of a back and forth for foreseeable future?

David Bistricer -- Co-Chairman and Chief Executive Officer

Which deal are you referring to?

Craig Kucera -- FBR Riley -- Analyst

The deal at 250 Livingston.

David Bistricer -- Co-Chairman and Chief Executive Officer

250, we are very close. We're exchanging address with them. So we don't think we need any catalysts. It's just lowering (ph) now, and we are very close to getting that done.

Craig Kucera -- FBR Riley -- Analyst

Got it. That's it for me. Thanks guys.

David Bistricer -- Co-Chairman and Chief Executive Officer

You're welcome.

Operator

Your next question is coming from Paul Puryear. Sir, your line is live.

Paul Puryear -- Raymond James & Associates -- Analyst

Hey, good afternoon guys. A couple of questions. David, could you talk some more about the master plan at Flatbush and sort of the -- I know you've mentioned some numbers as far as the upselling before, but we would really like to hear some more about that.

David Bistricer -- Co-Chairman and Chief Executive Officer

Well, what I can tell you about it is that, up until this quarter what we're doing is due diligence, touching base, refining the plan, we started out with a more modest plan and we were encouraged by the City to consider a more aggressive plan. We took that plan back to all the stakeholders, the elected officials, the tenants association, etcetera, and we discussed it internally. I think we now have one more meeting with city planning and then if that goes well as I hope it will go, we'll probably then start and file the formal application of (inaudible).

Paul Puryear -- Raymond James & Associates -- Analyst

And what are some of the expected dates there?

David Bistricer -- Co-Chairman and Chief Executive Officer

I think, the Touro (ph) with the support that we have I think, I would budget -- it's hard to tell exactly how it winds up, but probably 9 to 12 months.

Paul Puryear -- Raymond James & Associates -- Analyst

Okay. Are you still optimistic you're going to get, sort of the upselling, you talked about earlier?

David Bistricer -- Co-Chairman and Chief Executive Officer

We wouldn't go through this exercise and the efforts and the expense of preparing the master plan and getting lawyers involved if we didn't have a buy-in for all the important people that actually have to approve this plan. If we saw any opposition, we would probably go do something else with our time. And so far, we are encouraged from everybody. Everybody likes it. They like the affordability portion it. They like the look and the feel of how this project will eventually look if it's -- once it's fully in place. So it seems to be a plan that's well supported and so we're proceeding.

Paul Puryear -- Raymond James & Associates -- Analyst

Okay, sounds good. Turning to 107, it's terrific that you're getting that close to leasing. I guess the question is, are you hitting your pro formas in terms of cost and do you expect to hit your pro formas in terms of lease rates and lease up?

David Bistricer -- Co-Chairman and Chief Executive Officer

We think so. It's an excellent location. I think it's unusual for the neighborhood, because it's very well established neighborhood. Parking is not easy to come by within the building that you live in, very unusual. So the fact that, it's -- we are doing that I think that's a huge amenity for that particular building. The way it's situated in Columbia Heights with view of the River, the Promenade access, I mean, it's just a very nice part of the city to live in. So I think, we're going to be pleasantly surprised when we go into leasing and it's not large units. So the dollar per foot, I think, is going to come out very nicely.

Paul Puryear -- Raymond James & Associates -- Analyst

We're hearing so much about the escalation in costs, especially in certain markets. Are you experiencing that and is it -- again, is it in line with what you expected?

David Bistricer -- Co-Chairman and Chief Executive Officer

I think, construction cost in that particular project already booked and locked and loaded, I mean we bought this project many months ago. So I don't think, we're affected by any inflationary costs of construction there and again in the scheme of things is not a large -- not a large project. So I think we don't anticipate any surprises there.

Paul Puryear -- Raymond James & Associates -- Analyst

Okay. One more question from me, and maybe this is for JJ. But, of course there is pressure on prices and rents in your Manhattan market. Just wonder it might be especially at 1065 are you seeing that? And really the same question I guess is are the trends surprising you either direction?

JJ Bistricer -- Chief Operations Officer

So to answer your question in a more specific fashion, I will use the Tribeca House as a reference to 65th Street. The pricing, the way we look at each property and we have unique different types of rental products within each neighborhood. In the Tribeca House component, we are in the high '90s occupied right now, going -- coming out of the winter, going into the spring, which makes us -- that when you get into the high leasing season, we're in a much better negotiating position. And that helps you drive the price per foot in addition to maintaining occupancy. And that is what our -- that is our mission across the portfolio and we do that at Flatbush and now we do it at Tribeca House, and we plan to do the same at 65th Street.

We are currently in the midst of a conversion, if you will, not to the extent of let's say a 107, which was down to the (inaudible) but at 65th, we're in a conversion from a dormitory style type of building, which was what we bought from Touro into a pleasant nice and well-appointed residential property with strictly rental upon it. So there's going to be some transitioning pressure, but it's not that -- that's the indication of what the rents are going to be. It's just a matter of repositioning the building in the marketplace to be identified as a nice and comfortable rental property in a very, very exclusive neighborhood.

Paul Puryear -- Raymond James & Associates -- Analyst

Yes, OK.

JJ Bistricer -- Chief Operations Officer

So to answer the question, specifically to what to you asked, I think we don't have yet the maturity of the rents at 65th Street. I think there's a lot of upside there and we're going to be taking certain strategic appointment to the common areas in addition to the (inaudible) themselves to make that property stand out for its own unique attributes and to therefore get the highest rents possible in that neighborhood to that type of rental (ph) product.

Lawrence Kreider Jr. -- Chief Financial Officer

And Paul, I think you'll see that across our portfolio. As JJ said, with Flatbush and Tribeca, (inaudible) as well, quarter-by-quarter you can see in our information, and as we talk about it, our rents keep ticking up. Again the value ads, the things we're doing with it, the strong management and operational overview we delivered, you see in our results. So the rents keep ticking up, and I think we expect the same at 10 West, and 107 Columbia Heights online as well.

Paul Puryear -- Raymond James & Associates -- Analyst

Okay, thanks. Good answers. Thank you, guys.

David Bistricer -- Co-Chairman and Chief Executive Officer

Thank you.

Operator

We have no further questions in queue at this time.

David Bistricer -- Co-Chairman and Chief Executive Officer

So we'd like to thank everybody for joining us on the call today. We look forward to catching up in the coming months. Thank you.

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.

Duration: 27 minutes

Call participants:

Michael Frenz -- Head, Capital Markets

David Bistricer -- Co-Chairman and Chief Executive Officer

JJ Bistricer -- Chief Operations Officer

Lawrence Kreider Jr. -- Chief Financial Officer

Craig Kucera -- FBR Riley -- Analyst

Paul Puryear -- Raymond James & Associates -- Analyst

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