May 9, 2019
Operator
Good afternoon, ladies and gentlemen, and welcome to the Clipper Realty First Quarter 2019 Earnings Call. [Operator Instructions]
Operator
It is now my pleasure to turn the floor over to your host, Michael Frenz, Head of Capital Markets. Sir, the floor is yours.
Michael Frenz
Good afternoon and thank you for joining us for the First Quarter 2019 Clipper Realty Inc. Earnings Conference Call.
Participating in today's call will be David Bistricer, Co-Chairman of the Board and Chief Executive Officer; J.J. Bistricer, Chief Operating Officer; and Larry Kreider, Chief Financial Officer.
Michael Frenz
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, May 9, 2019, and the company undertakes no duty to update them.
Michael Frenz
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 Clipper's press release, supplemental financial information and quarterly report on Form 10-Q posted today for reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures.
Michael Frenz
With that, I will now turn the call over to David Bistricer.
David Bistricer
Thank you, Michael. Good afternoon and welcome to the first 2019 earnings call for Clipper Realty.
I am pleased to discuss with you the state of affairs at Clipper. I will provide a few highlights of our recent activity and then turn the call over to J.J., who will update you on our portfolio, including leasing and ongoing repositioning projects.
Finally, Larry will discuss our quarterly results and our balance sheet. We will then take your questions.
David Bistricer
Regarding our recent activity. At 250 Livingston Street, we have now entered through a fully signed lease with the City of New York for renewal of our commercial lease at 250 Livingston Street, which has been countersigned by the city.
The new lease has a 10-year term. Expiration of the current lease is in August of 2020 and combines the 2 existing leases into 1 lease.
The lease encompasses 342,000 and 496,000 remeasured square feet at initial rent of $43.62 rent is -- rent per square foot with rent escalating beginning in the third year and [ comfortable ] as the company making certain alterations and improvements to the property. The company expects the new lease to initially add approximately $5 million to the property's annual net operating income net of adjustments based on current expense levels.
David Bistricer
At 107 Columbia Heights in Brooklyn, we are steadily approaching completion of renovations to create a fully amenitized residential building with 159 market rate studio, 1- and 2-bedroom with indoor parking for 68 cars. We are funding the improvements in part with a 14,000 -- $14.7 million construction loan and proceeds from the new mortgages through our 250 Livingston Street.
We expect to obtain a temporary certificate of occupancy, or TCO, and begin lease-up in June 2019. The property is located in the historic Brooklyn Heights neighborhood with unobstructed rooftop view of the Lower Manhattan and near various subway and bus lines in the famous Brooklyn promenade.
David Bistricer
At the 10 West 65th Street in Manhattan, which we purchased in October of 2017, we have completed the leasing of 11 units, which we inherited when we bought the building. In addition, we are well into the process of renovating and leasing 40 units, which we received from the present -- the prior owner of the property, the Touro College.
At the present time, we have leased approximately 65% of these units and expect to complete the repositioning in the third quarter of this year.
David Bistricer
At the Flatbush Gardens property, as mentioned in our last earnings call, we have been working with the city on an updated plan to add additional floor area ratio for the complex. In our discussions with New York City's 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 ULURP application in the second quarter of this year, beginning a process which we believe will take 9 to 12 months.
David Bistricer
Importantly, both 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 Tax Cuts and Jobs Act of 2017. This federal program encourages private investment in 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 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.
David Bistricer
As for overall, in the operating results, we are pleased with the performance of our portfolio which, in the first quarter, delivered quarterly revenue of $27.7 million; quarterly NOI of $14.7 million; and quarterly AFFO of $5.3 million, an increase of -- 60% increase over last year.
David Bistricer
Moving ahead in 2019, we expect to continue to benefit from steady revenue increases at most of our properties and controlled operating and general admin expenses. Additionally, we expect our overall results to begin to reflect leasing revenues and expenses at 10 West 65th Street and 107 Columbia Heights as we bring them online.
Larry will further detail this in a few minutes.
David Bistricer
At this point in time, we are also announcing that Larry Kreider, our Chief Financial Officer, will be retiring. And Michael Frenz will become the new Chief Financial Officer effective June 30 of this year.
Larry has been our CFO since inception and was instrumental in executing the 144A offering in August of 2015 and subsequently bringing us public and developing our financial systems. On behalf of the entire company, we thank Larry for his significant contribution to Clipper Realty.
Personally, I thank Larry for being a true partner and a valued executive member of leadership team. His contributions have strengthened our organization and positioned us well for the future.
David Bistricer
I am also thrilled to welcome Michael as the new CFO. Michael has spent almost 2 decades in investment banking and private equity and was also instrumental in the 144A offering and subsequent IPO we had with FBR.
Michael's strong financial skills and managing experience in the process analysis of our operations will help drive our strategic vision for the future. Larry and Michael will work on our executive management, finance and accounting teams over the next several months to ensure an early transition.
David Bistricer
I will now turn the call over to J.J., who will update you on our recent operations.
Jacob Bistricer
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 investment and strong property management.
First, as mentioned earlier, we are getting closer to completing the renovation of 107 Columbia Heights property and plan to begin leasing in June of 2019. This work comprised over 60% of overall capital spending during the quarter.
We are very excited to get the building operational.
Jacob Bistricer
At the Flatbush Gardens 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, including the previously discussed landscape terrace, enhanced security and lighting throughout the complex and revenue-additive centralized laundry and storage.
We remain extremely pleased with leasing demand and cash collections at the property. The complex was 99.5% leased at the end of March.
And during the first quarter, we signed new leases at an average of $32 per square foot. These rates were approximately 28% higher than previous rates for the same units.
Combined with an approximate 6.2% increase on renewals, the property's rent per square foot continues to steadily increase, now above $24 per square foot.
Jacob Bistricer
At Tribeca House in Downtown Manhattan, our leasing teams continue to make excellent progress. At the end of March, we were 99% leased and overall rents remained strong in the $69 per square foot range.
During the quarter, we experienced renewals and new leases in the $69 per square foot range. We are increasing our focus on improving turnover downtime to better deal with our residents' mobile profile at this property and as you can see reflected on our 99% lease status.
We continue to renovate and upgrade apartments, units and common areas, including a new leasing office and children's playroom, all to further drive rent growth and enhance overall attractiveness of the property.
Jacob Bistricer
Our Aspen property located in the Upper East Side of Manhattan continues to be a strong performer. The building was 98% leased at the end of December with rent per square foot remaining in the $36 per square foot range during the quarter.
The neighborhood continues to enjoy a [ renaissance ] driven by the Second Avenue Subway line, which is located a few blocks from the property.
Jacob Bistricer
Lastly, as we -- as also previously discussed, we are making major changes at the 10 West 65th Street property, including the lease-up of 11 market rate units and repositioning and re-leasing the 40 units that came back to us from Touro College to whom we have previously leased the units in their original dormitory room configuration.
Jacob Bistricer
I will now turn the call over to Larry, who will discuss our financial results. Thank you.
Lawrence Kreider
Thank you, J.J. Our first quarter results clearly demonstrate the operational improvements that David and J.J.
described. For the first quarter, we achieved revenues of $27.7 million, an increase of approximately $1.5 million over the first quarter last year after adjusting for a $400,000 noncash and nonrecurring straight-line rent write-off from a lease restructuring at the Tribeca House property and a $300,000 decrease from the repositioning of units at 10 West 65th Street.
Lawrence Kreider
We see strong NOI in the first quarter of $14.7 million and excellent AFFO in the first quarter of $5.3 million or $0.12 per share, an approximate 61% increase over AFFO for the first quarter last year. Our strong result this quarter versus last year reflects higher revenue, controlled operating expenses in real estate taxes and insurance and lower G&A.
Lawrence Kreider
Some additional detail on the year-over-year revenue increase. At Flatbush Gardens, revenue has increased 8.2% year-on-year, reflecting the steadily increasing rents described by J.J.
and nearly 100% leased occupancy. At Tribeca House, residential revenues increased 6.8% year-on-year primarily driven by gains in occupancy and, to a lesser extent, rent per square foot.
Commercial revenues, excluding the nonrecurring and noncash straight-line rent adjustment, were slightly higher due to scheduled rent adjustments.
Lawrence Kreider
At the Aspen property, residential revenues increased 3.3% year-on-year, reflecting increasing rents and continuously high occupancy in the 98% range.
Lawrence Kreider
At the 250 Livingston Street and 141 Livingston Street, office properties leased to the departments of New York City, revenues were slightly higher, reflecting higher property tax and operating expense reimbursements. Additionally, at the 250 Livingston Street property, as David mentioned earlier, we just entered into a new lease, which we expect will increase our annual revenues by approximately $5 million beginning August 2020.
Lawrence Kreider
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.
Lawrence Kreider
The 10 West 65th Street property acquired in October contributed approximately $466,000 of revenue in the first quarter, a decrease of $286,000 from last year. As we mentioned earlier, this reflects taking off-line 40 units previously leased to the prior owner, Touro College, on February 1, 2019, offset somewhat by bringing online 11 units that we created from the taken space.
The 40 units being repositioned are currently 65% leased, and we expect to complete the repositioning in the third quarter.
Lawrence Kreider
Lastly, in 107 Columbia Heights, we expect to begin recording leasing revenue during June 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 effectiveness and overall results as we progress during the year to stabilization and gain more clarity.
Lawrence Kreider
Looking at the expense side year-on-year. Property operating expenses increased by $306,000 year-on-year in the first quarter primarily due to higher collection expense at the Flatbush Gardens property, which were excellent but not to the extent as last year.
Real estate taxes and insurance increased by $383,000 due to property tax increases begun last year in the new -- in that fiscal year and insurance cost increases as a result of higher loss experienced.
Lawrence Kreider
General and administrative expenses decreased in the quarter year-on-year by $1.5 million due to lower LTIP amortization expense from vested LTIPs, lower cash executive bonus costs and lower legal costs.
Lawrence Kreider
Interest expense decreased by approximately $270,000 in the quarter year-on-year mostly due to lower cash interest expense. This reflects lower interest expense from the refinancing in February 2018, offset by higher expense from the refinancing in December 2018.
Lawrence Kreider
Depreciation and amortization expense was flat on the quarter year-on-year, reflecting an increase in the depreciation component from fixed asset additions during the year, offset by cessation of certain purchased accounting cost amortization at the 10 West 65th Street acquisition.
Lawrence Kreider
During the first quarter 2019, we incurred $10.9 million of capital spending, over 62% of which related to bringing Columbia Heights online. The remaining amounts included expenditures for unit buildout at 10 West 65th Street, property renovations at Tribeca House and Flatbush Gardens and New York City local law requirements at Tribeca House and 250 Livingston Street.
Lawrence Kreider
Other financing costs in the first quarter of 2019 were -- sorry, 2018 were approximately $7 million, all relating to the refinancings at the Flatbush Gardens and Tribeca House properties.
Lawrence Kreider
Lastly, we are announcing a dividend of $0.095 per share and unit for the first quarter of 2019. This dividend will be paid on May 29, 2019, to shareholders of record on May 21, 2019.
Lawrence Kreider
Additionally, as we announced, I will be retiring at the end of June. It has been a real pleasure and opportunity to work with David and the whole team at Clipper, including J.J.
and Mike, in addition to the company's distinguished Board. I believe the organization is well set up for the future and believe the team is well positioned to take advantage of the many opportunities they have to grow shareholder value.
Mike and I and the team will work hard to ensure a smooth transition.
Lawrence Kreider
Let me now turn the call back to David for concluding remarks.
David Bistricer
Thank you, Larry. We are pleased with our results this quarter.
Our portfolio is performing well, and we have continued to grow our company with recent acquisition that adds to our platform and offer a meaningful upside through capital enhancement 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.
David Bistricer
With that, I would like to open up the line for questions.
Operator
[Operator Instructions] And it looks like your first question is coming from Craig Kucera.
Craig Kucera
I wanted to ask about the -- kind of your expectations with developments throughout the year. As you think about -- and how would you think about capitalized interest?
Is capitalized interest going to roll off as these properties are bought in phases? And just give us a little more clarity if possible and kind of what your thoughts are there.
Lawrence Kreider
Yes. The capitalized interest will roll off as we bring the properties online, particularly at 107 Columbia Heights, and you'll see the amount at the bottom of the cash flow statement, the amount that we capitalized during the quarter.
Craig Kucera
So I guess what I'm saying is will the entire amount of capitalized interest at 107 no longer be capitalized once you open up a phase? Or is it little kind of roll off in phases throughout the year, I guess?
Lawrence Kreider
Yes. Well, we don't know precisely right now because we don't have an understanding entirely of how the property will come online.
It may be sort of a floor at a time, in which case we would do it rapidly, based on when a floor becomes available for its "intended use."
Craig Kucera
Okay. Got it.
And I know you noted that rental revenue will -- the residential side was up in Aspen, but I think the overall building had total revenue that was modestly down. Was that on the retail side?
Or I guess what's going on there?
Lawrence Kreider
Well, I think that's on the residential side.
Craig Kucera
Okay. Because there's a drop an occupancy.
I got you.
Lawrence Kreider
Exactly.
Craig Kucera
I guess now that the lease has been signed by the city, and I think you mentioned in your prepared commentary that there was some expected tenant improvements at that building, do you have a sense of when that will be incurred and what that amount will be?
David Bistricer
Most of that work is sprinkle work, which is ongoing as we speak. And we think it's going to be not more than $2 million.
And then like I said, I think it will be -- next couple of months, it will be all completed.
Craig Kucera
Okay. Got it.
The -- so just as I think about 10 West, you mentioned that 65% of the 40 units are leased. How should we think about occupancy there?
I think you said you thought the asset will be completed in the third quarter. Does that basically imply that fourth quarter, maybe first quarter, that asset will be pretty much fully occupied?
David Bistricer
Hopefully, yes.
Michael Frenz
Craig, we've actually had a pretty good experience so far. As you know, we took back the apartments at the end of January.
And as Larry and David mentioned, we've started leasing them up already. Some of them have started.
Some of them will start in next month or so. That's why you see a nice healthy lease occupancy number for us.
But again, we're progressing significantly on the CapEx and whatever else is needed. So yes, by the end of the year, we should be in really good shape on this.
Craig Kucera
Got it. Mike, I noted in your comments you mentioned there was the straight-line write-off.
There was another comment you made, I think, in regard to -- I was taking notes quickly, 10 West. Can you just give -- go over those comments again?
Lawrence Kreider
Sure. Well, I said there was a straight-line write-off.
I think I said $400,000 related to accumulated straight-line rent. This is kind of -- technically, accounting.
We could follow up on this. But as -- we restructured the lease and as such had to write-off the accumulated straight-line rents.
And now we will continue to record the actual rent received, and that's all.
Operator
Your next question is coming from Buck Horne.
Buck Horne
Just any extra color you can provide on your expectations for the G&A run rate for the rest of the year? It looks like you did -- came in a little bit better than expected in this quarter.
So do you expect those savings to continue through the year? Any other items we should be aware of?
Lawrence Kreider
Yes. Well, I think the run rate should continue with the following additional couple of items.
There are uncertainties. One of them is the LTIP amortization.
We did issue more LTIPs in late March so there should be some additional noncash LTIP amortization. And I think we were estimating approximately $250,000 per quarter, something like that.
And secondly, we had pretty low legal costs during the first quarter and those could tick up. I think we historically have seasonally adjusted higher legal costs from administrative matters like the shareholder meeting and so forth; and secondly, we have the tenant lawsuit outstanding for which we are in a bit of a hiatus at the moment, and that could resume in some point.
Michael Frenz
Generally speaking, Buck, it's going to be relatively [ normal ] run rate here, as Larry said.
Lawrence Kreider
Yes. I think we're...
Michael Frenz
I think we generally target roughly around, on a cash basis, somewhere in the neighborhood of $7 million -- $6 million to $7 million of cash G&A here. I think there were -- again, there may be some things here and there.
But generally speaking, I think this is a pretty good run rate for modeling purposes.
Buck Horne
Perfect. Very helpful.
And I believe you mentioned also a couple of items at the property level, things like the collection expense at Flatbush and then higher taxes and insurance expense. So as you look at the rest of the year, do you think that those headwinds on the cost side -- how do you think about your property level operating margins for the rest of the year?
Do you think those can continue to expand upward for the rest of the year?
David Bistricer
I don't think they're going to expand upwards. I think what you see now in this particular quarter is a normal quarter.
We had some things in Flatbush Gardens. We had certain maintenance, they had run off.
And so the other maintenance at Tribeca had run off. And when those maintenance run off, their taxes did go up.
But right now I think we're out of the case to that, and now we're just in a normal run rate, I think. So you'll see a typical run rate for this quarter going forward barring any unforeseen expenses.
Buck Horne
And last one for me. Just -- I think you covered it in the opening remarks on the area rights discussion with the city.
So I guess this goes to, I just will look at my notes here real quick, goes to knowing -- I guess you're going through an application process in the second quarter, and maybe just elaborate a little bit on how that process over the next year unfolds and then where does it go after that 9- to 12-month process.
David Bistricer
We've had a lot of progress made. We had numerous meetings with city planning.
We expect to file the first draft of the application within the next 2 or 3 weeks. The team is assembled, and so we're kicking off the official application process with the city.
The city is well aware of what the plan is. They worked with us.
They unified suggestions which we've incorporated. As I've said in the past, we've organized with all the stakeholders on this particular project such as the tenant association of very selected officials, and so far we received enormous amount of support.
So we're marching forward. And like I said, the process of this magnitude usually takes about a year to get it accomplished because we're going through our master plan of rezoning the entire project.
And so far, it looks good, but there's a lot of wood to chop here.
Operator
We have a follow-up question coming from Craig Kucera.
Craig Kucera
Yes. Now that you're a quarter or 2 away from completing 10 West and 107 Columbia, how much incremental capital do you think you need to spend to complete those projects over the next several quarters?
Michael Frenz
No. 107 Columbia, I think we're really far along here, as David said.
It's less than $10 million, I think, roughly speaking. Again, we saw a [ growth ] on our construction loan, as you know.
But that's -- again, we're pretty much at short strokes at this point.
Michael Frenz
And then on 10 West, as I said, with the 40 apartments, we've already basically worked up a good portion already. So it's relatively minimal, maybe up to $1 million, $1.5 million roughly.
But again, this is -- 10 West is a lot less of an effort than 107. But again, we're extremely far along on both, so I think we'll be wrapping the set pretty quickly and then we're ready to roll.
Operator
[Operator Instructions] And you currently have no questions in queue.
David Bistricer
Thank you again for joining us today. We look forward to speaking with you again next quarter.
Have a pleasant evening.
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.