Clipper Realty Inc. Q3 FY2024 earnings call

• Record operating results including revenue, NOI, and AFFO due to excellent residential activity. Rental demand strong, rents at all-time highs and increasing, nearly fully leased.
• New leases in the third quarter exceeded prior rents by over 9.5% across market-based portfolio, with Tribeca House and Clover House leading.
• Pacific House in Brooklyn fully stabilized, 100% leased, yielding projected 7% cap rate. Dean Street ground-up development ahead of schedule.
• Flatbush Gardens property performing strongly under Article 11 agreement, completing capital projects and seeing rent increases.
• Recycling properties in portfolio to maximize performance, marketing some properties like 10 West 65th Street.

Residential revenue in the third quarter increased to $27.8 million, contributing to the overall revenue growth. Commercial revenue was flat compared to the previous year. Record quarterly revenue was $37.6 million, NOI was $21.8 million (an increase of 9% from the previous year), and AFFO was $7.8 million (an increase of 24% from the previous year).

• Leasing expected to remain strong due to high demand and constrained rental housing supply.
• Focus on optimizing Flatbush Gardens property under Article 11 transaction, 953 Dean Street development, and other growth opportunities.
• Managing New York City leasing issues at Livingston Street properties.

• Temporary drop in Flatbush Gardens collection rate to 90% due to procedural issues with New York City.
• Establishing cash management account for 250 Livingston property in the fourth quarter, which will affect cash flow but not profitability significantly.
• Dispute with special servicer regarding interpretation of loan agreement for 141 Livingston property, with ongoing negotiation for a solution.

Q: Can we start with the bad debt issue with Flatbush? Is there an event that's going on at Flatbush that would cause that collections rate to drop so precipitously there to 90%? Have you seen events like that in the past where it's gone down to that level?

A: No, not particularly. I think it appears to be a temporary issue where we negotiate our procedures with New York City and we think it should reverse itself shortly.

Q: Then let's dive a little bit further on the Livingston buildings and the status there, believe in the 10-Q, it says at least for the 250 Livingston property, you intend to establish a cash management account for that revenue, I guess, shortly. Does that mean in the fourth quarter? What's the timing for establishing the cash management account?

A: I would say fourth quarter.

Q: And should - would that mean for accounting purposes, the revenue and NOI of 250 Livingston would get taken out of the consolidated results?

A: No, it really would not. It would result - no, it doesn't change the accounting for - on the income statement. What it will change is a little bit on the cash flow, monies will instead of going into operating cash accounts would go into the restricted cash accounts, restricted. So it's - yes. So there's no real change to the profitability based on entering into these DACA arrangements.

Q: And on 141 Livingston, it sounds like you guys have an issue with the special servicer. I was wondering if you could just give us an update or your - what your take on the situation where the special servicer is and what their interpretation of the loan agreement is on 141 Livingston?

A: Well, briefly, the 10-Q is remarkably up-to-date because we just got this notice on Monday of this week. But basically, our take is we're disputing their interpretation of the agreement, which require - which would require us to begin establishing an escrow account of that builds up to $10 million by the end of next year, over in '18, but that would have begun from July. The way we read the agreement is that the escrow account is not required.

Q: Right. So I guess you guys are going to not make that - the payment as demanded? Or I guess, is there an arbitration that goes to.

A: We're not quite sure what the next steps are. We think we can negotiate a proper solution. We're - I guess, we're now working with the special servicer who we feel we'll be in a better position to interpret the agreement properly.