Yet Another Value Podcast - Bill Chen on Clipper Realty and the NYC apartment boom

Episode Date: May 9, 2022

Bill Chen makes his second podcast appearance to discuss Clipper Realty (CLPR). Clipper owns a bunch of NYC apartment buildings, and Bill thinks the current boom in apartment rentals will drive strong returns for the company going forward.Bill's first podcast appearance: https://yetanothervaluepodcast.substack.com/p/bill-chen-breaks-down-frphs-sotp?utm_source=url0:00 Intro2:05 CLPR overview4:35 Where is Bill most differentiated on CLPR?8:20 How does the post-COVID NYC apartment boom help CLPR?14:15 CLPR's leverage and balance sheet16:45 Why CLPR over SLG or another similar REIT?20:30 Are the long term trends against NYC?28:00 Rent control in NYC34:50 Why do people have cable companies and their landlords?39:30 CLPR and inflation41:10 "Regulatory inflation" and NYC's moat43:30 CLPR's controlling family47:15 Discussing cap rate environment for NYC apartment49:40 CLPR's development projects and potential value creation53:40 The safety of CLPR1:00:00 Bill makes me feel bad about my shoebox apartment

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So check it out. All right, hello, welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have my friend Bill Chen. Bill, how's it going? Great. Doing fantastic. Thank you for having me on.

Hey, thanks for coming back on. Let me start this podcast the way to do every podcast. First, the disclaimers remind everyone, nothing on this podcast is investing advice. Please do your own work, consult a financial advisor, all that stuff. And then second, with the pitch for you, my guest, this is your second time on. I've told everyone you're the best croquet player I know, but I'm just really excited to have you back on. I know you do great work in real estate. If I was ever going to invest in New York real estate, there's one man who I pitched and it's you.

And actually, I was telling you before the podcast, you know, I normally get a good feel for what's really going to resonate with guests. and that's normally like, hey, this is a YOLO stock. It might be up 5X next week or it might be a zero. And your last pitch, FRPH, which is great, I'll link to it in the show notes. You did not say any of that, right? You were just like, look, I think this is going to generate really attractive, risk-adjusted returns over time. And I like that story, but a lot of times I feel like some guests might not.

And I was just surprised how many guests reached out and were like, you've got to have Bill back on. I love that pitch. So I just think it speaks to how well, yeah, what great work you do and how well you pitch the story. So all that out of the way, let's turn to the company we're going to talk about today. The stock is Clipper, real estate. The ticker is CLPR. And I'll just turn it up to you. What is Clipper? Yeah. So Clipper is a New York centric, most fully multifamily. They own 3.2 million square foot of mostly multifamily. There's two office buildings in downtown

Brooklyn, but most of it is multi-family that spread in Manhattan in Brooklyn. In kind of very simple terms, I think this is a $2 billion company. If we ran an auction and, you know, we invite all the brokers and all participants to bid on these assets, I think this collection of assets sell for about $2 billion, and you could buy it for about a billion for today. and that's about a billion dollars of debt and about $380 million market cap. They did some transactions. I think the cash balance have moved around a little bit.

The debt's a little bit more than the net that's a little more than the billion dollars, but I think $1.4 billion EV today is, so you're buying it at 70 cents on the dollar for a collection of New York City assets, which is mostly multifamily. And what's really exciting is that you're getting a little bit over 4% dividend yield today. And I think that, you know, by my estimate, I think they could actually, over time in the next three years, they could potentially increase that dividend yield to about 7% on today's price. And so you're getting paid to wait. you get to collect a 4% dividend EO while you wait for the, you know, I believe market is probably about 20 to 25% above what the existing rents are currently, but it may take, you know, show up

in the financials because you can't just, you can't just reset that to market. You want to keep a certain number of your existing tenants in the beds, and you can't push that all the way to market right away. But this is a great setup because you're buying in at this collection of assets at about 4.6% cap rate. And then, you know, when it's all fully stabilized, you look out two years, you're looking at closer to 6% cap rate for New York City multifamily, which is kind of a really deep bargain. And you get paid to wait. Pay to wait. Well, hey, that's perfect.

A lot of stuff I want to dive in there. But let me start with the question I'm kind of trying to start the podcast. podcast with, you know, what, we're investing in this. You're investing in this because you think it will generate a attractive risk-adjusted return, right? And to do that, you have to be right about something that the market is wrong on. So what is it that you see that you think the market is missing here? So I think there's an element of kind of like what I traffic in, which tend to be small capital estate, there's some sort of investor fatigue, there's some sort of trading illiquidity, right? Like, you know, this is not the most liquid. I think there's been a couple seeking

off articles recently that actually bump up the trading liquidity and trading liquidity is about a million dollars, you know, even though it's a two billion dollar company, where the equity should be worth a billion dollars, the trading, the daily trading liquidity is maybe a billion dollars, right? So that creates some issues. And I think that there's some stigma attached to the name because it IPOed at $13 in 2017. There's been multiple write-ups on Value Master Club. And the stock has not worked in the past, right? The stock has not working. And there's some issue there, right? Because when they IPO, the company was really, really sub-scale. They raised the IPO, raised some equity, went out, bought a couple of deals. And, uh,

You know, my family is in the New York City real estate business, and we know if you try to go out and buy some deals in 2017, 2018, that was a really, really tough time to do deals, to try to do value add deals. None of the deals could kind of really pass so out just simply because, you know, cap rates were low. Every deal was being marketed. There was no, there was no deal that you were paying, you know, super low cap rates. they just really weren't any good deals to have, and the IPO, they came public, they was sub-scale. And then, you know, 2019, you have the New York City rent regulation laws. You know, that kind of put a damper on.

So, like, there, it's been many years, it's trading at roughly nine bucks, an IPO at 13. So there's been a lot of unhappy shareholders. But since then, what has happened is that they've grown into the, you know, the, you know, The companies that they acquire, they've been able to, you know, do the value add, you know, bring on those net operating income, bring on those cash flow. And, of course, the biggest event was COVID, right? Like, like, everything was supposed to work. It was like, you know, 2017, the IPO were going to do a bunch of deals, like deals were tough. And then finally, early 2020 was when they stabilized a building.

They were supposed to all these numbers were going to show up nicely. And then we have COVID, right? and through big monkey ranch. And I think the opportunity exists today because you have this history of disappointment and kind of, you know, a little bit out of their own control dynamics that are, that we're finally kind of starting to see, okay, now they've actually got $65 million NOI, which I believe that could go to, you know, 80, like almost 80. and then when they stabilize through the development projects to get into the high 80s, right?

And I think, you know, when everything's stabilized, this could trade to somewhere in that kind of nine to 12 times price to AFFO, which is really, really cheap for multifamily REAP. Perfect. And I think there's a, again, a couple things we should go to, but I guess the elephant in the room right now is the COVID recovery, right? If you and I were, if you and I know this because I told you before the pot, I think I put in the Twitter notes, I just got my rent renewal. You know, a year ago, if you were getting rent renewals, it was a renter's dream, right? They were concessions left and right. And right now, as somebody with the rent renewal, I can tell you there are no concessions coming. So let's talk about the near term environment because I think if we can also talk valuation there. But when I just look at it, I say, okay, AFFO, I think was like 16 million or something.

for 2021. This is a almost 400 million market cap stock. We'll talk about leverage in a second, but when you look at that, you say, oh, that's not that cheap, but obviously that's trailing numbers, which includes, you know, a lot of those cover. So what does the environment look like going forward? And how should we be thinking about kind of this, the near term environment starting to flow through the financials? Sure. So, so, you know, they have on their earnings cost, they've been consistently saying, okay, as of this day, you know, as of February, February, they're, you know, if you look at the supplementals, you look at what the existing grant is at each building, right? So Tribeca House is a building that they own. I, you know,

I believe number was, is $62 a square foot, but they're signing leases at $83 a square foot, right? That's what new leases. You probably can't get 83 if a tenant is in there and they're looking to renewal because you don't, you know, you want to raise a rent, but you don't, you probably can't do that lease at 83, right? But you could probably get 75. You could push through. You're still pushed through. I think that any new lease, whether it's a renewal or new lease,

gets done at at least 10% above what it is currently, right? And that's what's really exciting at the moment right now is that you have all this trailing 12-month leases that were COVID. You know, I think it started to change in kind of key. Q3, Q4, but, you know, a lot of those are still from, you know, and COVID leases tend to be a little bit longer, right? Because people do want to lock in those corporate leases, those specials. So you got a dynamic where we're at 65 million of NOI, I think that in, if we're talking 12 to 24 a month from now, that run rate number could be $70 to $80 million. And this doesn't even include any new, you know, the new developments that they have, right?

So, so I, it's just, to me, it's a one-foot hurdle, right? It's a one-fourth hurdle because, because the way to look at it is that the billion dollars are dead, you know, the interest expenses is about $40 million, about $10 million GNA, at $65 million that gets you to about $15, $16 million of AFFO, right? Now, if you go from $65 million to $70,000 to $80 million, now all of a sudden that AFFO is $30 million, right? And then you bring out, you stabilize the two new development projects. You know, there's one that's supposed to be finished at the end of this year. You know, that's going to bring probably at another $5 or $6 million of NOI, right? Now all of a sudden you got, you're in that mid-80s, you know, like kind of low to mid-80s

N-O-I and your fixed cost is still kind of probably like, you know, somewhere between 50, 55 million, like, like now we're trading at a really low multiple to AFFO and they'll probably raise, raise a dividend rate. So, I mean, I think the story is, and this is, every investor loves this, right? You've got something that's highly leverage, both financially and operationally, right? Every dollar increase in rent should flow pretty much straight through to the bottom line. So you get something with a lot of leverage. they're raising rents.

It should flow straight through the bottom line. AFFO goes from 15 to 30 to 40 million real quick. And all of a sudden you're looking and saying, hey, I'm buying New York City apartment buildings for less than 10 times forward free cash flow, you know, 12 months out or something. Where else can I get that deal? Yeah.

And I just want to kind of, you know, comment on the leverage, right? That was my next question. Yeah. Go ahead. Yeah. And I think it's really important. I think, I think what makes Clipper unique is that they, you know, these are old school Brooklyn guys, the management team. You know, these are people who, they've been in this line of business for really, really long time, right?

So they don't necessarily operate in a standard of re-environment. They kind of operate like how my family will run a business, right? And if you think about implicitly, if you buy a 4% cap rate multifamily and you're going to do 50% loan to value, That naturally implies that you've got to put about 12 times NOI of debt on it, right? So when you think about, you're like, oh, like, that's a lot of leverage, right? Like the EBIT of, you know, is over 10 times. Like, you think that's a lot of leverage. But in reality, in a multifamily asset where the cap rate is 4%, which naturally implies 25 times NOI,

like to put 12 times NOI on it is actually fairly reasonable. And I was, you know, like the private, the private, some of the private guys will put 75% loan to value, right? To go out and get 70, 75% loan to value in the multifamily space in New York City is actually fairly normal. So, so if anything, they're kind of more conservative. Yeah. But it just doesn't gel with like traditional reap metric, which is around six times even. And that's, that's something pushback that I get on the name, right, is that this thing just, looks way over levered, right? And I just want to add, and you can correct me here on here, but look, it's about a 400

million market cap company, a little over a billion dollar of net debt. And most people look at it and say, oh, that's pretty levered. And again, as you said, not that levered for New York City real estate. But I guess the other thing, and correct me from wrong, all of the debt is held at the real estate level, right? So none of it's held at the hold code level. So even if, you know, one building burned down in a fire and for some reason they didn't didn't get insurance proceeds. They would just hand the keys to the lender. So it's actually a lot,

I don't want to say it's a lot safer, but it's better than, you know, you look at a high yield company, six X clever. One business goes down. The whole thing goes down. In this case, they, you know, there's still going to be hold co value. Am I thinking about that? No, that's, that's exactly right. And that's exactly what a savvy kind of private landlord will do, right? Everything, you know, everything is an LLC, right? Everything is non-recourse. Everything is a silo. So, The way you think about the debt is that there's, there's, you know, individual building is a silo. And there's a certain liability, you know, that's attributable to that building. And if something goes wrong, you could always kind of like what Blackstone or Brookfield would do, right?

You know, Blackstone famously gave back that office building on Broadway. You could just say, hey, this specific building doesn't work for me anymore. Like, you know, the bank, you know, you, the bank, take this building back, right? Now, you don't want to do that too often because then like it, it, but it's like when push comes to shelf, right? Like, you know, we're here talking if somehow we get into the great financial crisis, which I live through and I witness a lot of, you know, a lot of failures in a real estate world, in a world in a situation like that, you could, you could selectively default on on these mortgages. And look, these are 100 million plus buildings. right like literally all of the almost all of them have 100 million plus mortgages on them so these are these are huge buildings like the lenders here are big boys who understand these are you know my

my recourse is here they understand that there is the risk they're taking that on let me ask you same question to ask during the frpH podcast right yeah so clipper cheap cheap stock uh great momentum through the rental through the rental environment we just talked about but opportunity costs right First thing that pops in my head when you and I were talking about Clippers is I say, oh, okay, that's great. Nice management team. Not buying back shares, trades cheaply. Why would I invest in Clipper versus I just always throw this one out there. So you know, SLG, right? SLG probably trades 70, 60% of NAV, probably trades a little cheaper than this on a forward yield. They buyback shares pretty aggressively. Like, why is this to play instead of SLG? Sure. I mean, look, you know, I've looked at SLG. I've been following it. You know, I always. I own a little bit of office than COVID. I think structurally in the long run, so COVID's been a really unique experience, right? Like, like, this goes back to to betting on things that will be relevant 20, 30 years from now, right?

Yep. And, and, you know, like, if we were talking a year ago, right? Like, you know, even in early 2020, everyone's like, no one's going to live in New York City. It's a debt town. Like, you can't give away the apartment. apartments, right? And now you have bidding wars over apartments. And like, why is that? I think it has to do with the fact that the density here, the cultural relevance, right? The restaurants, the museums, the art scene, right? There's even, you know, tech employees from San Francisco who's moving here to New York because they can work anywhere now, right? And I think that, but the funny thing is people want to be in New York, the young, the hungry, they educated, talented, they want to be in New York, but they don't necessarily want to be in an office. And I think, I think we've, it's been over two years now and we learn how

to work outside of the office. So what's very clear to me today is, is that if you're single between the age of 22 and 45, right, you want to tap into the, like, you know, the dense dating pool that's here, right? There's something about New York City. that keeps people coming, right? And I kind of jokingly say that that rodents, roaches, and dreamers where the suitcase are, like, the three things you can't get rid of in New York City, right? Like, like, it's, it's, it's just, it's just, people just want to be here. But, like, people don't necessarily, there's a lot of mixed views over, do people want to be in the office? Do people want, like, the, if you look at the occupancy rates of Clipper's portfolio,

it's in the high 90s. If you look at occupancy for office and how that's going to row when the leases come off, I don't have clarity on the terminal value of the in-state, right? And you can make the argument, well, that may impact, right? That may impact the residential side as well. But I have a lot stronger opinion that people still want to be here. Like you literally had a, you know, a disease. which, you know, 15 month ago, we don't know how well the vaccine's got to work.

We don't know, like, is it permanently impaired. But the young folks just want to be here. And I've seen this three times. I've seen this after September 11. I've seen this after financial crisis. And I've seen it under COVID. Like, every 10 years you get an opportunity by residential New York City on the cheap. And every time everyone's like, this is it.

It's over. Like, you know, no one wants to be in New York City anymore. but the city just keeps proving people wrong. You know, like, you and I both live in New York City, so maybe we're expressing a bias view. I definitely agree with you, though. We're talking May the Fourth be with you. We're talking on May 4th. We're right after tax day.

And I think two of the pushbacks I would get would be number one, New York City is a high, extremely high tax share section, right? And with work from home proliferating everything, like, yeah, right now we're starting the roaring 20s. But in a year or two, when people really start thinking about that tax bill, you know, our demographic, basically our demographics against New York City, right? The subway sucks, the taxes suck. Florida's looking pretty nice during the debt of winter. So what do you think about that demographic pushback? So I think there's, and we could get into it and they'd be a little bit, right?

Like if you look at New York City, it's in roughly a million population, right? And you start looking into, like, I think the narrative feels like, all right, everyone's moving to Texas. Everyone's moving to Miami because it's low taxes. The reality is that not everyone is a, you know, a married person, right, with, you know, two kids and they've established their careers already. And, you know, they build up the network and they just kind of stay in touch with people telephonically, right?

And not everyone, you know, like, there's still a large amount of population that are single, look into date, look into advanced at careers, they're physically looking into, my take is someone who's 22 to 45 is one makes a lot less in income. So the tax consideration is a lot less. And also the way that they weigh, okay, you know, my dating life, like do I stress my dating life over how. much I didn't pay taxes. And from my experience, being someone, being a landlord New York City with my family for 20 years, I could tell you without a doubt that people value the dating, the networking, the meeting, going to the cool places, the restaurants, the art events, the random kind of like broken meetups and whatnot, you know, I think that's going to have a lot more appeal, right? And there will be a time, I think, I think, I think, you know, especially for

someone like me, you know, I moved away from the very center park of, of New York City and Brooklyn. But, you know, I'm kind of aged out, right? I think, I think if COVID saw, if COVID showed us anything, is that you could have a pandemic that's happening in real time. And if rent dropped enough, there will be a horde of young people, young single people who says, I've never had an opportunity, it was never affordable. I want to be in a city right now. And I think if anything, that probably made you even more bullish on the city. Yeah. No, look, I agree.

And I would just say as somebody who is not quite as young and certainly not single anymore, you know, my wife and I just said we got our rent renewal. And we talked about moving elsewhere. And, you know, when we put it to show, we were like, well, at this point, I guess this is person, but all of our friends are here. Anywhere we'd move, we'd have a lot less kind of activities and stuff to do. And, you know, once you put roots down somewhere, it's tough to move. And there's nowhere for, you know, kind of young, educated professionals. There's nowhere like New York City in terms of most of your friends are probably going to come through here or be around here yet. There's just nothing like it.

Let me ask you another bear case. You know, go into that a little bit, I think, I think, you know, I kind of want to do a breakdown of New York City as well, like the 8,000 population. So, like, Brooklyn, you know, Pete David and his crew, right, that, that's, that's. a whole different segment, right? That's like native. That's not going to change. They're going to stay, right? And they have apartments in Brooklyn and mainly five-eye area of Manhattan, right? Those are the two areas. They're in the Tribeca area. And they've got the one Upper East now that I think about it as well. Central Park West, Upper East Side, right? So basically all over Manhattan. Yeah. Over Manhattan, Brooklyn, right? It's really Manhattan and Brooklyn. So there's

I think, you know, something like three million people. There's like a million household. if I remember correctly, a million households are in some sort of rent regulated rent control, right? And if you are already in a rent regulated apartment, you don't move because the moment that you give that of, that's a quasi form of ownership, right? So let's start with 8 million population. There's a certain population, Staten Island, that's probably, I don't even know, population there, maybe a half million, that's just like, that's in its own ecosystem. That doesn't, like, factored into the Manhattan, Brooklyn, right?

And then you got something like two to three million that are in that rent control, rent regulated, like a million units, if I remember correctly, right? That they don't move, right? Like, they're not like the people, but I think, I think we, because we work in finance, we think we could go anywhere. We have the financial means to go anywhere, right? But there's, there's, you know. You say we have the financial means, but it's been a rough couple months. We don't have the financial means anymore, Bill. but you get them say like like like I think I think people in our row have the the most

flexibility the most financial means to be able to to go settle anywhere right you even go to Puerto Rico in a true low like zero tax haven and and I think and then you go out to Queens right go into the neighborhood's like you go to Corona that's a predominantly Mexican and Ecuador you go to Jackson Heights which is you know kind of like you know there's a lot of Indian, there's all the Polis, and like, there's a lot of immigrants that regardless of what, like, they're not thinking of moving to Texas because this is home, this is roots, right? So when you add up all the population that are in some sort of rent regulated, rent control apartments, and then you add up the immigrant population that don't want to be in Texas because

they can't get the grocery, they don't have the community, they don't, they may not even speak English, right? And then you kind of go up to, to the Bronx, and, and, and, and, and then you kind of go up to, to, And there's a whole different demographic there. But when you really look at this mobile, highly educated population, there's maybe only two or three million people out of that eight million. So the question becomes, are there, in any given year, are there two to three million of like the most single, highly educated from some of the top school? Do they want to live in New York City?

Right. And I would say that if you segment the population, the cohort into 22 to 45, single, looking to date, looking to enjoy the amenities, right? I would say, yes, unequivably, that population still want to rent and live in New York City. That's a true mobile, you know, market rate tenant. And I think that 1% of the U.S. population want to be here. You know, it's so silly, but, you know, at the depths of the 2020 pandemic, when people were saying New York City is dead, it's so silly. But I would just think there's that Hamilton song where they're singing, we're in the greatest city in the world singing about

New York City. And I was like, yeah, I'm sure they were over exaggerating for the play. But, you know, even in the 1770s, we've got 250 years of example where New York City is the place where if you kind of want to be single and mingle in America, like New York City is the best place to be or one of the top places to be. And it's like, that just doesn't go away. You know, it's got those, it's the great thing about city. You get that great network effect. And I believe you said an FRPH thing, the great thing about FRPAH's properties, and this very much applies to Clippers property as well. There's literally a moat around them, right? Yes, yes. It's an island and there's literally a mode around it. Well, I mean, that's, let's talk about

the other thing is that, like, let's talk about rent control. Let's talk about the geography. Let's talk about the nimbism, right? rent control was going to be my next question because I've got some friends in real estate. And every time I talk to them about buying an apartment, investing in New York City real estate, the first they say, politics are awful, everything's going to be rent controlled in five years. And you just can't buy anything because everything's going to be rent controlled. Okay. So this is someone coming from, you know, my family, like we built a little bit of an essay on the private real estate side in New York City.

I've been doing this since 2002, right? Rent control is a hot button issue, right? But what it does is that the combination of having this geography, right, having rent control and forcing any new development to kind of have 30% rent-stabilized apartments, right? what it does is it increase the cost of bringing on new supply. I mean, it already takes about four years to bring on new supply, right? And if you look at the stats, something like only 20 units every year gets permitted for per 1,000, right?

There's more than, you know, 20 basis point in population increase. There's more than, you know, more than that kind of increase in the amount of people want to live in New York City, but only 20 basis points for 1,000 people, you know, actually gets, you know, get permitted every single year. What actually gets built is probably less, right? And what rent control does is that these laws, what's interesting is when you look at any industry in any market that's highly regulated, where it's very cumbersome to do business, what it does is naturally creates a barrier to entry for newcomers to come in. It becomes very, very difficult to bring out a new supply. And the reason why we know it, because my family's, you know,

actually you have been doing a couple of development projects. And my younger brother just, you know, he basically calls me up in his therapy form, right? He's like, the government wants us to do this, you know, they're not happy with this. And, you know, it takes way longer to bring on support. And I would make the argument that rent regulation makes it, you know, harder to bring on new supply because now you get 30% of your unit needs to be rent regulated, right? So you can only build, it costs you, the construction cost has gone up. Labor has gone more expensive.

It's more difficult because now you have fewer parcels of land that are, that are, you know, kind of shovel-ready, that are easy to build. But now you have to set aside 30% of it to, you know, rent-regulated unit. So if you own something that's 100%, you know, free market, you know, that's, in my opinion, that actually becomes worth more down the road. So these, I think a lot of these regulatory forces, a lot of the regulatory forces, how hostile they are, it actually forces the market rate to be higher

and to really constrain the supply to market. And if you talk to people, you know, real estate developers, real estate landlords in Los Angeles, I mean, they'll complain about regulation, but it's also the reason why they're able to push three, four percent in rent increases every single year. Yep. So in the same way, we underbuilt on homes for a decade and now we're kind of experiencing

it with the home price. I mean, New York City, the regulations, bad, good, whatever you think of them, they form a barrier to entry, supply is going to trail demand, and that just continued price increases for this. And I guess my most bearish friends would say, okay, that all sounds great, but what if they just like pass across the board rent, rent? rental control or rent control for these apartments that that's just not on the in the cards for this no i mean i don't think i don't think they i mean so the 2019 rent uh you know rent regulation

there were a lot of negative uh regulation that were passed that that you know and surprised a lot of industry people and if anything there's there's a court case trying to reveal that you know really they're arguing that that was essentially taking of property, right, without compensation. So if anything, that's a potential, that's a free option, right, if that gets overturned. What would happen if that got an overturned for Clipper? I think, you know, what that, so I don't know if, I don't think they'll actually get compensation, but I think going forward make it a lot easier for them to increase rent on the units that are rent, regulated in this portfolio. So just so that you know, I think another reason why Clipper is cheap

is that out of 3.2 million square four, there's 1.7 million that are that are kind of like, if you look it up, you're like, oh, geez, like I don't want to own that. That's rent regulated. It's Brooklyn. It's not a pretty side. If you look at the reviews, right, like I'll just go into it. Let's open Kimodo. It's like the tenants complain about rodents and all these things, right? The thing is, and I'll just come out and say it, like, the reality is that when you charge people, you know, $25 a square foot, which is $3,000 for a 1,000 square foot apartment in New York City, that is one of the most affordable product out there in the market. If it's rent regulated, like, you're not going to find happy tenant review, okay? This is not the Ritz Carlton. Like, this is just how life is.

And in general, I think most tenant reviews, you've got to find they tend to be negative, right? No one says, I love, you know, writing a rent check to my landlord. So once you go into that landlord comment, and I get this feedback from people all the time. And they're like, oh, you know, like, like you read the reviews, it's just awful. You're like, it's different when you go to a market like Vegas. You go to market like D.C. You go to market where they built these brand-new, monetized, you know, multifamilies. and it's almost like live in a hotel, right?

Like, you may be really happy, but New York City, I mean, I think years ago on Craiglist, I saw an ad of a lady who said she's got a really large bathroom and you can rent her bathroom, you know, as a place to sleep in, but like she needs to use it to shower and poop from time to time. And I'm just like, like, only in New York City would you put an ad on Craiglist renting out your unusually large bathroom. Mike it reminds me of you know everyone always hates on cable companies right it's like yeah of course they hate on cable companies but if you really thought about it's because who's ever going to say anything good about a cable company right but if you really thought about like the one moment your internet goes out we had a little bit of technical difficulties or you hate your cable company yeah but

99.9% of time they're providing you with literally the most important service in your life you're getting it for 60 bucks a month and it lets you do everything in your life yes unload entertainment. Everything's like you just don't think about that type of thing. I don't know it's not apples to apples with the rent, but I definitely understand that. There's a ton of similarities between Cable and and New York City multi-family housing. If you think about it, it's, you know, someone joke that, you know, if you look at the Maswell's hierarchy, right? Cable is actually the very most bottom layer. Right. There's cable and rent, right? There are absolutely necessities. And if you think about, like, what of a cost to replicate, right?

What is the replacement value? Like, think about the overbuilding, trying to dig out trenches in New York City and wire buildings, right? Like, it is so difficult. There's so many dynamics that are similar between cable and residential in New York City. And, I mean, this is the reason why, like, if you break down the component of why do people get wealthy owning multifamily in New York City? Like, I have a lot of relatives who were in a Chinese takeout business 20 years ago.

And they do not deserve to be super wealthy. Like, okay, like, I'll take that back. They deserve it, Bill. On paper, they should not be your landlord, right? They should not be Andrew's landlord, yet they are. And the reason is because I think, you know, 20 years ago, they bought a piece of property. Maybe they paid a quarter million dollars for, like, a two family out in Queens, right? And what happens, you know, is that the, if you think about the land, the land appreciates in value over time because they're not making any more of it.

This isn't like, you know, somewhere in Texas where you could just go further out, right? What's been like any, any parcel that's been built has been built for the most part, right? The structure, right? The structures could last hundreds of years. There's a ton of brown stones in New York City that are hundreds of years old, right? So the structure, you know, there's a tremendous amount of value in that. And then really the entitlement and the zoning, right? The hardest thing to get done in New York City is that to go to go down to like the

billing department, submit your plans and they're like, oh, this is a little bit off. Or like your neighbor is complaining. Like, you know, it's, I've seen it. It takes four or five years to bring supply to the market. And it's chronically on the supply. They currently don't bill enough to service the demand out there. So I can't say that enough. And this is the reason why I have some family member from, you know, they bought 10, 15, 20 years ago.

And they're all, you know, they don't speak any English, but they wind up becoming, you know, the landlord to the guy who work at a hedge fund, the landlord who, you know, the Ivy League investment backer, right? Like they're their landlord, but they don't speak any English. They have, they have, they don't understand, you know, official markets. if they don't understand, you know, cost of capital. So they just bought and held on. New York City, I think every city has a certain model to how you get wealthy. Chicago is a town where you make money as a developer. You built something, you built a nice, shiny office building, and you flip it.

You get a nice roster tenant in there. You get a 15-year leases in there, like how huge did, right? They developed this new shiny building and they sold it for a billion dollars. So Chicago is a town where you don't want to hold on to assets. in the loan run because the zoning is very lax, they keep building more. New York City is a city where the money's really made on sitting around and watching paint dry. It's literally just, you buy something and you just sit on it. And that's kind of the core of my strategy. My core strategy is watching paint dry. It is the most boring thing. But over time, it's hard to build.

you can push through three to four percent rent increases. What's unique about this specific situation is we're probably going to go through two years where they're going to get, you know, 10% rent increases every, you know, for two, you know, for two, for two, three years in a row. I was, as you were saying that, I was just thinking like New York City is the ultimate compounder bro market, right? You just buy it and you hold it forever and you let the demographics and the moat do the work for you.

Yes. Real quick, you mentioned inflation a few minutes ago. and I don't think we need to talk along about it, but I don't think I'd be crazy to say Clipper is a huge beneficiary of inflation, right? Like most of their buildings, I'm looking at their debt right now. Almost all of it is locked up for the next seven to 10 years at very low interest rates. Obviously, inflation goes crazy. If you've got the rent-controlled buildings, it's going to be tough to pass through,

but the non-rent-controlled buildings, you're going to be able to pass that straight through. Once the buildings in place, it's not like there's crazy amounts of upkeep. So big inflation beneficiary, am I thinking about that? Yeah, I mean, I think in an inflationary environment, you definitely want to own hard assets, right? Like, you know, you definitely want to own hard assets. And if you think about fixed costs of these, you know, a lot of the time is it's really the mortgage payment. You know, there is a maintenance cap-ex component to all this, right? Of course, yep.

But your replacement cost goes up. But, like, you know, a good example is when I bought my first rental apartment in 2008, I paid $250 a square foot for it, right? Just to kind of replace that, right? So someone built it, sold it to me, made a profit on it. You know, they might have built it for 180, I'm 70, 180 a square foot. And he made, you know, $70, $80 a square foot selling it to me, right? Today to, like, replace that, like, just to build the shell, like, not even the cost of land. It's probably, you know, 300 hours just to build the structure.

And then you got to pay, like, $150, $200 for the land, right? And then to kind of go through the entire process, I mean, that building's, you know, doubled, right? And I was about to say, you benefit from a different type of inflation too. You probably benefit from regulatory and bureaucracy inflation too, right? It was a lot easier to build in 1995 than 2005. And it was probably a lot easier to build in 2005 than it is today. And probably doesn't get any better 10 years from now. No.

And yeah, exactly. If anything, the sites gets used up. If you look at an overhead view of New York City, right? there's like there's just not no big empty parcel when the last time that we asked something like that was when they built hussing yards right that was a multi-decade kind of like lobbying there for lots of you know political back and forth right that was probably the last big parcel that got built in new york city other than that like what you're really doing is you're a corner-round neighborhood there's an old warehouse you know

you you you pay 40 million dollars for old warehouse and then you knock down and they built 2,300 units. Let me shift gears a little bit. We talked about, we did metrics, right? We talked, hey, probably about 24 times trailing, NOI, FFO, however you want to break it down. You know, this is real estate. Everybody wants an NAB number. How would you break out the NAB for Clipper right now? You know, I think the NAB is probably somewhere in the high teens, close to 20, right? As we're talking, it's nine. NAB, high teens to 20. So it's trading for about half of NAB.

Obviously, the lever number and everything. But that's kind of how you're thinking. And I'm comfortable saying that because it's subscale, it's illiquid. There's, you know, the management team isn't quite, you know, kind of like re-savvy, right? Like put a 15, 20% discount on that. Like still get you to a $16, you know, like what I think it should trade at. and it trades at about nine today, like if you got a $16 figure on it, that's, you know,

over 70% upside while you're getting a 4% dividend to wait. Let's talk management team. That's a great transition. So I want to talk a couple things, management team. First, look, I think the management team, you know, I haven't talked to them, but you look at their background, it's great. They've got a great background. But the two things that jumped out to me, you know, just looking through the 10K,

looking through the proxy were, I guess three things. A, the CEO son is the COO and probably set to take over for the CEO, the CO 72. And New York real estate guys hang on as long as they can, but eventually they'll be a transition. So number one, you know, father, son, in charge of a real estate property with part B, they've got a lot of equity ownership, but there are some related party transactions here. So, you know, I started seeing, oh, New York City real estate, the son is in there, the father's in there, related party transactions. And I start to wonder, hey, am I in a heads they win, tails they don't lose situation where one way or another, they're kind of going to take a lot of the money.

You know, real estate is famous for there's always a hidden fee in there. There's always a little extra kicker for the manager. Do you worry about that at all here? So we, you know, I've done, we've been in there for two years and we've talked to them at Navy years before that. And I've done some, you know, back channel check. What we get is people say, okay, you know, like if you read the tenant reviews, like, they don't really like that. But I, you know, I was able to talk to a couple shareholders who've been the best for many years with them.

And the feedback is, look, you know, they're, they're reasonable people. They're just never trying to take advantage of me. And, you know, like someone mentioned, is there a take on the risk, right? and like let's let's think through like in early 2020 their equity traded below six dollars right so they own 60% of the shares and and they just did a cash out refi they had 100 million dollars of cash on the balance sheet like if they wanted to take the company under like that was the time to do it because they just did a big cash out refi like literally was probably a hundred million dollars like that that was like exactly the number what the number would have been for them to

just take the entire company private right what they winded up doing was that in around uh thanksgiving in 2020 they did a 10 million dollar share buyback so like to your question like why aren't they buy back sure they bought back 10 million dollars of shares at uh at five dollar seven you know the stock is at nine dollars today right pretty nice and you saved not that it's you but you saved the dividend in the meantime too. So your TRA, your total return on that buyback section even higher. Yeah. So this is where, you know, I have not found anything that, you know, we've been shareholders for two years. I have not found any evidence of them doing anything that upsets me that that I think are, you know, harmful to minority, right? And there was a golden moment

to take the whole thing private because they had the cash. You know, that was like the perfect moment to do it. And I think in, I think like if it was 2020, you're in a small illiquid reet, like, like you might not actually welcome to be like, hey, like, you give me the liquidity to get out. Like, yeah, like pay me a 20% premium. Let me just get out, right? So that didn't happen. In terms of the, no, but I would love for anyone who's listening to this, like if they, if they know more than I do, I love to hear it. Like, I please. out to me. I say that all the time. I'm like, look, I put a lot of stuff out on the internet. If you disagree with me and you're thoughtful, right? I get all sorts of trolls to discreet.

But if you're thoughtful, I would love for you to come and be like, Andrew, you're wrong. And here's X, Y, and Z reason why. Like, that's part of the reason I put stuff out there. So I'm with you. Let me ask you another question. Look, I mean, we mentioned at the front of the show. This trades for about four and a half times cap rate on trailing numbers. If you run it forward, let's say, you know, the NOI goes from 65 to 90 million, that'd be about a 6% cap rate, right? What is the cap rate for multifamily in New York right now? I mean, you know, for the really trophy stuff, like, it was like a three-handle, right? Like, you're probably looking at, like, low force.

And there's also, there's also a component of like dollar per square foot, right? Yeah, yeah. If you look at, if you look at, like going back to the map that I was laid out, right? Like, this is 3.2 million square foot. Like, if you look at the Tribeca house and Clover House, like, like, if you want to buy that, that's $1,500 a square foot. Now, not the entire portfolios like that, but I think at what it trades at on a dollar per square foot basis today, it's about $420.

Now, you know, the 1.7 million square foot that's rent stabilized out in Flatbush, right? That's maybe like $3,400 a square foot, right? But all the other stuff, you know, probably. average is about a, you know, close to $1,000 a square foot, right? So when you blend it all, like, like on a dollar per square foot, on a cap rate basis, like, like gone to my head, I would probably say that, you know, four and a half percent cap rate, you know, somewhere in the low to mid fours is probably the right cap rate, you know, like if you want to be concerned, like if you want to say, okay, you know, because they own some, some office, they own,

they own this, rent regulated, you know, the amount of Brent regulated. You know, the amount of Brent regulated is that it's a very large square footage, but it's like the 80-20 route, right? It's a very large square footage, but it's not a lot of the value. Another way looking at it is if you take their two best buildings, which is Tribeca House and Cloverhouse, right? If you look at, if you back out the equity and you add the cash on the balance sheet, like if you take Cloverhouse, Tribeca House, and the cash they have on a balance sheet, that's your market cap. You kind of get everything else for free, right? Like, that's another way of looking at it. Great. I was going to ask a question along this line, so that's perfect. Let me ask you, they've got two development properties, if I'm

remembering correctly. One, one is in Prospect Heights. It's a mile from Atlantic and Barclays. I think they're going to put $85 million into it. And then they just bought its 953 Dean Street, which I don't know where in Brooklyn that is. But I think that's right next to, that's right next to 10-10 Pacific. To where? So it's right. So they're basically developing that. They're like literally like one street over and they're almost like touching each other. So 10-10 Pacific, they're going to put like 85 to 90 million in.

Dean Street, I think about 50 million. So that's 140 million. You know, we just said this is a 400 million market cap company. So it's a big investment. So how are you looking at those developments in the value creation there? So I've been out there like as with all my real estate. I've been in like I put boots on every single one of these buildings. right like i put boots on every like i've been inside i've been inside i've looked at their

apartments i told the dormant i was looking to rent you know i i've seen all these all these assets and uh tendon pacific is is in a you know nice fun area in brooklyn my brother-in-law actually just rent an apartment last year around that area and they're not where he lives right They're like, in real estate development, you generally want to be, you want to see where the trends are going, and you want to kind of be a little bit on the frontier, right? And, and like, you know, after spending a few, you know, a few after many and a few nights out with my younger brother-in-law, I'm like, this is a really fun part of Brooklyn. This is a really fun part of Brooklyn.

There's where they are right now, there's like a cool Brooklyn thrift store. there's like some warehouse which are all getting knocked down to be like develop into into multifamily and there's just you could just kind of see that it's it's all moving that way it's all moving towards towards that way like on on I think 5th Avenue or 4th Avenue where 4th Avenue is where my brother-in-law lives 5th Avenue there's a ton of restaurants and then it's hard to describe like without a map but I've been to the I've been to the I've been into the neighborhood. It's a fun, vibrant area where a lot of young people want to live in

Brooklyn. And look, I think if I'm just doing the math in my head, right, let's say they're investing 150 million into the two of these. I think they say they're going to develop them at about a six and a half percent implied cap rate. If they, if those end up being worth a four and a half percent implied cap rate, I think the math says they make, they create 80 to 90 million of equity value through that. And again, it's a $400 million stock. So, If that's right, and I think you get a margin of safety in there, right? If it ends up being a five and a half instead of four and a half, it's only $40 million. Like, that's still a lot of equity value creation for the stock here.

Yeah, well, I mean, that's the thing is that you're not paying for any of that, right? You're not paying, you're paying for the equity value in Tribeca House, Clover, and the cash on the balance sheet, right? You're not paying for the right regular stuff. You're not paying for the office building. You're not paying for the Central Park building where it's actually right near there's no chance Central Park Croquet Court, right, like where I used to play croquet, not paying for the Upper East Side, right? Like, they're just, you're just getting a ton of free optionality.

And I like the development project because what it does is that one of things that people complain to me about is, is, well, no one's going to, like, assign any value to some construction in progress or land parcel, right? Like, because it doesn't throw off any cash, right? People want to be able to run a screen and say, this is cheap because it trades at 10 times price to AFFO, right? Well, this is true because of the NOI, it's a 6% NOI, and that's too cheap or multifamily, right? And I think when those projects get developed and gets stabilized, now it's a bigger company,

it's got more scale, you know, it looks more real to people, and people could just slap a multiple on it, right? Like, that's my strategy. My strategy is I own them usually two, three years before the rest of the market figure out that, hey, like, like, this was really true. cheap, but the market needed to see it when these assets gets leased up and stabilized. You know, I think I said it with FRPH, but the great thing about FRPAH was it was one of those businesses, it was one of those stocks, it was just impossible to kill, right?

No matter how we broke it down because they had so many different source of value and the debt would structure properly, like, it doesn't mean you're going to make huge amounts of alpha, but you weren't going to take a zero on it, right? And six months ago, you and I were talking before the podcast, nobody wanted to hear about the safe assets that we're going to generate nice returns. Again, I'm not saying it's not going to generate great alpha, but maybe it does, maybe it doesn't, but it wasn't going to be zero. And today, you know, after we've had Peloton down 90%, we've got Zillow down 90%.

After all these things have blown up, you kind of reassess and say, oh, maybe that thing where maybe the returns 8%, maybe it's 15, but it's definitely not going to be negative 20. It starts to sound a lot better. And Clipper, it's the same thing, right? like all the debt is non-recourse there's cash at the hold co so a zero is literally off the cards unless management went and did something completely crazy and lit money on fire right like you literally can't zero it because you can't go bankrupt so let me let me let me walk through that right like because like during the financial crisis I mean this this is these are lessons that

I learned right so there's like jitters like if you look at the reits right the reeds like kind of sold off a little bit this week right uh and I guess they reversed today like like, you know, the market rally, the SV rally 3%. And like, from the moment we started talking to deal. I hate to base any podcast on like one day, the Fed, it's the biggest Fed meeting ever. Yeah, yeah. No, but like, you know, there's a trend of like rates going up, right? And in any sorts of real estate failure, and I've seen a lot of state failure, right?

It's all, it's usually a function of you got debt coming due during a time when it's very inopportune, right? Like, just like, like, if you look at general growth, right, like, why did general growth go bankrupt, right? That's the one I was going to say because it's the trade I was in college at the time. I always regret it, but they had great assets. Nobody doubted the value of the assets, but all their debt came due during the financial crisis. Exactly. They have, you know, they did that deal. I think it was a $5 billion unsecure that came due and the cap market was not open and they had to file for technical bankruptcy.

right like how does this thesis get killed right and and and let's look at the debt maturity the you know they have 20 million dollar construction loan that are on 10 10 Pacific that that you know i think that's due in 2027 and then the next one is 2028 which is tribeca house right so really like the the really big chunk trabeca house i think has over 300 million dollars of mortgage on it right so really the next big event where where like you really need to worry is is literally like six years away, right? And even if they can't refy it, it's not recourse, right? So, yeah, you lose the property, but you don't destroy the company. Exactly. And that's a key. Like, everything comes after 2028, right? So, so you like to really, and like from an equity point of perspective, you get over

4%. So like between now and then six years, I mean, getting 24% of capital back isn't, isn't like, doesn't, it isn't going to lie. You're not getting all your money back, right? but you're getting, you're getting a good chunk of your equity check back, right? And they should increase the equity between now and in 2028, right? So to physically break this company, you're looking six years out and you really need that. But like, they need to do something that's very, very dramatically different than the playbook that they have.

And then like going back to like, okay, like the family, they own 60% of the equity. and their 60% equity, $26 million, $26 million shares times $0.38, they're getting $10 million a year of dividends, right? Like, this is what I've kind of noticed about the market is that people say, oh, like, is a governance, right? It's like, it's like if they did anything to kind of ruin the situation for themselves, they'll literally take in $10 million like their apparent $10 million a dividend check. away from themselves. But, like, sometimes, like, you know, whatever comp package that you put together, it's like, like, have management team own 60%

and that kind of takes care of a lot of problems. You know, it's funny because I was talking for completely different subject, but Elon Musk is going to, and he's going to buy Twitter, right? Yeah. And if he walks away from it, he owes them a $1 billion break fee. And me and someone were debating me, like, is $1 billion, is that enough to hold him to the fire? for the richest man in the world.

It's just, and when you were saying it's a $10 million check, I don't know their finances, but I was like, I don't know. I don't know their finances. Their New York real estate finance science. I'm sure 10 million matters, but does it matter to them? But it's just funny. I have one last question for you. And then I'll let you kind of have the final words to wrap this up.

Just in their conference call, I didn't investigate it. They said you've had, somebody asked you've had elevated litigation expense for a while. They say we don't expect anything else. It was some litigation that's now settled. what was going on with the litigation so the my understanding was that in their tribeca house right there were some sort of uh tax uh like property tax uh related uh let me see hold that second and uh that was uh someone kind of sue saying you know they charging more rent than they should off right uh because because the trapeca house has some sort of favorable tax treatment right

And that's behind them. And that's, you know, I've asked them before, my, hey, how big is this liability? And they're like, you know, maybe, maybe it's like a couple million dollars, but like, it was not 10, 20. It was not 50 million dollars, right? Relative to the size of the enterprise, it's not really material, but that's behind them now. It's fine. You know, I just hear somebody call it elevated litigation expense and your mind can go all sorts of places. That's perfect.

No, this is not like a Bowen liability on the max, right? Like, that's a different kind of. We've been going for almost, I think, over an hour at this point. We hit all the points I wanted to hit, but I wanted to turn it over to you for the last word. Anything you think we should have hit that we didn't hit or anything you wish we had hit it a little bit harder? Let me see, I mean, the, I think, you know, the best thing, like I would suggest people If people want to follow the thesis kind of in real time, right? Like one thing that you could do is you go to a street easy, right?

Like I love to do this ruling, right? You go to Street Easy, type in Tribecah, type in Cloverhouse. And you could like look at the units that they're showing you. And you could literally see like what the asking breadth is, right? They'll tell you what the square foot is. They'll tell you like what the asking breadth is. And you could like, any investor want to own this name, you could like figure out how much the existing rents are below market, right?

And you could, you could like click on some of the units and it will literally show you what rent was in 2019, how low they got in 2020, then COVID, and what they are right now. So that's like a great way for people to independently verify whether I'm BSing or not. I'm going to put you on the spot, Bill. One bedroom apartment, try back a house. How much is it going for right now? What's the square footage? Because that matters a lot.

You know, I don't know how big my apartment is. I was asking, I was asking for a friend. Probably five, probably five grand. Like, if it's gone to my head, probably five grand for one bedroom. Nah, I'm staying in my current apartment. That's, uh, that's too rich for my blood. That's not podcaster. You know, it's, it's $83, I think.

I think they were saying it's $83 a square foot. So if you have like, uh, 600, right? Like, that's, that's right around that high, high four thousands. And, uh, depending on the, you know, like, like, like, you got a one bedroom of the penthouse and there could be more you know what they uh you know what the best ira campaign they could do yeah shareholder rent discounts for shareholders that's the best iar campaign they can do they should just host like a like a investor day at the tribeca house and people could just like literally just show just show people the trabeca house and clover house you know like

you could take the ferry across you know across to to dumbo and like it's like people won't understand what they own. And so like, so you know, the other thing I just want to add is people should follow Jonathan Miller on Twitter. He writes, he published like on monthly basis the best data on New York City rent and condo. And you get commentary on how tight the market is, what the trends are. And also, you know, use street easy. Look at, look at the units. We'll get like check, you know, and then they publish supplementals. So you could see what the existing rents are. And you can compare it, like you can easily see 20, 30 percent delta between what the current market is and what the tenants are currently paying. And I think a good way to understand this is

the Sunbelt multi-family was like the hottest, you know, trade of 2021, right? And I think that COVID, essentially what it did is that New York City recover about a year later. I think potentially this is 2020 is the Sunbelt multifamily trade. You know, like but just you know it got delayed another year cool cool well uh this was great bill the weather's getting nice i know uh seaport i know that's another that's another area of interest for you i think you and are going to have to grab a drink at seaport real quick but bill chen thanks so much for coming on and looking forward to having you on again yeah thank you andrew appreciate it perfect