Bill Chen returns to the podcast to discuss his thesis on CLPR and the ongoing boom in NYC apartment rentals. You can find my notes on CLPR here, a summary of Bill’s CLPR thesis here, and Bill’s first podcast on FRPH here.
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Andrew: All right. Hello. Welcome to 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?
Bill Chen: Great. Doing fantastic. Thank you for having me on.
Andrew: Hey, thanks for coming back on. Let me start this podcast the way I do every podcast. First, a disclaimer to 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 had pitched and it's you.
And actually, I was telling you before the podcast, I normally get a good feel for what's really going to resonate with guests, and that's normally like, hey, this is a yellow stock. It might be up to five X next week or it might be 0. 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. We're like, you've got to have Bill back on. I love that pitch. So I just think it speaks to what great work you do and how well you picture the story. So all that out 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. I'll just turn it over to you. What is Clipper?
Bill: Yeah. So Clipper is a New York-centric multiple multifamily. They own 3.2 million square foot, mostly multifamily. There's two office buildings in downtown Brooklyn, but most of it is multifamily that spread in Manhattan and Brooklyn. In kind of very simple terms, I think this is a $2 billion company. If we ran an auction and we buy all the brokers and all participants to bid on these assets, I think this collection's an asset itself of about $2 billion. And you could buy it for about a billion for today. And that's about a billion dollars a day and about a $380 million market cap. They did some transactions. I think the cash balance booped around a little bit.
That's a little bit more than a billion dollars. But I think 1.4 billion EV today is. So you're buying it at $0.70 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 by my estimate, I think they could actually overtime next three years, they could potentially increase that dividend yield to about 7% on today's price. So you're getting paid to wait. You get to collect a 4% dividend while you wait for the...
I believe market is probably about 20% to 25% above what the existing rents are currently. But it may take show up in the financials because you can't just reset that to market. You want to keep a certain number of your existing tenants in the bed and you can't push that all the way to market right away. But this is a great setup because you're buying in this collection of assets at about 4.6% cap rate. And then when it's all fully stabilized, you walk 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.
Andrew: Paid 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 with. We're investing in this. You're investing in this because you think it will generate an 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?
Bill: I think there's an element of kind of like what I traffic in, which tends to be small capital estate. There's some sort of investor fatigue, there's some sort of trading illiquidity. Right. This is not the most liquid. I think there's been a couple seeking out for articles recently that actually bump up the trading liquidity. And trading equity is about a million dollars, even though it's a $2 billion company where the equity should be worth a billion dollars of trading. The daily trading, the quota 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 Valuemencer Club and the stock has not worked in the past, the stock has not worked. And there's some issue there. Right. Because when the IPO, the company was really upscaled, the IPO, raised some equity, went out, bought a couple of DOs. And my family is in the New York City real estate business. And we know if you try to go out and buy some DOs in 2017, 2018. That was a really tough time to do DOs, to try to do value add DOs. None of the DOs could kind of really pass out just simply because cap rates were low. Every deal was being marketed.
There was no deal that you're paying super low cap rates. There just really weren't any good deals to have. And the IPO, they came public, they were subscale. And then in 2019, you have the New York City rent regulation laws. That kind of put a damper on it. So it's been many years. It's trading at roughly $9, the IPOs at $13. So there's been a lot of unhappy shareholders. But since then, what has happened is that they've grown into the company that they acquire, do the value add, bring on those net operating income, bring on those cash flow. And of course, the biggest event was COVID, right. Everything was supposed to work. It was like 2017. The IPO was going to do a bunch of deals.
Deals were tough. And then finally early 2020 was when they stabilized a building. 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 a little bit out of their own control dynamics 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 almost $80. And then when they stabilize through the development projects to get you into the high $80s. And I think when everything stabilized, this could trade to somewhere in that kind of nine to twelve times price to AFFO, which is really cheap for a multi-family reap.
Andrew: Perfect. Again, a couple of things we should go through. But I guess the elephant in the room right now is the COVID recovery. Right?
Bill: Yes.
Andrew: 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. A year ago, if you were getting rent renewals, it was a renter's dream. There 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 we can also talk about 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 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 a lot of those companies. So what is the environment look like going forward and how should we be thinking about kind of the near-term environment starting to flow through the financials.
Bill: Sure. So they have on their earnings cost, they've been consistently saying, okay, as of this date, as of February, if you look at the supplementals, you look at what the existing rent is at each building, right? So Tribeca house is a building that they own, I believe the number is $62 a square foot. But they're signing leases at $83 a square foot, right? That's what new leases are. You probably can't get $83. If a tenant is in there and they look into renewal because you want to raise the rent but you probably can't do that lease at $83, right? But you could probably get $75, you could push through. I think that any new lease, whether it's a renewal or new lease, gets done at least 10% above what it is currently. And that's what's really exciting at the moment right now is that you have all this trail and 12 month leases that were COVID.
I think it started to change in kind of Q3, and Q4. But a lot of those are still from... And COVID leases tend to be a little bit longer. Because people do want to lock in those COVID leases, those specials. So you got a dynamic where we're at $65 million of NUI. I think that if we're talking 12 to 24 months from now, that run rate number could be $77 to $80 million. And this doesn't even include any new developments that they have. So to me, it's a 1ft hurdle. It's a 1ft hurdle because the way to look at it is that the billion dollars of debt, the interest expenses, about $40 million, about $10 million GNA at $65 million, that gets you about $50, $60 million AFFO.
Now, if you go from $65 million to $77 to 80 million, now, all of a sudden that AFFO is $30 million. And then you bring out, you stabilize the two new development projects. There's one that's supposed to be finished at the end of this year that's going to bring probably add another 5 or $6 million of NOI. Now, all of a sudden you're in that mid-80s, kind of low to mid-80s NOI, and your fixed cost is still kind of probably like somewhere between $50, and $55 million. Now we're trading at a really low multiple to AFFO, and they'll probably raise the dividend rate.
Andrew: Perfect. I think the story is every investor loves this, right. You've got something that's highly leveraged both financially and operationally. 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 online. 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 ten times forward, free cash flow, twelve months out or something. Where else can I get that deal?
Bill: Yeah. I just want to kind of comment on the leverage.
Andrew: That was my next question. Yeah, go ahead.
Bill: And I think it's more important to think what makes Clipper unique is that these are old school Brooklyn guys. The management team, these are people who they've been in the final business for a really long time. So they don't necessarily operate in a standard [inaudible] environment. They kind of operate like how my family will run a business. And if you think about it implicitly, if you buy a 4% cap rate multifamily and you're going to do a 50% loan to value, that naturally implies that you've got to put about twelve times NOI of debt on it. So when you think about it, you're like, oh, that's a lot of leverage, right.
The EBITDA is over ten times. 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 twelve times NOI on it is actually fairly reasonable. Some of the private guys will put 75% loan to value. To go out and get 70%, 75% loan to value in the multifamily space in New York City is actually fairly normal. If anything, they're kind of more conservative. But it just doesn't gel with a traditional reap metric, which is around six times EBITDA. That's some pushback that I get on the name. Is that this thing just looks way over levered.
Andrew: And I just want to add and you can correct me your answer. 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 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 if I'm wrong, all of the debt is held at the real estate level, right? So none of it is held at the HoldCo level. So even if one building burned down in a fire and for some reason, they 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 S levered[?]. One business goes down, the whole thing goes down. In this case, there's still going to be HoldCo value. You might think about that [inaudible]?
Bill: No, that's exactly right. And that's exactly what a savvy kind of private landlord will do. Everything is an LLC. Everything is non-recourse. Everything is a silo. So the way you think about the debt is that each individual building is a silo, and there's a certain liability that's attributed to that building. And if something goes wrong, you could always kind of like what Blackstone or Brookfield would do. Blackstone famously gave back that office building on Broadway. You can just say, hey, this specific building doesn't work for me anymore. Like, you the bank, take this building back. Now, you don't want to do that too often because it's like when push comes to shut, we're here talking if somehow we get into the great financial crisis which I lived through and I witnessed a lot of failures in the real estate world, in a situation like that, you could selectively default on these mortgages.
Andrew: Look, these are $100 million-plus buildings, right? Literally, almost all of them have $100 million-plus mortgages on them. These are huge buildings like the lenders here are big boys who understand my recourses here. They understand that there is a risk that's taking that on. Let me ask you the same question to ask during the FRPH podcast.
Bill: Yeah.
Andrew: So, Clipper. Cheap stock, and great momentum through the rental environment we just talked about. But opportunity costs, right?
Bill: Yeah.
Andrew: First thing that pops in my head when you and I were talking about Clipper, I say, "Okay, that's great. Nice management team, not buying back shares, and 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 NAD, probably trades a little cheaper than this on a four[?] yield and they buy back shares pretty aggressively. Why is this the play instead of SLG?
Bill: Sure. I've looked at SLG. I've been following it. I own a little bit of office in COVID. I think structurally in the long run, COVID has been a really unique experience. This goes back to betting on things that will be relevant 20-30 years from now, right?
Andrew: Yes.
Bill: If we were talking a year ago. Even in early 2020, no one's going to live in New York City. It's a debt town. You can't give away the apartments. And now you have bidding mores over apartments. Why is that? I think it has to do with the fact that the density here, the cultural relevance. The restaurants, the museums, the art scene. There's even tech employees from San Francisco who's moving here to New York because they work anywhere now. But the funny thing is people want to be in New York. They're young, the hungry, the educated, talented. They want to be in New York, but they don't necessarily want to be in an office. And I think 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 that if you're single between the age of 22 and 45, you want to tap into the dense dating pool that's here.
There's something about New York City that keeps people coming. And I kind of joke when we say that rodents, roaches, and dreamers with suitcases are like the three things you can't get rid of in New York City. People just want to be here, but people don't necessarily. There's a lot of mixed views overdo people want to be in the office. If you look at the occupancy rates of Clipper's portfolio, it's in the high 90s. If you look at occupancy for the office and how that's going to grow when the leads come off, I don't have clarity on the terminal value of the instate. And you can make the argument.
Well, that may impact the residential side as well. But I have a lot stronger opinion that people still want to be here. You literally had a disease, 15 months ago. We don't know how well the vaccine is going to work. We don't know, 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 the financial crisis, and I've seen it on the COVID. Like every ten years, you get an opportunity to buy residential in New York City on the cheap. And every time everyone's like, this is it, it's over. Like no one wants to be in New York City anymore but the city keeps proving people wrong.
Andrew: You and I both live in New York City. So maybe we're expressing it, it buys you. I definitely agree with you, though. We're talking May the fourth be with you. We're talking on May 4. 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 jurisdiction. Right?
Bill: Yeah.
Andrew: 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, basically our demographics against New York City. The subway sucks, the taxes suck, and Florida is looking pretty nice during the dead of winter. So what do you think about that demographic pushback?
Bill: And we could get into the nitty-gritty a little bit. If you look at New York City, roughly 8 billion population. And you start looking into the narrative feels like, all right, everyone's moving to Texas. Everyone is moving to Miami because it's low taxes. The reality is that not everyone is a married person. With two kids and they've established their careers already and they build up a network and they just kind of stay in touch with people telephonically. Not everyone... There's still a large amount of the population that are single, look into the date, look into advanced their careers.
They're physically looking to... My take is someone who's 22 to 45, is one who makes a lot less income so the tax consideration is a lot less. And also the way that they weigh... My dating life, do I stress my dating life over how much I pay taxes? And from my experience being someone, being a landlord in New York City with my family for 20 years, I could tell you without a doubt that people value the dating life, the networking, the meat, going to the cool places, the restaurants, the art events, the random kind of like Brooklyn meetups and whatnot.
I think that's going to have a lot more appeal. And there will be a time, especially for someone like me. I moved away from the very center part of New York City and Brooklyn, but I'm kind of aged out. I think 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 the city right now." And I think if anything, that probably made me even more bullish on the city.
Andrew: Yeah, no, look, I agree. And I would just say as somebody who is not quite as young and certainly not single anymore, my wife and I said we got our rent renewal. We talked about moving elsewhere. And when we put it to show, we're like, well, at this point, I guess this is personal, 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 once you put roots down somewhere, it's tough to move. And there's nowhere for 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 [inaudible]. [crosstalk]. Go ahead.
Bill: Go into that a little bit. I think I kind of want to do a breakdown of New York City as well. Like the 8 million population. So like Brooklyn, Pete David, and his crew, that's a whole different segment. That's like native. That's not going to change. They're going to stay.
Andrew: And they have apartments in Brooklyn and mainly the FiDi area in Manhattan. Those are the [inaudible].
Bill: In the Tribeca area.
Andrew: And they've got one in Upper East, now that I think about it as well.
Bill: Central Park, West, Upper East Side.
Andrew: So basically all over Manhattan.
Bill: Yeah, over Manhattan and Brooklyn. It's really Manhattan and Brooklyn. So I think something like 3 million people there's like a million household, if I remember correctly, a million households are in some sort of rent-regulated rent control. And if you are already in a rent-regulated apartment, you don't move because the moment that you get that, that's a quasi-form of ownership. So let's start with the 8 million population. There's a certain population, Staten Island, that's probably I don't even know the population. There may be a half-million that's just like that's in its own ecosystem that doesn't like factor into the Manhattan and Brooklyn. And then you got something like 2 to 3 million that are in that rent control rent-regulated. Like a million units, if I remember correctly. That they don't move. They're not like the people because we work in finance. We think we could go anywhere. We have the financial means to go anywhere.
Andrew: You say we have the financial means. But it's been a rough couple of months, we don't have a financial anymore, Bill.
Bill: But you get what I'm saying. I think people in our row have the most flexibility, the most financial means to be able to go settle anywhere. You even go to Puerto Rico in a [inaudible] zero tax haven. And then you go out to Queens. Going to neighbors like you go to Corona, that's predominantly Mexican and Ecuadorian. You go to Jackson Heights, which is kind of like there's a lot of Indian, there's all the Polys. And there's a lot of immigrants that regardless of what they're not thinking of moving to Texas because this is home, this is roots. 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 may not even speak English.
And then you kind of go up to the Bronx and there's a whole different demographic there. But when you really look at this mobile, highly educated population, there's maybe only 2 or 3 million people out of that 8 million. So the question becomes, are there in any given year, are there 2 to 3 million of the most single, highly educated from some of the top schools. Do they want to live in New York City? 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. I would say yes, unequivocally, that population still wants to rent and live in New York City. That's a true mobile market-rate tenant. And I think that 1% of the US population wants to be here.
Andrew: It's so silly. But the depth 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 even in the 1770s, we've got 250 years of an 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 I was like, that just doesn't go away. It's the great thing about the city. You get that great network effect. And I believe you said an FRPH thing. The great thing about FRPH properties and this very much applies to Clipper's property as well. There's literally a mode around them. It's an island and there's literally a mode around it.
Bill: Well, let's talk about the other thing is that let's talk about rent control. Let's talk about the geography. Let's talk about the NIMBYism.
Andrew: 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, or investing in New York City real estate, the first they say is politics are awful. Everything is going to be rent-controlled in five years and you just can't buy anything because everything's going to be rent-controlled.
Bill: Okay. This is someone coming from my family. We built a little bit of NESA[?] on the private real estate side in New York City. I've been doing this since 2002. Rent control is a hot-button issue, but what it does is that the combination of having a boat, and having this geography. Having rent control and forcing any new development to kind of have 30% rent-stabilized apartments. What it does is it increases the cost of bringing on new supply. I mean, it already takes about four years to bring on new supply, and if you look at the stats something like only 20 units every year gets permitted per 1000.
There's more than 20 basis points in population increase. There's more than that kind of increase in the mail. People want to live in New York City, but only 20 basis points for 1000 people actually get permitted every single year. What actually gets built is probably less. And what we're 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 difficult to bring on new supply. And the reason why we know it is because my family actually have been doing a couple of development projects and my younger brother, basically calls me up and it's therapy for him.
He's like the government wants us to do this. They're not happy with this. And it takes way longer to bring on supply. And I would make the argument that rent regulation makes it harder to bring on new supply because now you get 30% of your unit needs to be rent-regulated. So you can only build the construction cost has gone up, and labor has gotten more expensive. It's more difficult because now, you have fewer parcels of land that are kind of shovel raids that are easy to build. But now you have to set aside 30% of it to the rent-regulated units.
So if you own something that's 100% free market, in my opinion, that actually becomes worth more down the road. 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 constraint the supply of the market. And if you talk to people, 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 3% to 5% in rent increases every single year.
Andrew: So in the same way we underbuilt homes for a decade and now we're kind of experiencing it with the home price. I mean, in New York City, the regulations are 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 rental control or rent control for these apartments that's just not on the cards for this?
Bill: No, I don't think they... So the 2019 rent regulation. There were a lot of negative regulations that were passed and surprised a lot of industry people. And if anything, there's a court case trying to reveal that really they're arguing that that was essentially taking off a property. Without compensation. So if anything, that's potential. That's a free option, right. If that gets overturned.
Andrew: What would happen if that got overturned for Clipper?
Bill: 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 foot, there's 1.7 million that are kind of like, if you look it up, you're like, "Oh, Geez, I don't want to own that. That's rent-regulated. It's in Brooklyn and it's not a pretty sight." If you look at the reviews. I'll just go into it. Let's open kimoro[?]. The tenants complain about rodents and all these things.
And I'll just come out and say the reality is that when you charge people $25 a square foot, which is $3,000 for a 1000 square foot apartment in New York City, that is one of the most affordable products out there in the market. If it's rent-regulated, you're not going to find a happy tenant review, okay? This is not the Ritz Carlton. This is just how life is. And in general, I think most tenant reviews you're going to find, they tend to be negative, right. No one says I love 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 read the reviews just awful.
You're like, it's different when you go to a market like Vegas, you go to a market like DC, you go to the market where they built these brand new ties multifamily. And it's almost like living in a hotel. You may be really happy, but in New York City, I think years ago on Craigslist, I saw an ad for a lady who said she's got a really large bathroom and you could rent her bathroom as a place to sleep in, but she needs to use it to shower and poop from time to time. And I'm just like, only in New York City would you put an ad on Craigslist renting out your unusually large bathroom.
Andrew: It reminds me of 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, because who's ever going to say anything good about a cable company, right? But if you really thought about it, like the one moment your Internet goes out, we had a little bit of technical difficulties. You hate your cable company, but 99.9% of the time they're providing you with literally the most important service in your life. You're getting it for $60 a month, and it lets you do everything in your life, unload entertainment, everything. You just don't think about that type of thing. I know it's not apples to apples with the rent. But I definitely understand that.
Bill: There is a ton of similarities between cable and New York City multi-family housing. If you think about it, someone joked that if you look at the [inaudible] hierarchy. Cable is actually the very bottom layer.
Andrew: There's cable and rent. They're absolute necessities.
Bill: And if you think about what it costs to replicate. What is the replacement value? Think about the overbuilding. Trying to dig out trenches in New York City and wire buildings. It is so difficult. There's so many dynamics that are similar between cable and residential in New York City. This is the reason why if you break down the component of why do people get wealthy owning multifamily in New York City? I have a lot of relatives who were in a Chinese hangout business 20 years ago, and they do not deserve to be super-wealthy. Like, okay, I'll take that back. They deserve it on paper. They should not be your landlord. They should not be Andrew's landlord. Yet. They are. And the reason is because I think 20 years ago they bought a piece of property, maybe they paid a quarter-million dollars for like a two-family out in Queens.
And what happens is that 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 somewhere in Texas where you could just go further out. Any parcel that's been built has been built for the most part. The structure is to last hundreds of years. There's tons of brownstones in New York City that are hundreds of years old. So the structure, there's a tremendous amount of value in that. And then really the entitlement and the zoning. The hardest thing to get done in New York City is to go down to the billing department, submit your plans, and they're like, oh, this is a little bit off or like your neighbors complaining. I've seen it. It takes four to five years to bring supply to the market, and it's chronically on the supply. They currently don't build enough to service the demand out there.
So I can't say that enough. This is the reason why I have some family members from they bought 10, 15, 20 years ago, and they don't speak any English, but they wind up becoming the landlord to the guys who work at a [inaudible], the landlord, the Ivy League investment backer. They're their landlord, but they don't speak any English. They don't say fish and market. They don't say the 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 got 15-year leases in there. Like how Houston. 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 long run. Because the zoning is very lax. They keep building more. New York city is a city where the money is really made on sitting around and watching paint dry, it's literally just you buy something and you just sit on it. 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 4% rent increases. What's unique about this specific situation is we're probably going to go for two years where they're going to get 10% rent increases for three years in a row.
Andrew: As you were saying that, I was just thinking like New York city is the ultimate compounder bro[?] market. You just buy it and you hold it forever and you let the demographics and the moat do the work for you.
Bill: Yes.
Andrew: Real quick, you mentioned inflation a few minutes ago, and I don't think we need to talk long about it. But I don't think I'd be crazy to say Clipper is a huge beneficiary of inflation. 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 ten 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 building is in place. It's not like there's crazy amounts of upkeep. So big inflation beneficiary. Am I thinking about that correctly?
Bill: Yeah. I think in an inflationary environment, you definitely want to own hard assets. You definitely want to own hard assets. And if you think about fixed costs of these long times, it's really the mortgage payment. There is a maintenance Capex component to all this, but your replacement cost goes up. A good example is when I bought my first rental apartment in 2008, I paid $250 a square foot for it. Just to kind of replace that. So someone sold it to me, and made a profit on it. They might have built it for 180 square foot. And he made $70, $80 per square foot. Selling it to me. Today to replace that. Like just to build the show. Like not even the cost of land. It's probably $300 just to build the structure. And then you got to pay like $150, $200 for the land. And then to kind of go through the entire process and that building is doubled.
Andrew: I was about to... You benefit from a different type of inflation, too. You probably benefit from regulatory and bureaucracy inflation, too. It was a lot easier to build in 1995, in 2005, and it was probably a lot easier to build in 2005 than it is today and probably doesn't get any better ten years from now.
Bill: No. Yeah, exactly. If anything, the sites get used up. If you look at an overhead view of New York City. There's just no big empty, parcel of land. The last time that we have something like that was when they built Hudson Yards. That was a multi-decade, kind of like lobbying there for lots of political back and forth. That was probably the last big parcel that got built in New York City. Other than that, what you're really doing is going around the neighborhood. There's an old warehouse. You pay $40 million for a warehouse and then you knock it down and they built 200, 300 units.
Andrew: Let me shift gears a little bit. We did metrics. We talked hey, probably about 24 times trailing NOI, FFL, or however you want to break it down. This is real estate. Everybody wants a NAB number. How would you break out the NAB for Clipper right now?
Bill: I think the NAB is probably somewhere in the high teens, close to 20.
Andrew: As we're talking. It's 9 NAB, high teens to 20. So it's treating for about half of NAB, obviously a levered number and everything. But that's kind of how you think of it[?].
Bill: I'm comfortable saying that because it's sub-scale, it's illiquid. The management team isn't quite savvy. Put a 15%, 20% discount on that still gets you to a $16 what I think it should trade at. And it's raised at about $9 today. Like if you got a $16 figure on it, that's over 70% upside. While you get a 4% dividend to wait.
Andrew: Let's talk management team. That's a great transition. So I want to talk about a couple of things. Management team first. Look, I think the management team, I haven't talked to them. But you look at the background, it's great. They've got a great background. But the two things that jumped out to me, just looking through the ten K, looking through the proxy were I guess three things. A, the CEO's son is the COO and probably set to take over for the CEO, the CO72. And New York real estate guys hang on as long as they can, but eventually, there'll be a transition.
So number one, 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 I started seeing 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 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?
Bill: We've been in Bay for two years and we talked to them at Navery years before that. And I've done some back-channel checks. What we get is people say, okay, if you read ten reviews, they don't really like that. But I was able to talk to a couple of shareholders who have been the best for many years with them. And the feedback is, look, they're reasonable people. They just never try to take advantage of me. And someone mentioned, is there a take on the risk? Let's think through it. In early 2020, their equity traded below $6. So they own 60% of the shares and they just did a cash-out refinance. They had $100 million of cash on the balance sheet. If they wanted to take the company under, that was the time to do it because they just did a big cash-out refinance. Like literally was probably $100 million. That was exactly what the number would have been for them to just take the entire company private, right?
Andrew: Yeah.
Bill: What they winded up doing was that around Thanksgiving, in 2020, they did a $10 million share buyback. So your question is why aren't they buying back shares? They bought back $10 million of shares at $5.07. Stock is at $9 today.
Andrew: It's pretty nice. Not that it's you, but you save the dividend in the meantime, too. So your total return on that buyback is actually higher.
Bill: Yeah. This is where I have not found anything that we've been shareholders for two years. I have not found any evidence of them doing anything that upsets me that I think are harmful to the minority. And there was a golden moment to take the whole thing private because they have the cash. That was like the perfect moment to do it. And I think if it was 2020 or in a small illiquid, you might actually walk and be like, hey, you give me the liquidity to get out, pay me a 20% premium. Let me just get out. So that didn't happen. But I would love for anyone who's listening to this. If they know more than I do, I'd love to hear it. Please reach out to me.
Andrew: I say that all the time. I put a lot of stuff out on the Internet. If you disagree with me and you're thoughtful. I get all sorts of trolls. 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." That's part of the reason I put stuff out there. So I'm with you. Let me ask you another question. Look, we mentioned at the front of the show this trades for about four and a half times the cap rate on traily[?] numbers. If you run it forward, let's say the NOI goes from $65 to $90 million. That'd be about a 6% cap rate. What is the cap rate for multifamily in New York right now?
Bill: For the really trophy stuff, it was like a three-handle. Like, you're probably looking at low force. And there's also a component of like dollar per square foot, right?
Andrew: Yes.
Bill: If you look at going, going back to the map that I was laying out. This is 3.2 million square foot. Like, if you look at the Tribeca house and Clover house, if you want to buy that, that's $1,500 a square foot. Now, not the entire portfolio is like that. But I think what it trades at on a dollar per square foot basis today, it's about 420. Now, the 1.7 million square foot that's rent-stabilized out in flat Bush. That's maybe like $3,400 a square foot. But all the other stuff probably averages about close to $1,000 a square foot. So when you blend it all on a dollar per square foot, on a cap rate basis. Like a gun to my head, I would probably say that a four and a half percent cap rate somewhere in the low to meet Ford is probably the right cap rate.
If you want to say okay because they own some office, they own this rent-regulated. The amount of rent-regulated is that it's a very large square footage but it's like the 80, 20 roofs, right? It's a very large square footage but it's not a lot of the value. Another way of looking at it is if you take the two best buildings, which is Tribeca House and Clover House, right? If you back out the equity and you add the cash on the balance sheet, like if you take Clover house, Tribeca house and the cash they have on the balance sheet, that's your market cap, you kind of get and everything else for free, right? That's another way of looking at it.
Andrew: Great. I was going to ask a question along those lines. That's perfect. Let me ask you. They've got two development properties if I'm remembering correctly. 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 at 953 Dean Street. Which I don't know where in Brooklyn that is.
Bill: That's right next to 1010 Pacific.
Andrew: To where? So they're basically developing that on [crosstalk].
Bill: They're like literally like one street over, and they're almost like touching each other.
Andrew: So 1010 Pacific, they're going to put like $85 to $90 million in Dean Street, I think about $50 million. That's $140 million. We just said this is a 400 million market cap company. So this is a big investment. So how are you looking at those developments and the value creation there?
Bill: So I've been out there, as with all my real estate, I put boots on every single one of these buildings. All right. I've been inside, I've looked at their apartments. I told the dorm man I was looking to rent. I've seen all these assets. And 1010 pacific is in a 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 in real estate development. You want to see where the trends are going and you want to kind of be a little bit on the frontier. And after spending 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 a cool Brooklyn thrift store, there's some warehouses which are all getting knocked down to be like, to develop into multi-family. And you could just kind of see that it's all moving that way. It's all moving towards that way. Like, I think Fifth Avenue or Fourth Avenue. Fourth Avenue is where my brother-in-law lives. Fifth Avenue, there's a ton of restaurants, and then it's hard to describe without a map. But I've been to the neighborhood. It's a fun, vibrant area where a lot of young people want to live in Brooklyn.
Andrew: I think if I'm just doing the math in my head right. Let's say they're investing 150,000,000 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 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. If it ends up being a five and a half instead of four and a half, it's only 40 million. That's still a lot of equity value creation for the stock here.
Bill: Yeah, well, that's the thing is that you're not paying for any of that. You're paying for the equity value in Tribeca House, Clover, and the cash flow balance sheet. You're not paying for the right regulated stuff. You're not paying for the office building. You're not paying for the Central Park building. It's actually right near the Central Park Croquet Court, like where I used to play Croquet, not paying for the Upper East Side. You're just getting a ton of free optionality. And I like the development project because what it does is that one of the things that people complain to me about is, well, no one's going to assign any value to some construction in progress or land parcel.
Because it doesn't throw up any cash. People want to be able to run a screen and say this is cheap because it trades at ten times the price of AFFO. Well, this is cheap because it's a 6% ROI and that's too cheap or multifamily. And I think when those projects get developed and get stabilized now it's a bigger company. It's got more scale, it looks more real to people and people could just slap a multiple on it. That's my strategy. My strategy is I own them usually two, three years before the rest of the market figures out that, hey, this is really cheap, but the market needed to see it when these assets get leased up and stabilized.
Andrew: I think I said it with FRPH. But the great thing about FRPH was, it was one of those businesses, it was one of those stocks. It was just impossible to kill. No matter how we broke it down because they had so many different sources of value and the debt was structured properly, it doesn't mean you're going to make huge amounts of Alpha, but you weren't going to take a zero on it. And six months ago, you and I were talking before the podcast, nobody wanted to hear about the safe assets that were 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 after we've had Peloton down 90%, we've got Zillow down. After all these things have blown up, you kind of reassess and say, oh, maybe that thing where maybe the return is 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. like all the debt is non-recourse. There's cash at the Holdco. So zero is literally off the cards unless management went and did something completely crazy and lit money on fire. Like you literally can't do it because you can't go bankrupt.
Bill: Let me walk through that. Because I do the financial crisis, these are lessons that I learned. So there's like jitters if you look at the REITs, the REITs kind of sold off a little bit this week. And I guess they reversed today. The SBA Rowley[?], 3%. From the moment I started talking [crosstalk]. You know, there's a trend of rates going up. And if any sort of real estate failure. And I've seen a lot of real estate failures. It's usually a function of you got debt coming due during a time when it's very inopportune. If you look at General growth. Like, why did General Growth go bankrupt?
Andrew: 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 debts came due during the financial crisis.
Bill: Exactly. They did that deal. I think it was a $5 billion unsecured that came to you. And the capital markets was not open and they had to file for technical bankruptcy. How does this thesis get killed? And let's look at that maturity. They have a $20 million construction loan that are on 1010 Pacific. I think that's due in 2027. And then the next one is 2028, which is Tribeca House. So really like the really big chunk Tribeca House, I think has over $300 million of mortgage on it. So really the next big event where you really need to worry is literally like six years away.
Andrew: Even if they can't repay it, it's not recourse. So, yeah, you lose the property, but you don't destroy the company.
Bill: Exactly. That's the key. Like everything comes after 2028. From an equity holder's perspective, you get over 4%. So between now and then, six years, getting 24% of capital back isn't a lie. You're not getting all your money back, but you're getting a good chunk of your equity check back. And they should increase the equity between now and in 2028. So to physically break this company, you're looking six years out and you really need that. But they need to do something that's very dramatically different than the playbook that they have.
And then going back to. 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 in dividends. This is what I kind of noticed about the market is that people say, oh, is that governance, it's like if they did anything to kind of ruin the situation for themselves, they're literally taking $10 million. They're paying $10 million of debit checks away from themselves. But sometimes whatever comp package that you put together, it's like half the management team owns 60%, and that kind of takes care of a lot of problems.
Andrew: It's funny because I was talking for a completely different subject. But Elon Musk, he's going to buy Twitter. 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? When you were saying it's a $10 million check, I don't know their finances. But I was like, I don't know their finances. They're new York real estate 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 somebody asked if 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?
Bill: So my understanding was that in their Tribeca house. There were some sort of tax, property tax-related. Let me see. Hold on a second. And that was someone tenant sue saying they charge more rent than they should off. Because the Tribeca house has some sort of favorable tax treatment. And that's behind them. And I've asked them before, hey, how big is this liability? And they're like, maybe it's like a couple of million dollars, but it was not 1020. It was not $50 million. Relative to the size of the enterprise. It's not really material. But that's behind them now.
Andrew: It's fine. I just hear somebody call it elevated litigation expense. And your mind can go all sorts.
Bill: No, this is not like a bow in liability on the max. That's a different kind of.
Andrew: 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 a little bit harder.
Bill: Let me see. I think the best thing I would suggest to people. If you want to follow the pieces in real-time. One thing that you could do is you go to Street Easy. I love to do the smoothing. You go to Street Easy, type in Tribeca House, and type in Clover House. And you could look at the units that they're showing you, and you could literally see what the asking breadth is. They'll tell you what the square footage will tell you what the asking breadth is. And any investor wants to own this thing[?], you could figure out how much the existing rents are below market. And you can click on some of the units and it will literally show you what rent was in 2019, how low they got in 2020, in COVID, and what they are right now. So that's like a great way for people to independently verify whether I'm guessing or not.
Andrew: I'm going to put you on the spot, Bill. Okay. One-bedroom apartment, Tribeca House. How much is it going for right now?
Bill: What's the square footage? Because that matters a lot.
Andrew: I don't know how big my apartment is. I was asking for a friend [crosstalk].
Bill: Five grand. It gun in my head[?]. Probably five grand for one bedroom.
Andrew: Not staying in my current apartment. That's too rich for my blood, that's not a podcaster.
Bill: It was $83. I think I think they were saying it's $83 a square foot. So if you have like 600. That's right around that high $4,000. And depending on if you got a one-bedroom and a penthouse, it could be more.
Andrew: Do you know what the best IR campaign they could do? Shareholder rent discounts for shareholders. That's the best IR campaign they can do.
Bill: They should just host an investor day at the Tribeca House and people could just, like, literally just show people the Tribeca House and Clover house. You could take the ferry across to Dumbo. It's like people won't understand what they own. The other thing I just want to add is people should follow Jonathan Miller on Twitter. He publishes on a monthly basis the best data on new York city rent and condos.
And you get commentary on how tight the market is, what the trends are, and also used to be easy. Look at the units we'll get and then they publish supplemental so you could see what the existing rents are and you can compare like you could easily see 20%, 30% delta between what the current market is and what the tenants are currently paying and I think a good way to understand this is some multi-family was like the hottest trade of 2021, and I think that COVID, essentially what it did is that new York city recover about a year later. I think potentially this 2022 is the sunbelt multi-family trade but it got delayed another year.
Andrew: Cool. Well, this was great, Bill. The weather's getting nice. I know Seaport. I know that's another area of interest for you. I think you and I 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.
Bill: Yeah, yeah. Thank you, Andrew. I appreciate it.
Andrew: Perfect.
[END]
Question, it is "NAB" or NAV?: "Andrew: As we're talking. It's 9 NAB, high teens to 20. So it's treating for about half of NAB, obviously a levered number and everything. But that's kind of how you think of it[?]."