Clipper Realty Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Clipper Realty owns and operates residential and commercial properties in Manhattan and Brooklyn and is taxed as a REIT. Financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $30.7 | $28.4 | $61.6 | $56.1 |
| Income from operations | $8.6 | $8.8 | $17.6 | $17.0 |
| Net loss | $(5.5) | $(1.2) | $(6.3) | $(1.3) |
| Net loss attributable to common stockholders | $(2.2) | $(0.5) | $(2.5) | $(0.5) |
| Basic and diluted loss per share | $(0.13) | $(0.03) | $(0.15) | $(0.04) |
- Residential rental revenue increased 12.0% in Q2 and 13.1% for the first half; commercial rental revenue declined 3.4% in Q2 and was approximately flat for the half. Total revenue rose 8.0% and 9.8%, respectively.
- Q2 operating margin was approximately 28.0%, versus 31.0% a year earlier; first-half operating margin was 28.6%, versus 30.2%. Higher property taxes and insurance, depreciation, and interest costs weighed on results.
- Six-month operating cash flow was $5.1, down from $10.4. Investing cash outflow was $13.5, primarily capital spending; financing cash inflow was $67.8, chiefly from the Flatbush Gardens refinancing. Cash and restricted cash together increased to $116.3; unrestricted cash was $88.3 and restricted cash was $28.0 at June 30.
- Notes payable were $1,091.1 gross, or $1,079.7 net of unamortized costs, compared with $1,009.4 gross at year-end 2019. Total assets were $1,230.4 and total equity was $127.6. The estimated fair value of debt was $1,219.5.
- On May 8, the Company refinanced Flatbush Gardens’ $246.0 mortgage with a $329.0, 12-year loan at 3.125% through May 2027; interest-only payments continue through then. The refinancing generated a $4.2 debt modification/extinguishment loss. The 1010 Pacific loan, with $19.9 outstanding, matures December 24, 2020, with a one-year extension option.
Changes, outlook, and risks
- Revenue growth reflected higher residential rents and the 2019 renovation and lease-up at 10 West 65th Street; Clover House also contributed. Excluding Clover House, Q2 revenue rose 1.5%, but operating income fell 7.8%. For the first half, excluding Clover House, revenue rose 3.5% while operating income declined 1.4%.
- Management reported 96% leased occupancy at June 30 and said Q2 rent collection was 94% of the Q1 collection rate. Properties remained open and operating. Management expects the portfolio and New York City market to remain desirable and operations to normalize over time, but provided no specific financial guidance.
- Management believes available cash and operating cash flow, together with financing sources, should cover operations and obligations for at least the next 12 months; it cautions that future refinancing and capital-market access are not assured. The Company expects operating cash flow alone will not meet all long-term needs.
- COVID-19 creates risk to tenant payment, occupancy, rents, and leasing; some commercial tenants closed temporarily or requested deferrals, and rent terms could be restructured on less favorable terms. Bad debt expense increased by $0.9 in the first half. The portfolio is concentrated in New York City, and City of New York commercial leases represented about 17% of revenue in 2020.
- Rent-stabilization litigation remains unresolved. A New York Court of Appeals ruling favored tenants claiming overcharges at two Manhattan properties; the amount and timing of any payments remain undetermined, and no liability was recorded. A separate similar tenant action is also pending. Management cannot predict the outcome.
- Other unusual items included a $0.1 gain from insurance proceeds for fire damage at two Flatbush Gardens units. First-half dividends and distributions totaled $8.6.
Key investor verification points
- Track rent collections, tenant arrears and bad-debt provisions as pandemic effects evolve; confirm whether occupancy and leasing remain near reported levels.
- Assess potential exposure and procedural developments in the rent-stabilization cases, noting that no liability has been recorded.
- Verify extension or refinancing of the 1010 Pacific loan before its December 2020 maturity, and review the terms and future rate exposure of the Flatbush Gardens debt.
- Monitor liquidity after capital spending and distributions, and consider the high debt balance and reliance on continued access to financing.
- Review the performance of the commercial tenant base, including the City of New York leases, and the effect of New York City market concentration.