Clipper Realty Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. The company owns and operates residential and commercial properties in Manhattan and Brooklyn and is taxed as a REIT. Financial amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $30.7 | $31.2 | $61.3 | $62.5 |
| Income from operations | $7.0 | $8.9 | $13.1 | $18.3 |
| Net loss | $(3.2) | $(5.2) | $(10.4) | $(5.6) |
| Net loss attributable to common stockholders | $(1.2) | $(2.1) | $(3.9) | $(2.2) |
| Basic and diluted loss per share | $(0.09) | $(0.12) | $(0.27) | $(0.13) |
| Operating margin | 22.8% | 28.7% | 21.4% | 29.4% |
Q2 revenue declined 1.6%: residential rental income fell 8.9% to $21.6 million, while commercial rental income rose 21.6% to $9.1 million. For the first half, revenue declined 1.8%. Operating expenses rose 6.5% in Q2 and 9.3% for the first half, contributing to lower operating income. Q2 net loss improved year over year, in part because the prior-year quarter included a $4.2 million debt-extinguishment loss. First-half net loss worsened despite a smaller debt-extinguishment loss in 2021.
- Cash flow: First-half operating cash flow was $9.0 million, versus $5.1 million; investing cash outflow was $12.8 million, versus $13.5 million; financing cash flow was $13.0 million, versus $67.8 million. Capital additions were $11.9 million. Cash and cash equivalents plus restricted cash ended at $98.3 million.
- Liquidity and debt: At June 30, cash and equivalents were $85.0 million and restricted cash was $13.3 million. Debt principal was $1,114.9 million ($1,104.5 million net of unamortized issuance costs), compared with $1,089.7 million gross at year-end 2020. Total equity was $86.6 million. Management believed available cash and operating cash flow, together with financing access, would meet obligations for at least the next 12 months, but gave no assurance of favorable future refinancing.
- Cash distributions: $8.4 million paid in the first half, compared with $8.6 million a year earlier.
- Supplemental REIT measures: Q2 FFO was $3.1 million versus $0.7 million; AFFO was $4.1 million versus $5.5 million; NOI was $16.1 million versus $17.3 million. First-half FFO was $2.2 million versus $5.9 million; AFFO was $7.1 million versus $11.0 million; NOI was $30.9 million versus $34.4 million. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Material changes and operating developments
- Residential rent pressure, attributed primarily to COVID-19, reduced base rent per square foot at Tribeca House from $70.43 to $60.14 and at Clover House from $72.05 to $60.90 year over year. Tribeca House was 97% leased at quarter-end.
- Commercial rental growth reflected a new lease at 250 Livingston Street that commenced in August 2020, partly offset by lease terminations at Tribeca House. New York City government leases represented 25% of revenue in 2021, up from 19% in 2020.
- Management reported a 96% Q2 rent-collection rate and 94% leased occupancy across the portfolio at June 30. Properties remained open and operational.
- On February 18, 2021, the company refinanced 141 Livingston Street with a $100 million, 10-year loan at 3.21%, replacing a loan with $74.2 million outstanding. The refinancing generated a $3.0 million first-half debt-extinguishment loss and increased interest expense. Gross debt increased during the half.
Outlook, risks, contingencies and unusual items
- Management expects New York City properties to remain desirable and operations to normalize over time, but provided no quantified earnings or revenue guidance. It cautioned that COVID-19, tenant payment capacity, occupancy, rents, and market conditions remain uncertain.
- Commercial tenants had $0.8 million of rent deferrals outstanding at June 30. Further lease restructuring, lower occupancy, or difficulty finding replacement tenants could affect results.
- The $20.9 million 1010 Pacific Street loan, bearing LIBOR plus 3.60%, was extended in June from June 24 to August 30, 2021. Management reported compliance with loan covenants and no defaults. A 1 percentage-point rate change on variable-rate debt was estimated to affect annual net income by about $0.2 million.
- Rent-stabilization litigation concerning Tribeca House remains unresolved. The company recorded no liability for potential settlements; the filing says the amount and timing cannot be predicted. A court ruling set a four-year rent-overcharge calculation period, which the company expects to limit exposure, but attorneys’ fees were affirmed and additional tenant claims have been filed.
- The filing references a recent restatement of the first three quarters of 2020 and a material weakness involving accounting for straight-line rent after reassessment of a commercial lease term. Remediation procedures were implemented, but management was still testing them; the weakness was not yet considered remediated. Management nevertheless concluded disclosure controls were effective at a reasonable-assurance level.
- Portfolio concentration in Manhattan and Brooklyn, changes to rent regulation, property expenses, refinancing access, and COVID-19 effects are material risks. No material property impairment was recorded as of June 30.
Key facts for investors to verify
- Progress on 1010 Pacific Street loan repayment or refinancing following the August 30, 2021 maturity extension.
- Subsequent rent collections, occupancy, and residential rental-rate trends, especially at Tribeca House and Clover House.
- Resolution and potential financial exposure from the Tribeca House rent-stabilization cases and related tenant claims.
- Whether internal-control remediation was successfully tested and the material weakness formally resolved.
- Debt maturities, covenant headroom, refinancing terms, and the company’s capacity to fund capital needs and distributions.