Clipper Realty Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Amounts below are in millions unless stated otherwise. Clipper Realty is a New York City-focused REIT with residential and commercial properties in Manhattan and Brooklyn. The company reported a 40.4% interest in cash distributions, profits and losses of the property-owning LLCs.
Financial results and position
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Total revenue | $27.652 | $26.868 | Up 2.9% |
| Residential rental income | $20.772 | $19.679 | Up 5.6% |
| Commercial rental income | $6.880 | $7.189 | Down 4.3% |
| Income from operations | $8.141 | $6.530 | Up 24.7%; operating margin approximately 29.4%, versus 24.3% |
| Net loss | ($0.133) | ($8.994) | Common-stockholder loss was $0.054 million, or $0.01 per share, versus $3.630 million, or $0.21 per share |
| Operating cash flow | $11.950 | $10.812 | Up $1.138 million |
| Capital spending / investing cash flow | $10.208 used | $10.112 used | Primarily capital projects |
At March 31, cash and cash equivalents were $29.379 million and restricted cash was $13.255 million. Total assets were $1,097.154 million; total liabilities were $939.907 million and total equity was $157.247 million. Gross mortgage and other debt was $924.901 million, or $913.683 million net of unamortized issuance costs. Financing activities used $4.972 million, including $4.261 million of distributions and $0.711 million of scheduled debt payments. Cash and restricted cash combined declined $3.230 million during the quarter.
Management reported FFO of $4.416 million, AFFO of $5.252 million, Adjusted EBITDA of $13.175 million and NOI of $14.687 million. These are non-GAAP measures and should not be treated as substitutes for GAAP earnings or cash flows.
Changes and operating drivers
- Residential revenue growth reflected higher rents and occupancy, particularly at Flatbush Gardens and Tribeca House. At March 31, Flatbush Gardens was 99.5% leased at $24.04 base rent per square foot; Tribeca House was 99.0% leased at $69.14 per square foot.
- Commercial revenue fell mainly because of a nonrecurring, noncash write-off of straight-line rent related to a tenant lease amendment.
- Operating expenses declined 4.1% overall. Lower general and administrative expense—primarily lower executive cash bonuses, LTIP amortization and other fees—more than offset higher property operating costs, real estate taxes and insurance.
- Net loss improved substantially from Q1 2018, which included a $6.981 million loss on extinguishment of debt associated with the Flatbush Gardens and Tribeca House refinancings. Q1 2019 had no such charge.
- Residential and commercial operating income was $4.863 million and $3.278 million, respectively; the prior-year amounts were $2.850 million and $3.680 million.
Debt, outlook, risks and notable items
- Debt includes $139.7 million of variable-rate borrowings. Management estimated that a 1 percentage-point interest-rate increase would reduce annual net income by approximately $1.4 million. The 250 Livingston Street loan matures in December 2020; the 107 Columbia Heights loans mature in May 2020, with extension options described in the filing. Principal payments due in 2020 total $144.919 million.
- The company announced a proposed 10-year renewal of the City of New York leases at 250 Livingston Street, beginning after the existing leases expire in August 2020. It covers 342,496 remeasured square feet at initial blended rent of $43.62 per square foot, includes termination options at the end of years five and seven, and remains subject to City approval and countersignature. The agreement contemplates alterations and improvements.
- Touro College exercised its option to terminate leases for 40 units at 10 West 65th Street, effective January 31, 2019. The company is repositioning the apartments and expects to lease them at market rates.
- Management said cash flows from operations, together with additional mortgage debt, should be sufficient to operate, meet contractual obligations and make distributions for at least the next 12 months. It does not expect operating cash flow alone to meet all long-term needs and expects to rely on debt, equity or other sources; refinancing access and terms are not assured.
- Key risks include New York City market and regulatory conditions, rent stabilization matters, tenant demand and operating costs, property damage, development and redevelopment execution, refinancing and interest-rate exposure, and reliance on a single government tenant for a material portion of commercial rent. City leases represented approximately 19% of total revenue in both periods.
- A rent-stabilization case involving 41 present or former tenants at 50 Murray Street and 53 Park Place remains subject to further appeal; the company said potential liability cannot be estimated specifically. The filing also notes an ADA claim at 141 Livingston Street and other proceedings; management does not expect these matters to have a material adverse effect.
- No formal earnings or operating guidance was provided. The company reported no material change in risk factors from its 2018 Form 10-K, no material off-balance-sheet arrangements, and effective disclosure controls as of quarter-end.
Most important facts for investors to verify
- Progress and final terms of the City lease renewal, including City approval, termination options and required improvements.
- Plans and leasing results for the 40 vacated 10 West 65th Street apartments.
- 2020 debt maturities, extension-option requirements and the availability and cost of refinancing.
- Exposure to variable interest rates and the performance of the interest-rate caps.
- Developments in the rent-stabilization appeal and any resulting liability or rent restrictions.
- Whether operating cash generation can sustain capital spending and distributions, given the company’s leverage and its reliance on external capital for longer-term needs.