Clipper Realty Inc. — Q2 2019 Form 10-Q
Business context and period: Clipper Realty owns and operates residential and commercial properties in Manhattan and Brooklyn and is taxed as a REIT. This unaudited filing covers the quarter and six months ended June 30, 2019; financial statement amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $28.446 | $27.300 | $56.098 | $54.168 |
| Income from operations | $8.823 | $8.316 | $16.964 | $14.846 |
| Operating margin | 31.0% | 30.5% | 30.2% | 27.4% |
| Net income (loss) | $(1.158) | $0.308 | $(1.291) | $(8.686) |
| Net income (loss) attributable to common stockholders | $(0.467) | $0.124 | $(0.521) | $(3.506) |
| Basic and diluted earnings (loss) per share | $(0.03) | $0.00 | $(0.04) | $(0.20) |
- Revenue and costs: Q2 revenue grew 4.2%; residential rental income rose 5.2%, while commercial rental income increased 1.3%. For the first half, revenue rose 3.6%, with residential growth of 5.4% partly offset by a 1.5% commercial decline. Six-month operating expenses fell 0.5%; lower general and administrative expense was partly offset by higher property costs, real estate taxes and insurance.
- Profitability and non-GAAP measures: Q2 operating income improved, but the company recorded a $1.771 million loss on debt extinguishment related to the 250 Livingston refinancing, contributing to the quarterly net loss. First-half net loss narrowed from 2018, which included a $6.981 million debt-extinguishment loss. First-half FFO was $7.848 million and AFFO was $11.352 million, versus $0.345 million and $8.648 million, respectively, in 2018. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Cash flow: For the six months, operating cash flow was $10.443 million (down from $13.705 million); investing cash outflow was $21.383 million, primarily capital projects; financing cash inflow was $37.880 million, largely reflecting the new 250 Livingston mortgage. Cash and cash equivalents were $56.349 million and restricted cash was $16.455 million at June 30.
- Debt and liquidity: Notes payable totaled $974.197 million gross, or $963.335 million net of unamortized loan costs, versus $925.613 million gross at year-end 2018. Total liabilities were $988.866 million and total equity $152.516 million. The company reported $69.919 million of scheduled principal payments in 2020, including a $64.731 million variable-rate loan maturing in May 2020 that has two one-year extension options. Management said cash flows and financing sources should cover obligations and distributions for at least 12 months, while noting refinancing is not assured.
- Margins and distributions: Quarterly operating margin improved slightly and first-half margin increased. The company paid $8.538 million in dividends and distributions during the first half.
Material changes and management commentary
- On May 31, 2019, the company refinanced 250 Livingston Street’s $75 million loan with a $125 million, 10-year mortgage at a fixed 3.63% interest rate, interest-only for its term. The refinancing generated proceeds but also a $1.771 million extinguishment loss.
- Residential rent and occupancy increased at Flatbush Gardens and Tribeca House. At June 30, occupancy was 98.9% and 99.6%, respectively. Touro College terminated leases for 40 units at 10 West 65th Street effective January 31, 2019; the company is repositioning and leasing those apartments at market rates.
- The City of New York renewed its 250 Livingston Street commercial leases for a ten-year term beginning after the existing leases expire in August 2020. The lease has termination options at the end of years five and seven and requires certain property alterations and improvements. City leases represented approximately 19% of total revenue in both comparable periods.
- The June 2019 New York rent law restricts rent increases and deregulation for rent-stabilized units; management said it will reduce the company’s ability to raise rents on those apartments.
- Management reported no material impairment of properties, no material off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2019. The CFO retired effective June 30 and is providing consulting services through June 30, 2020.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management expects to fund short-term needs mainly from operating cash flow and long-term needs from cash, debt and equity financing, but cannot assure favorable or successful access to capital or refinancing.
- In June, the New York Court of Appeals ruled that apartments in buildings receiving RPTL 421-g tax benefits are not subject to luxury deregulation, reversing a prior appellate decision. The ruling concerns 41 current or former tenants at 50 Murray Street and 53 Park Place; additional tenants may bring similar claims. The company filed for reargument on July 25, 2019, and had not accrued a liability because timing and amount remained uncertain.
- Other disclosed risks include concentrated exposure to New York City, rent regulation, tenant claims, operating costs, property damage, development and capital requirements, refinancing and interest-rate risk. A 1 percentage-point rate change on $64.7 million of variable-rate debt would affect annual net income by approximately $0.6 million.
Important facts for investors to verify
- Potential exposure, claim scope and timing in the 421-g rent-regulation litigation, including the outcome of the reargument motion and special-referee process.
- Extension and refinancing plans for the $64.7 million 107 Columbia Heights loan due in May 2020, and the company’s ability to fund the stated 2020 principal payments.
- Economic impact and required capital work under the renewed City lease, including the City’s termination options.
- Effects of the 2019 rent law on rent growth, portfolio cash flow and property values; compare reported GAAP results with non-GAAP FFO and AFFO.