Clipper Realty Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed March 7, 2019. This is an annual filing, with unaudited fourth-quarter results included. Amounts below are in millions unless stated otherwise.
Business context
Clipper Realty is a self-managed REIT that owns, operates, manages and repositions residential and commercial properties in Manhattan and Brooklyn. At year-end, its seven-property portfolio had approximately 3.1 million rentable square feet and was about 98% leased; the separate 107 Columbia Heights redevelopment remained under development. Residential properties generated 75% of 2018 revenue. Continuing investors held 59.6% of the company on a fully diluted basis and, together, generally had 66.7% of voting power.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $110.0 | $104.0 |
| Income from operations | $32.5 | $29.5 |
| Operating margin | 29.5% | 28.4% |
| Net loss | $(9.0) | $(6.0) |
| Net loss attributable to common stockholders | $(3.6); $(0.22) per share | $(2.4); $(0.15) per share |
| Operating cash flow | $27.3 | $10.4 |
| Investing cash flow | $(39.3) | $(187.7) |
| Financing cash flow | $41.1 | $147.6 |
| FFO / AFFO | $9.0 / $19.8 | $10.7 / $16.7 |
| NOI / Adjusted EBITDA | $60.0 / $52.1 | $56.4 / $49.6 |
Fourth-quarter 2018 revenue was $27.9, operating income $8.5, net loss $1.6 and common-stockholder net loss $0.6 ($0.04 per share). In Q4 2017, the corresponding figures were $27.3, $7.5, $1.5 and $0.6 ($0.04 per share).
At December 31, cash and cash equivalents were $37.0, restricted cash $8.8, total assets $1,101.0 and total liabilities $939.5. Property-level debt was $925.6 gross ($913.6 net of unamortized costs); the company reported no corporate debt. The weighted-average interest rate was approximately 4.2%, and $139.7 of debt was variable-rate. A 100-basis-point rate increase was estimated to add about $1.4 annually to interest expense. Debt principal and interest obligations total $1,220.7, including $181.7 scheduled for 2020. Dividends and distributions paid in 2018 totaled $17.0; 2018 distributions were characterized as return of capital for federal tax purposes.
Changes versus the prior comparable period
- Revenue rose 5.8%, with residential rent growth and higher occupancy at Flatbush Gardens and Tribeca House contributing; same-property residential rental revenue, excluding 10 West 65th Street, increased 4.4%.
- Operating income increased 10.0%, and NOI rose 6.4%. Property-level operating expenses were broadly stable excluding the 2017 acquisition, while real estate taxes and insurance increased.
- Net loss widened to $9.0 from $6.0, principally reflecting an $8.9 loss on extinguishment of debt in 2018. That charge related to refinancing Flatbush Gardens and Tribeca House and defeasing the 250 Livingston Street loan.
- Interest expense declined to $32.8 from $35.5, mainly due to lower rates on the February 2018 refinancings. FFO declined to $9.0 from $10.7; AFFO increased to $19.8 from $16.7, in part because the AFFO calculation adds back the debt-extinguishment loss.
- Operating cash flow increased to $27.3; investing outflow fell substantially because 2017 included acquisitions. Capital projects were approximately $39.9 in 2018 versus $20.3 in 2017.
Outlook, risks and unusual items
No quantified company-wide earnings or revenue guidance is provided. Management said it expected operating cash flow and additional mortgage debt to be sufficient to support operations, contractual obligations and distributions for at least the next 12 months, while cautioning that future refinancing on favorable terms is not assured. Priorities include rent growth, active property management, selective repositioning and disciplined acquisitions.
- Leasing and tenant concentration: New York City agencies represented about 16% of portfolio annualized rent in the risk discussion; their leases at 250 Livingston Street expire in August 2020. The company was negotiating renewal and discussed potential rents in the low-to-mid $40 per square foot range versus the current blended $27.71, with no assurance of outcome. The filing also reports City leases equal to 19% of 2018 total revenue, using a different measure.
- Near-term leasing: Touro College ended leases covering 40 apartments at 10 West 65th Street effective January 31, 2019; the company planned to reposition and re-lease them. Approximately 62% of residential square footage at operating properties was scheduled to expire in 2019, including month-to-month leases.
- Debt and interest-rate exposure: The $75.0 million 250 Livingston Street loan and $64.7 million 107 Columbia Heights loan mature in 2020, each with extension options. The latter bears variable interest. Refinancing access, covenant restrictions and interest-rate increases could constrain liquidity and investment.
- Regulation and litigation: Flatbush Gardens is rent stabilized, limiting rent increases. A rent-regulation case involving 41 present or former Tribeca House tenants remained subject to further appeal after an appellate ruling for the company; potential liability was not clearly quantifiable. The company also disclosed an ADA claim at 141 Livingston Street.
- Tax protection and governance: A tax-protection agreement may limit dispositions and require payments in specified circumstances. The filing estimates a hypothetical indemnification amount of approximately $364.9 million if covered assets had been sold in a taxable transaction immediately after the 2015 private offering; this is not presented as a current payable, and management said it did not intend to trigger such a payment. Related-party legal and advisory fees were $2.0 million in 2018.
- Other material risks: The portfolio is concentrated in New York City; exposure includes property-tax increases, rent-law changes, severe weather, environmental and building compliance matters, and dependence on key personnel. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not audit internal controls.
Important facts for investors to verify
- Progress and final economics of the City of New York lease renewals, particularly the August 2020 expirations at 250 Livingston Street.
- Extension or refinancing plans and terms for the 2020 maturities, and the company’s liquidity after capital spending and distributions.
- Lease-up timing, achieved rents and remaining redevelopment costs at 107 Columbia Heights and the 10 West 65th Street apartments.
- Status and potential financial exposure of the Tribeca House rent-regulation appeal and the 141 Livingston Street ADA claim.
- How much of reported cash flow and AFFO is recurring after capital expenditures, debt service and distributions; these non-GAAP measures are not substitutes for GAAP cash flow.
- Potential restrictions or indemnification exposure under the tax-protection agreement, and the effect of continuing investors’ voting control and related-party transactions.