Clipper Realty Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023. Clipper Realty owns and operates residential and commercial real estate in Manhattan and Brooklyn and is taxed as a REIT.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $33.7 million | $32.1 million | Up 5.0% |
| Income from operations | $6.9 million | $6.5 million | Up 6.2% |
| Net loss | $7.1 million | $3.5 million | Loss increased $3.6 million |
| Net loss attributable to common stockholders; loss per share | $2.7 million; $0.19 | $1.3 million; $0.09 | Loss per share worsened |
| Operating cash flow | $7.4 million | $6.6 million | Up $0.8 million |
| Cash used in investing | $12.5 million | $17.9 million | Lower outflow |
| Cash from financing | $12.2 million | $2.9 million | Higher inflow |
Residential rent revenue rose 11.5% to $23.9 million, while commercial rent revenue declined 8.1% to $9.7 million. Operating margin, calculated as operating income divided by revenue, was approximately 20.5%, versus 20.3% a year earlier. Non-GAAP measures: NOI was $17.1 million (up from $16.5 million); Adjusted EBITDA was $14.5 million (up from $14.1 million); FFO was a loss of $0.3 million (versus positive $3.2 million); and AFFO was $4.5 million (versus $4.4 million). These measures are not substitutes for GAAP results or cash flow.
At quarter-end, cash and cash equivalents were $18.8 million and restricted cash was $19.0 million. Gross debt was $1.187 billion ($1.178 billion net of unamortized loan costs), against total assets of $1.237 billion and total equity of $26.4 million. Debt fair value was estimated at $1.137 billion. Interest expense, net, was $10.1 million, compared with $10.0 million. Net cash and restricted cash increased $7.2 million during the quarter to $37.8 million.
Material changes and notable items
- Residential revenue benefited mainly from rent increases and improved occupancy. Tribeca House residential occupancy was 99.4%, versus 97.8% a year earlier; Flatbush Gardens occupancy was 98.8%, versus 94.7%.
- Commercial rental revenue fell primarily because a $1.1 million prior-year revenue recognition related to a Tribeca House tenant did not recur; new leases partly offset the decline.
- Property operating expenses rose 7.4%, real estate taxes and insurance rose 7.6%, and general and administrative expenses rose 11.9%. Management cited higher repairs and utilities, property taxes and insurance, accounting fees, and computer services.
- The company refinanced the 1010 Pacific Street construction loan in February with a Valley National Bank loan: $60 million initially funded, with up to $20 million of additional borrowing subject to financial targets. The initial rate is 5.7%; the refinancing generated a $3.9 million debt-extinguishment loss, including prepayment penalties and write-off of prior loan costs.
- Commercial properties had $121.3 million of minimum future contractual cash rents, excluding tenant expense reimbursements. New York City leases represented approximately 24% of total revenue in both periods.
- A $4.3 million dividend and distribution was declared in March and paid April 5, 2023. No dividends or distributions were paid during Q1 2023.
Outlook, risks, and contingencies
No specific earnings or operating guidance was provided. Management expects short-term liquidity needs to be met by operating cash flow and cash on hand, and believes available cash flows, cash, and additional mortgage debt will be sufficient for operations, contractual obligations, and distributions for at least 12 months. It cautions that future refinancing and access to debt or equity capital are not assured; operating cash flow alone is not expected to meet all long-term needs.
- Scheduled mortgage principal payments total $38.4 million for the remainder of 2023. The $37.0 million Dean Street loan matures June 22, 2023, and bears a floating rate reported at 9.35% at quarter-end; an extension option remains. The filing says the company was not in default on its loan agreements.
- The company had $69.1 million of variable-rate debt and no interest-rate caps. A 1 percentage-point rate change would affect annual net loss by approximately $0.7 million.
- Inflation may raise property operating, replacement, and development costs. Management notes that residential leases are generally short-term and allow rent increases, while longer-term commercial leases permit recovery of some operating costs.
- Operations are concentrated in New York City, and the company identifies risks from local economic and regulatory conditions, rent regulation, occupancy and rental rates, property costs, refinancing, development, and a single government tenant in commercial buildings.
- Rent-stabilization litigation at Tribeca House resulted in a previously recorded $2.7 million charge; the company paid $0.4 million related to the Crowe case in Q1 2023. Other claims are disclosed, with management not expecting their resolution to materially adversely affect results, financial position, or cash flows.
- The company added a risk disclosure concerning cash deposits exceeding FDIC insurance limits. It reported no deposits, loans, or other balances with recently failed financial institutions and no losses to date, but access to uninsured funds could be delayed or impaired if a bank fails.
Investor verification priorities
- Confirm the Dean Street loan’s maturity, extension status, and repayment or refinancing plan, alongside the $38.4 million of scheduled remaining-2023 principal payments.
- Review the 1010 Pacific refinancing terms, potential additional funding conditions, prepayment provisions, and resulting development funding requirements.
- Assess the effect of floating-rate debt and any future refinancing on interest expense, liquidity, and distributions.
- Track residential rent collections, occupancy, receivable reserves, and the commercial revenue trend, including dependence on New York City leases.
- Reconcile GAAP losses with FFO and AFFO and evaluate whether cash flow supports capital spending, debt service, and distributions.
- Monitor rent-regulation litigation and uninsured bank deposits; management reported disclosure controls were effective and no material changes to internal control over financial reporting during the quarter.