Clipper Realty Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company owns and operates residential and commercial real estate concentrated in Manhattan and Brooklyn, and reports residential and commercial rental segments. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $32.1 | $30.7; up 4.6% |
| Operating income | $6.5 | $6.1; up 6.4% |
| Net loss | $(3.5) | $(7.1) |
| Net loss attributable to common stockholders; per share | $(1.3); $(0.09) | $(2.7); $(0.18) |
| Operating cash flow | $6.6 | $7.4 |
| Cash used in investing activities | $(17.9) | $(7.7) |
| Cash and cash equivalents at March 31 | $25.3 | $34.5 at December 31, 2021 |
| Restricted cash at March 31 | $18.5 | $17.7 at December 31, 2021 |
| Debt, net of unamortized issuance costs | $1,139.0 | $1,131.2 at December 31, 2021 |
| FFO / AFFO / Adjusted EBITDA / NOI | $3.2 / $4.4 / $14.1 / $16.5 | $(0.9) / $3.1 / $13.0 / $14.8 |
Operating margin was approximately 20.3%, compared with 20.0% a year earlier. Interest expense was $10.0 million. The company paid $4.2 million in dividends and distributions in the quarter. Cash, including restricted cash, totaled $43.8 million at March 31, down from $52.2 million at year-end.
Material changes and operating drivers
- Commercial rental income rose 17.0% to $10.6 million, including $1.1 million of revenue recognized after a Tribeca House tenant was reassessed as probable of collection, as well as revenue from new leases.
- Residential rental income declined 0.7% to $21.5 million. ASC 842 adoption resulted in $0.8 million of revenue charges for receivables deemed not collectible; the filing also reports a $1.1 million revenue increase from the tenant reassessment. Management cited improving rents and occupancy at Tribeca House, Clover House and Aspen.
- Property operating expenses fell 12.8% to $7.5 million, primarily reflecting the change in presentation of bad debt under ASC 842. Real estate taxes and insurance rose 8.5% to $7.9 million; general and administrative expenses rose 28.3% to $2.9 million, primarily due to executive compensation.
- Net loss improved year over year, helped by the absence of the $3.0 million debt-extinguishment loss recorded in Q1 2021. Operating cash flow nevertheless declined by $0.9 million.
- Investing outflows increased with development spending at 1010 Pacific Street and Dean Street, including land purchases. Real estate under development increased to $111.9 million from $97.3 million at year-end.
Debt, outlook, risks and unusual items
- Debt is primarily property-secured. Variable-rate debt was $58.7 million; management estimated that a 1 percentage-point rate increase would raise annual net loss by approximately $0.6 million. The company had no interest-rate caps and reported no loan defaults. Debt principal due in the remainder of 2022 was $31.7 million; the Dean Street loan matures in December 2022, with two six-month extension options.
- Management expects cash from operations, cash on hand and additional mortgage debt to cover operations and contractual obligations for at least 12 months, but says there is no assurance that future refinancing will be available on favorable terms or at all. No numerical earnings guidance was provided.
- At March 31, properties were 96% leased; Q1 rent collection was 96.5%, versus 96.7% for full-year 2021. COVID-19 effects remain uncertain; $0.6 million of commercial rent deferrals remained outstanding. The portfolio is geographically concentrated in New York City, and the City of New York accounted for approximately 24% of Q1 revenue.
- Rent-stabilization litigation involving Tribeca House remains material. A March 2022 court decision quantified rent overcharges in the Kuzmich case; the company had recorded a $2.7 million litigation charge in Q4 2021 for overcharges, interest and plaintiffs’ legal costs. Related tenant cases are also pending. The filing does not state a final total exposure.
- The company adopted ASC 842 using a modified retrospective approach and recorded a $6.0 million cumulative-effect reduction to retained earnings at transition. The filing also discusses a prior restatement and a recently identified material weakness among risk factors; however, its current-period controls discussion says controls were effective and reports no material control changes during Q1.
- The company purchased additional land parcels for $3.7 million in February and $4.3 million in April 2022. It borrowed an additional $7.0 million under the Dean Street mortgage in April. April LTIP awards included 1.175 million units, substantially all with 10-year vesting; some awards are subject to shareholder approval of plan share increases.
Important facts for investors to verify
- Progress, cost to complete, expected timing and financing needs for the 1010 Pacific Street and Dean Street developments.
- Final outcome and potential additional exposure from the Tribeca House rent-overcharge litigation and related cases.
- Debt maturities, extension conditions, refinancing access, floating-rate exposure and covenant headroom.
- Collection and leasing trends, especially at properties affected by COVID-19, and the concentration of revenue from the City of New York.
- The impact of ASC 842’s collectability judgments and the status of the previously disclosed restatement and internal-control weakness.