Clipper Realty Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance sheet compared with December 31, 2016. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context
Clipper Realty is a New York City-focused REIT owning residential and commercial properties in Manhattan and Brooklyn. Its portfolio at quarter-end included Tribeca House, Flatbush Gardens, 141 and 250 Livingston Street, and Aspen. The company completed its IPO in February and March 2017, selling 6,390,149 shares at $13.50 each and receiving approximately $78.9 million in net proceeds. Its interest in the property-owning entities generally entitled it to 40.4% of their cash distributions and profits or losses.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $25.263 million | $21.726 million |
| Income from operations | $7.354 million | $6.005 million |
| Operating margin | 29.1% | 27.6% |
| Interest expense, net | $8.652 million | $9.211 million |
| Net loss | $1.298 million | $3.206 million |
| Net loss attributable to common stockholders | $0.469 million | $0.973 million |
| Basic and diluted loss per share | $0.03 | $0.09 |
| Net cash provided by operating activities | $1.151 million | $0.990 million |
- Cash and cash equivalents were $105.2 million at March 31, 2017, up from $37.5 million at year-end; restricted cash was $16.5 million. Management expected to use approximately $46.0 million of cash for capital projects.
- Investing activities used $12.0 million, including $3.1 million of property additions and an $8.75 million deposit related to the Columbia Heights acquisition. Financing activities provided $78.5 million, principally reflecting IPO proceeds.
- Notes payable totaled $764.3 million gross, or $754.8 million net of unamortized costs. Debt fair value was $751.0 million. Total liabilities were $780.7 million and total equity was $200.6 million.
- Approximately $410 million of Tribeca House debt matures in November 2018, with three one-year extension options. Other listed maturities include $35.1 million in 2023, $170 million in 2024, and $149.5 million in 2028. The filing cautions that refinancing may not be available on favorable terms or at all.
- Non-GAAP measures: FFO was $2.637 million versus $0.084 million; AFFO was $4.010 million versus $1.809 million; Adjusted EBITDA was $11.940 million versus $9.722 million; and NOI was $13.541 million versus $11.044 million. These measures are not substitutes for GAAP results or cash flows.
Material changes and management commentary
- Revenue rose 16.3% overall, partly reflecting Aspen, acquired in June 2016. Excluding Aspen, revenue increased 8.3% to $23.540 million, and operating income rose 7.1% to $6.434 million. Management attributed growth to higher residential rents, a new Tribeca retail lease, and increased tenant recoveries.
- At Flatbush Gardens, base rent per square foot increased from $20.71 to $21.29 year over year, while occupancy eased from 96.5% to 95.9%.
- Excluding Aspen, operating expenses increased 8.8%. Higher property payroll, utilities, collection costs, real estate taxes, staffing, incentive compensation, and depreciation contributed. Taxes rose in part because real estate tax abatements ceased.
- Interest expense excluding Aspen declined to $7.956 million from $9.211 million, reflecting lower balances and rates after refinancing Tribeca House and 141 Livingston Street. Despite improved results, interest expense exceeded operating income and the company remained loss-making.
- On May 9, 2017, after quarter-end, the company acquired a vacant 161-unit Brooklyn residential building for $87.5 million, partly financed with a $73.7 million loan package. Management planned to create 12 additional units through conversion of public areas.
Outlook, risks, and unusual items
- Management expected operating cash flow to cover short-term needs, but said it would not meet all long-term needs, including acquisitions, major renovations, and debt maturities. Long-term funding may rely on additional debt, equity issuance, or property sales; access to these sources is not assured.
- The $410 million variable-rate Tribeca House debt is exposed to interest-rate changes. Interest-rate caps cover approximately $410 million at a 2.0% one-month LIBOR strike. The filing estimates that a 1% rate increase would reduce annual net income by approximately $4.1 million.
- Approximately 20% of revenue in both reported quarters came from leases with New York City, a significant tenant concentration. The portfolio is geographically concentrated in Manhattan and Brooklyn. Management also identifies New York economic and regulatory conditions, rent regulation, occupancy and rental-rate changes, operating costs, property damage, development execution, and refinancing as risks.
- The company must distribute at least 90% of REIT taxable income, subject to applicable rules. Failure to maintain REIT qualification could result in corporate-level taxes and restrictions on re-electing REIT status.
- Management said there were no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no legal proceedings expected to materially affect results. It reported disclosure controls effective at a reasonable-assurance level, while also noting limited accounting personnel and systems and the need to develop public-company controls.
- The filing contains no formal earnings or revenue guidance. Management stated it intended to continue operating to qualify as a REIT and believed current operating cash flows, together with additional mortgage debt, would support operations, obligations, and distributions.
Investor verification priorities
- Verify progress toward refinancing or extending the $410 million November 2018 maturity, including extension-option conditions and funding costs.
- Assess whether the planned $46 million capital program and the Columbia Heights acquisition can be funded while maintaining liquidity and distributions.
- Track property-level rent growth, occupancy, tax abatements, expense inflation, and the contribution and lease exposure associated with New York City.
- Review the effects of the IPO’s share issuance and non-controlling interests on per-share results and distributions; shares outstanding increased to 17,812,755 at March 31, 2017.
- Monitor execution, financing, and unit-conversion plans for the May 2017 acquisition, as well as development costs and expected returns.