Clipper Realty Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Clipper Realty owns and operates residential and commercial properties in Manhattan and Brooklyn and is taxed as a REIT. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $34.54 | $31.89 | $68.21 | $63.94 |
| Income from operations | $8.04 | $7.05 | $14.95 | $13.56 |
| Net loss | $(3.30) | $(2.95) | $(10.38) | $(6.43) |
| Net loss attributable to common stockholders | $(1.25) | $(1.12) | $(3.94) | $(2.44) |
| Basic and diluted loss per share | $(0.10) | $(0.08) | $(0.29) | $(0.18) |
- Q2 revenue increased 8.3%; operating income increased 14.0%. Operating margin was approximately 23.3%, versus 22.1% a year earlier.
- For the first half, revenue increased 6.7% and operating income increased 10.3%; operating margin was approximately 21.9%, versus 21.2%.
- Residential rental income rose 10.8% in Q2 and 11.2% in the first half, reflecting higher rental rates and leased occupancy. Tribeca House reported base rent of $76.36 per square foot and 100% leased occupancy, compared with $67.14 and 99.7% a year earlier.
- Commercial rental income increased 2.3% in Q2 but declined 3.3% for the first half. The first-half comparison was affected by a $1.1 million commercial receivable collectability reversal recorded in 2022.
- Operating costs rose: real estate taxes and insurance increased 10.3% in Q2 and 9.0% in the first half; first-half general and administrative expense rose 9.0%. Management cited higher property taxes, insurance, utilities, payroll, accounting and computer-services costs. Q2 property operating expense declined 2.1%.
Cash flow, debt and liquidity
- First-half operating cash flow was $17.22 million, up from $11.68 million. Investing cash outflow was $18.92 million, compared with $30.88 million, reflecting lower capital spending and no comparable Dean Street land acquisitions. Financing cash inflow was $2.10 million, versus $10.94 million.
- Cash and cash equivalents were $16.34 million at June 30, 2023; restricted cash was $14.73 million. Combined cash and restricted cash was $31.07 million.
- Debt was $1.187 billion gross, or $1.177 billion net of unamortized issuance costs, versus $1.171 billion gross at year-end 2022. Total equity declined to $19.53 million from $37.18 million.
- First-half interest expense increased to $21.47 million from $19.99 million. The filing identifies a floating-rate reset on 10 West 65th Street as a principal driver. The company reported $69 million of variable-rate debt; a one-percentage-point rate change would affect annual net loss by approximately $0.7 million. It had no interest-rate caps at quarter-end.
- In February, the company refinanced the 1010 Pacific Street construction loan with a five-year Valley National Bank mortgage: $60 million funded initially, with up to $20 million of additional borrowing subject to financial targets. Its rate was reduced by 15 basis points to 5.55% after a target was met. Refinancing costs and accelerated prior loan costs produced a $3.87 million first-half debt extinguishment loss.
- Debt principal requirements include $37.96 million for the remainder of 2023 and $2.01 million in 2024; the Dean Street loan, approximately $37.0 million, was due September 22, 2023 after an extension. Management said it believes operating cash flow, cash on hand and additional mortgage debt will support operations and obligations for at least 12 months, while noting refinancing cannot be assured on favorable terms or at all.
Material developments, outlook and risks
- On June 29, Flatbush Gardens entered a 40-year New York City Article 11 regulatory agreement. It provides a full property-tax exemption and eligibility for incremental rental assistance, in exchange for rent and tenant requirements, leasing 249 units to formerly homeless families as units become vacant, prevailing-wage obligations and a three-year capital-improvement plan. Estimated improvement costs are up to $27 million; management expects tax savings and assistance payments to offset costs, but the filing cautions that reimbursements could be lower and construction costs higher than expected. The agreement also gives a newly formed nonprofit nominal ownership and certain consent rights over property transfers and financings.
- Reported net loss for the first half worsened, in part because of the one-time $3.87 million debt extinguishment loss and higher interest expense. Excluding 1010 Pacific Street, management’s comparison shows first-half net loss of $9.65 million versus $6.43 million in 2022; inclusion of 1010 Pacific contributed $0.74 million of net loss in the 2023 period.
- The company paid $8.70 million in dividends and distributions in the first half. It declared $4.3 million on May 4, paid May 24. Management expects short-term liquidity needs to be met through operations and cash on hand; longer-term needs are expected to require debt and/or equity financing and other sources.
- FFO was $3.97 million in Q2 and $3.71 million in the first half; AFFO was $5.49 million and $9.97 million, respectively. These are non-GAAP measures and do not represent GAAP cash flow or cash available after all debt, capital and distribution needs.
- Other disclosed exposures include concentration in New York City, rent-regulation and tenant claims, a City of New York tenant representing 23% of revenue in both 2023 comparison periods, inflation and operating-cost pressures, refinancing and interest-rate risk, and uninsured bank deposits. The company reported no loan defaults and no material changes to previously disclosed risk factors apart from the updates described in the filing.
- No specific earnings, revenue or operating guidance was provided. Management said inflation had not significantly affected reported results but could raise future property costs.
Important facts for investors to verify
- Status, terms and repayment/refinancing plan for the Dean Street loan due September 2023, and scheduled principal payments thereafter.
- Progress and actual costs of the Flatbush Gardens capital plan, and whether tax savings and Section 610 assistance offset those costs as expected.
- Interest-rate exposure, debt covenants and availability of refinancing or other capital, particularly given low reported equity and high leverage.
- Occupancy, rent growth, tenant receivable collectability and the concentration represented by the City of New York tenant.
- Current status and potential financial exposure of the Tribeca House tenant litigation and related rent-regulation claims.
- Whether distributions remain supportable alongside debt service, required capital spending and REIT distribution requirements.