Clipper Realty Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; compared with the same periods in 2020. Amounts below are in millions of dollars unless stated otherwise. Clipper Realty owns and operates residential and commercial properties in Manhattan and Brooklyn.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $30.6 | $30.0 | $92.0 | $92.5 |
| Income from operations | $7.0 | $7.3 | $20.1 | $25.7 |
| Net loss | $(3.4) | $(2.9) | $(13.8) | $(8.5) |
| Net loss attributable to common stockholders | $(1.3) | $(1.2) | $(5.2) | $(3.4) |
| Basic and diluted loss per share | $(0.09) | $(0.08) | $(0.36) | $(0.21) |
| Operating cash flow | Not separately presented for the quarter | $13.5 | $10.2 |
- Q3 revenue rose 2.0% year over year, as commercial rental income increased 14.8% to $9.3 million, more than offsetting a 2.8% decline in residential rental income to $21.3 million. For the first nine months, revenue decreased 0.6%: residential income fell 7.0%, while commercial income rose 18.4%.
- Operating income margin was approximately 22.7% in Q3 2021 versus 24.4% in Q3 2020, and 21.8% for the first nine months versus 27.7%. The filing reports no conventional gross-profit margin.
- Q3 net loss widened by $0.5 million. For the nine-month period, net loss widened by $5.3 million, reflecting lower operating income, higher interest expense, and the absence of the prior-year lease-termination gain. Results also included a $3.0 million debt extinguishment loss in 2021, versus a $4.2 million debt modification/extinguishment loss in 2020.
- Supplemental non-GAAP measures: Q3 FFO was $3.0 million versus $3.0 million; AFFO was $4.1 million versus $2.9 million; Adjusted EBITDA was $14.2 million versus $12.8 million; and NOI was $16.1 million versus $14.5 million. Nine-month FFO was $5.2 million versus $8.9 million; AFFO was $11.2 million versus $13.9 million; Adjusted EBITDA was $41.4 million versus $43.4 million; and NOI was $47.0 million versus $48.8 million. These company-defined measures are not substitutes for GAAP results or cash flow.
- At September 30, cash and cash equivalents were $59.1 million and restricted cash was $29.1 million. Combined cash and restricted cash decreased $0.8 million from year-end 2020. Net cash used in investing was $20.7 million, primarily property additions; net cash from financing was $6.4 million. Cash after investing outflows was negative $7.2 million.
- Debt was $1,114.6 million before unamortized financing costs and $1,102.5 million net, up from $1,089.7 million gross at December 31, 2020. Total assets were $1,211.6 million and total equity was $79.7 million. The filing states the company was not in default on its loans.
Material changes and transactions
- Residential weakness reflected lower Clover House rents and lower Flatbush Gardens occupancy. Clover House rent per square foot declined from $67.56 to $61.63; Flatbush Gardens occupancy fell from 96.3% to 92.6%. Commercial revenue benefited mainly from a new 250 Livingston Street lease that began in August 2020.
- Property operating expenses declined 15% in Q3, partly due to lower apartment turnover, bad-debt provision, and Flatbush Gardens payroll costs. For the nine-month period, those expenses rose 3%, with higher bad debt and utilities partly offset by lower payroll. Real estate taxes and insurance rose in both comparisons; depreciation and amortization also increased.
- In February 2021, the company refinanced 141 Livingston Street with a $100 million, ten-year loan at 3.21%, interest-only, replacing a $74.2 million loan. In August, it refinanced 1010 Pacific Street with development loans allowing up to $52.5 million of borrowings, bearing 30-day LIBOR plus 3.60% with a 4.1% floor; the loans mature in September 2024 and may be extended to September 2026.
- Scheduled principal payments include $23.5 million in 2024; most debt, $1,083.6 million, is due thereafter. The company reports $21.1 million of variable-rate debt; a one-percentage-point rate change would affect annual net income by approximately $0.2 million.
- Dividends and distributions totaled $4.2 million in Q3 and $12.6 million in the first nine months of 2021. The company says it expects operating cash flow and cash on hand to cover operations, contractual obligations, and distributions for at least the next 12 months, but gives no quantified earnings or operating guidance.
Management commentary, risks, and contingencies
- Management reported a 96% rent collection rate in Q3 and 94% leased occupancy at September 30. Properties remained open and operational. Management expects operations and the New York City market to normalize over time, while noting uncertainty around COVID-19, tenant payment capacity, occupancy, rents, and leasing demand. Commercial tenant rent deferrals totaled $0.7 million at quarter-end.
- COVID-related pressure includes lower residential rents and occupancy at certain properties and potential further concessions. The portfolio is concentrated in Manhattan and Brooklyn. New York City government leases represented approximately 25% of revenue in Q3 and for the nine-month period, creating tenant concentration exposure.
- Rent-stabilization litigation concerning Tribeca House remains unresolved. A hearing on potential overcharges took place October 27, 2021, with supplemental briefs due November 17; a ruling and attorneys’ fee determination remained pending. The company recorded no liability for potential claims and cannot predict the outcome. Related actions by other tenants are also pending.
- The company identified a material weakness in internal controls related to accounting for straight-line rent after reassessing a commercial lease term; management says remediation procedures have been implemented and will continue to be assessed. Disclosure controls were deemed effective at a reasonable assurance level. The filing also references a restatement of 2020 interim financial statements.
- Management says it believes short-term liquidity is sufficient, but gives no assurance that future debt can be refinanced on favorable terms or at all. Risks also include rent regulation, property costs, development execution, interest rates, and access to capital. The company reported no material off-balance-sheet arrangements and no property impairment as of September 30, 2021.
Key facts for investors to verify
- Progress in rent-stabilization cases, potential overcharge and legal-fee exposure, and the absence of an accrued liability.
- Rent collections, occupancy, bad-debt allowances, and rent trends at Flatbush Gardens and Clover House as pandemic and market conditions evolve.
- Debt maturities, refinancing access, floating-rate exposure, and funding and completion of the 1010 Pacific Street redevelopment.
- Whether the internal-control remediation remains effective, particularly for lease-term reassessments and straight-line rent accounting.
- Cash available after restrictions, capital spending needs, distributions, and the sustainability of management’s stated 12-month liquidity expectation.