Clipper Realty Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company owns and operates residential and commercial properties in Manhattan and Brooklyn and is taxed as a REIT. Unless stated otherwise, financial figures below are in millions of dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $27.30 | $25.36 | $54.17 | $50.62 |
| Income from operations | $8.32 | $7.32 | $14.85 | $14.67 |
| Operating margin | 30.5% | 28.9% | 27.4% | 29.0% |
| Interest expense, net | $8.01 | $8.93 | $16.55 | $17.58 |
| Net income (loss) | $0.31 | ($1.61) | ($8.69) | ($2.91) |
| Net income (loss) attributable to common stockholders | $0.12 | ($0.65) | ($3.51) | ($1.12) |
| Net income (loss) per common share | $0.00 | ($0.04) | ($0.20) | ($0.08) |
Q2 revenue rose 7.7% year over year; six-month revenue rose 7.0%. Residential rent growth and higher occupancy at Flatbush Gardens and Tribeca House supported revenue. Excluding the 10 West 65th Street property, residential base rent per square foot and leased occupancy increased at both properties. Commercial rental revenue was broadly flat, while tenant recoveries and garage and other income increased.
Q2 operating income increased 13.6% year over year. For the six-month period, operating income was nearly flat as higher real estate taxes and insurance, general and administrative costs, and depreciation offset revenue growth. The company reported Q2 net income, but a six-month net loss that included a $6.981 million loss on extinguishment of debt.
Cash flow, debt and liquidity
- Operating cash flow: $14.98 million in the first half, versus $4.33 million in the prior-year period. Management attributed much of the increase to changes in operating assets and liabilities, including lower receivables and restricted cash.
- Investing cash flow: $18.86 million used, including $19.25 million of additions to land, buildings and improvements. The company reported $22.51 million of segment capital expenditures, a broader measure than cash additions.
- Financing cash flow: $11.74 million provided, principally reflecting refinancing proceeds and repayments, offset by financing costs and $8.52 million of dividends and distributions.
- Cash and liquidity: Cash and cash equivalents were $15.79 million at June 30, 2018, versus $7.94 million at year-end 2017; restricted cash was separately reported at $12.46 million. Management believed current operating cash flows, together with financing, would meet short-term needs, but did not expect operating cash flow alone to cover all long-term needs.
- Debt: Notes payable were $883.71 million before unamortized issuance costs and $872.58 million net on the balance sheet. Debt increased from $855.12 million gross at December 31, 2017. The company said it had no debt maturing in 2018; scheduled principal payments include $68.67 million in 2020.
- Refinancing: In February 2018, the company refinanced the Flatbush Gardens debt with a $246 million loan, bearing 3.5% for the first five years and then prime plus 2.75% (subject to a rate-fixing option). It also replaced the $410 million Tribeca House loan with a $360 million, fixed-rate 4.506% loan that is interest-only through maturity in 2028. Refinancing costs and write-offs contributed to the $6.981 million debt-extinguishment loss.
- Rate exposure: $62.7 million of debt was variable-rate at June 30, 2018; management estimated a 1 percentage-point rate change would affect annual net income by approximately $0.6 million. The Tribeca House interest-rate cap was terminated in April 2018.
Material changes, outlook and risks
- The refinancing reduced reported interest expense, but the associated extinguishment charge drove the higher first-half net loss. In Q2, lower interest expense helped earnings improve versus the prior-year quarter.
- Management was negotiating renewal of City of New York commercial leases at 250 Livingston Street, which expire in August 2020. The company described proposed rents in the low-to-mid $40s per square foot, compared with a current blended $27.71; negotiations were ongoing and there was no assurance of an outcome. The leases represented approximately 19% of total revenue in the first half of 2018.
- No formal earnings or operating guidance was provided. Management said it expected short-term liquidity needs to be met from operations and anticipated using debt and equity financing, among other sources, for long-term needs; access to capital is not assured.
- A tenant lawsuit involving rent-stabilization status at 50 Murray Street and 53 Park Place remains subject to further appeal. An appellate court ruled for the company, but leave to appeal was granted; the company said potential liability could not be estimated specifically.
- Risk factors include concentration in New York City, rent regulation and rent-overcharge claims, reliance on a significant government tenant, property operating costs, refinancing and capital-market access, and development or renovation costs. Management reported no material change to the risk factors in its 2017 Form 10-K.
- The company stated it had no material off-balance-sheet arrangements and no material impairment of its properties as of June 30, 2018. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Progress, economics and final terms of the City lease renewal at 250 Livingston Street before the August 2020 expirations.
- Outcome and potential financial exposure of the rent-stabilization appeal and any related tenant claims.
- Ability to refinance or repay the 2020 maturities, and compliance with loan terms and extension options, particularly for 107 Columbia Heights.
- Whether rent and occupancy gains persist and offset rising property taxes, insurance, operating costs and capital spending.
- Cash available after capital investment and distributions; operating cash flow benefited from working-capital changes, and REIT distributions remain an ongoing cash requirement.
- Interest-rate exposure on variable-rate borrowings and the implications of having terminated the Tribeca House cap.