Clipper Realty Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017, unless otherwise noted. Dollar amounts are in millions unless stated otherwise. Clipper Realty is a New York City-focused REIT operating residential and commercial properties in Manhattan and Brooklyn. The company’s interest in property-owning entities generally entitles it to 40.4% of their cash distributions, profits and losses; the statements include non-controlling interests.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $26.9 | $25.3 |
| Income from operations | $6.5 | $7.4 |
| Net loss | $9.0 | $1.3 |
| Net loss attributable to common stockholders; loss per share | $3.6; $0.21 | $0.5; $0.03 |
| Operating cash flow | $11.0 | $1.2 |
| Cash and cash equivalents at period end | $24.1 | $7.9 at Dec. 31, 2017 |
| Restricted cash at period end | $13.6 | $13.7 at Dec. 31, 2017 |
| Notes payable, net of unamortized costs | $871.3 | $843.9 at Dec. 31, 2017 |
| Total assets / total liabilities | $1,068.7 / $895.8 | $1,052.1 / $866.5 at Dec. 31, 2017 |
Revenue increased 6.4%, while operating expenses rose 13.6% to $20.3 million. Operating margin was approximately 24.3%, compared with 29.1% a year earlier. Interest expense was $8.5 million, and the company recorded a $7.0 million debt-extinguishment loss. The filing reports FFO of negative $4.4 million and AFFO of $3.2 million, versus FFO of $2.6 million and AFFO of $4.0 million in Q1 2017. Adjusted EBITDA was $11.6 million versus $11.9 million; NOI was $14.2 million versus $13.5 million. These are non-GAAP measures and should be considered alongside GAAP results and cash flows.
Changes, refinancing and cash flows
- Residential rent growth and occupancy gains at Flatbush Gardens, along with higher Tribeca House rents, contributed to revenue growth. Flatbush Gardens reported 97.2% leased occupancy and $22.58 base rent per square foot at March 31, 2018, compared with 95.9% and $21.29 a year earlier.
- Real estate taxes and insurance increased, partly because tax abatements ceased. General and administrative expense rose substantially, attributed in part to executive cash bonuses and public-company professional fees.
- In February, the company refinanced Flatbush Gardens debt with a $246 million loan maturing in 2028, and refinanced Tribeca House debt with a $360 million loan, also maturing in 2028. The latter replaced a $410 million loan package and required cash on hand. The refinancings generated a $7.0 million extinguishment loss. Management said there was no debt maturing in 2018.
- Operating cash flow was $11.0 million, but the filing attributes much of the year-over-year improvement to changes in operating assets and liabilities. Investing activities used $10.1 million, principally for property additions and improvements. Financing activities provided $15.3 million, including new mortgage proceeds, offset by repayments, issuance and extinguishment costs, and $4.3 million of distributions.
Outlook, risks and contingencies
The filing provides no specific earnings or operating guidance. Management said it expects current operating cash flows and additional mortgage debt to support operations, obligations and distributions, and believes short-term liquidity is sufficient. It expects long-term needs—including acquisitions, major renovations and debt repayment—to require additional capital; access to debt and equity financing is not assured. The REIT is generally required to distribute at least 90% of REIT taxable income annually.
- Interest-rate risk: $61.2 million of variable-rate debt remained outstanding at quarter-end; a 1 percentage-point rate change would affect annual net income by approximately $0.6 million. The company terminated its Tribeca House interest-rate cap on April 27, 2018.
- Geographic concentration: properties are located in Manhattan and Brooklyn. New York City government tenants represented approximately 19% of Q1 2018 revenue.
- Rent-stabilization litigation: an appellate court ruled for the company in January 2018 concerning 41 tenants at two Manhattan buildings, but leave to appeal was granted April 24, 2018. The company said potential liability could not be estimated specifically.
- Other disclosed risks include occupancy and rent changes, refinancing and capital access, redevelopment costs, New York City economic or regulatory developments, and possible rent-regulation changes. Management reported no material change in the risk factors in its 2017 Form 10-K.
- The company paid approximately $1.88 million for legal and advisory services to firms in which two directors were principals or partners, compared with approximately $0.06 million in Q1 2017. Management stated that other legal claims are not expected to have a material adverse effect.
Investor facts to verify
- Whether refinancing savings and interest-only terms improve cash generation enough to offset the $7.0 million one-time extinguishment loss and substantial debt burden.
- The drivers and sustainability of operating cash flow, including the effect of working-capital movements and ongoing capital spending.
- Developments and potential exposure in the rent-stabilization appeal, including any eventual determination of rent overcharges, fees or costs.
- The basis and governance around the increase in director-affiliated legal and advisory fees and executive bonuses.
- Progress on leasing and renovation at 107 Columbia Heights, and the company’s ability to fund long-term capital needs and distributions.