Clipper Realty Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Clipper Realty is a REIT focused on residential and commercial properties in Manhattan and Brooklyn. This unaudited report covers the three and nine months ended September 30, 2020; financial amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $29.6 | $29.4 | $91.2 | $85.5 |
| Income from operations | $6.8 | $8.5 | $24.4 | $25.5 |
| Net loss | ($3.4) | ($0.2) | ($9.7) | ($1.5) |
| Net loss attributable to common stockholders | ($1.4) | ($0.1) | ($3.9) | ($0.6) |
| Basic and diluted loss per share | ($0.09) | ($0.01) | ($0.24) | ($0.05) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $10.2 | $18.4 |
- Revenue grew 0.6% in Q3 and 6.6% for the nine-month period. Operating income margin was approximately 22.9% in Q3 versus 28.9% a year earlier, and 26.7% for nine months versus 29.8%.
- Nine-month FFO was $7.6 million versus $12.6 million; AFFO was $13.9 million versus $16.8 million. Q3 FFO was $2.5 million versus $4.7 million; AFFO was $2.9 million versus $5.4 million. These are non-GAAP measures as defined by the company.
- At September 30, cash and cash equivalents were $82.9 million, with $22.1 million restricted cash. Net debt carrying value was $1,079.6 million; total equity was $120.1 million. Notes payable had estimated fair value of $1,224.8 million.
- Nine-month capital spending was $24.9 million. Investing cash outflow was $24.8 million; financing cash inflow was $62.6 million. Cash, including restricted cash, increased by $48.0 million to $105.0 million.
Material changes and operating drivers
- Q3 residential revenue excluding Clover House declined 6.8% year over year, primarily reflecting COVID-19-related weakness at Tribeca House: leased occupancy fell from 98.2% to 80.1%, and base rent per square foot declined from $70.85 to $65.74.
- Commercial rental income increased, helped by a new lease at 250 Livingston Street. For the nine months, residential and commercial revenue excluding Clover House increased modestly.
- Higher property operating costs, real estate taxes and insurance, general and administrative expenses, and depreciation weighed on operating income. Management cited COVID-related bad-debt provisions and litigation costs among the expense drivers.
- Interest expense rose to $30.0 million for nine months from $25.2 million. The company recorded a $4.2 million debt modification/extinguishment loss, mainly related to refinancing Flatbush Gardens; this compared with $1.8 million in the prior-year period.
- On May 8, the company refinanced Flatbush Gardens’ $246 million mortgage with a $329 million loan. The new loan carries a 3.125% rate through May 2027, then a floating rate subject to an option to fix. Total debt increased to $1,090.4 million before unamortized issuance costs, from $1,009.4 million at year-end 2019.
Outlook, risks and unusual items
- Management reported Q3 rent collections above 97% and portfolio occupancy of 93% at September 30. Properties remained open and operating. Management expects operations to normalize over time, but provided no quantified earnings or revenue guidance.
- Management stated it believes available cash, operating cash flow and additional mortgage debt will meet obligations and distributions for at least the next 12 months, while cautioning that future refinancing may not be available on favorable terms or at all.
- COVID-19 could further weaken residential demand, occupancy and rents, especially in New York City; commercial tenants requested deferrals, and lease restructurings could be on less favorable terms. The filing identifies renewed restrictions, tenant nonpayment, eviction limitations and difficulty reletting space as risks.
- Tribeca House rent-stabilization litigation remains unresolved. An October 29, 2020 appellate ruling limited the method and look-back period for calculating possible overcharges but did not eliminate potential liability; attorneys’ fees were affirmed. A related tenant action is also pending. No liability was recorded because the amount and timing were not determinable.
- Debt maturity concentration merits attention: $21.1 million of principal was listed as due in the remainder of 2020, including the 1010 Pacific Street loan maturing December 24, 2020. That loan has a one-year extension option and carried a 4.85% rate at quarter-end.
- The company recognized an $838,000 gain on termination of a Tribeca House commercial lease and an $85,000 insurance-related gain on involuntary conversion during the nine-month period. It reported no property impairment as of September 30.
- The board authorized up to $10 million of share repurchases; 45,858 shares were repurchased for approximately $0.3 million in Q3, leaving about $9.7 million authorized.
Important facts for investors to verify
- Subsequent developments and estimated exposure in the Kuzmich and Crowe rent-stabilization cases, including potential overcharges and legal fees.
- Tribeca House leasing, occupancy and rental-rate trends, and whether portfolio rent collections and occupancy remain resilient.
- Availability and terms of the 1010 Pacific Street loan extension or refinancing, and the company’s broader debt maturities, covenants and refinancing capacity.
- Whether operating cash flow can sustain capital spending, debt service and distributions; nine-month operating cash flow was below the $12.9 million of distributions paid.
- The assumptions behind management’s 12-month liquidity assessment and the pace of recovery in New York City residential and commercial markets.