Clipper Realty Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 16, 2021. This is an annual report, not a standalone Q4 filing. The company is a New York City-focused REIT with residential, commercial and retail properties in Manhattan and Brooklyn.
Business context and portfolio
At year-end, the portfolio comprised eight properties, with approximately 3.26 million rentable square feet in operation and approximately 119,000 square feet under development at 1010 Pacific Street. Operating properties were 94.7% leased. Residential rentals generated 74% of 2020 revenue. City of New York agencies leased approximately 17% of portfolio rentable area and represented approximately 23% of annualized portfolio rent. Seven properties generated revenue; 1010 Pacific Street was under development.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $122.9 million | $116.2 million |
| Income from operations | $32.1 million | $33.5 million |
| Net loss | $12.2 million | $4.1 million |
| Net loss attributable to common stockholders / diluted loss per share | $4.9 million / $0.31 | $1.7 million / $0.11 |
| Net cash from operating activities | $16.0 million | $23.8 million |
| Capital expenditures | $31.8 million | $43.8 million |
| FFO / AFFO (non-GAAP) | $11.4 million / $16.8 million | $15.5 million / $22.0 million |
| Adjusted EBITDA / NOI (non-GAAP) | $56.4 million / $63.6 million | $56.1 million / $62.8 million |
Revenue grew 5.8%, while operating income declined 4.0% and net loss widened. Operating margin was approximately 26.2% and net margin approximately negative 10.0% (calculated from reported GAAP figures). Net interest expense was $40.2 million, exceeding operating income. Operating cash flow fell by $7.8 million, reflecting weaker cash flow from operations and working-capital movements. Cash and cash equivalents were $72.1 million, with an additional $17.0 million of restricted cash.
Gross property-level debt was $1.090 billion; the balance-sheet amount, net of unamortized debt costs, was $1.079 billion. The company reported no corporate debt and no loan defaults. Debt maturities and interest requirements totaled $65.0 million in 2021, including $24.2 million of principal. The company said cash on hand, operating cash flow and additional mortgage financing should cover operations, contractual obligations and distributions for at least 12 months, while noting refinancing is not assured.
Cash dividends were $0.38 per common share for 2020, unchanged from 2019. Total distributions to common shareholders, unit holders and LTIP holders were $17.2 million, compared with $16.0 million of operating cash flow. The company repurchased 1,751,444 shares for approximately $10.0 million during 2020.
Q4 and material changes
For Q4 2020, the filing reports revenue of $30.3 million, operating income of $6.5 million, net loss of $3.8 million and diluted loss per share of $0.10. In Q4 2019, the corresponding figures were $30.6 million, $8.0 million, $2.7 million and $0.06.
- COVID-19 weakened residential demand and rents, especially at Tribeca House: leased occupancy fell from 98.2% at year-end 2019 to 89.7% at year-end 2020, and average rent per square foot fell from $70.52 to $64.20. The company reported 2020 rent collection of 96.0%, including 95.2% in Q4.
- Commercial rental income increased, mainly due to a new lease at 250 Livingston Street and higher straight-line rent at 141 Livingston Street. Real estate taxes and insurance rose 9.2% excluding Clover House; depreciation and amortization also increased.
- Net loss included a $4.2 million loss on modification/extinguishment of debt related to refinancing Flatbush Gardens, partly offset by an $0.8 million gain on termination of a Tribeca House lease.
- Flatbush Gardens debt was refinanced in May 2020 with a $329 million loan. After year-end, 141 Livingston Street debt was refinanced with a $100 million, 10-year loan at 3.21%.
- Management restated the first three quarters of 2020 after identifying an error in straight-line rent accounting for the 141 Livingston Street lease. Previously issued interim statements for those quarters should no longer be relied upon. The annual financial statements include the corrections.
Outlook, risks and contingencies
Management provided no specific quantitative financial guidance. It described operations as durable through the pandemic, said properties remained open, and expected New York City properties to regain normal operating conditions over time. The company planned to redevelop 1010 Pacific Street into an estimated 175-unit residential building and intended to refinance its acquisition and bridge loans with a construction loan before their June 24, 2021 maturity; completion and financing were not assured.
- Tenant concentration and lease risk: The City of New York leases the company’s office space. The City advised it may vacate 250 Livingston Street in 2025; the lease has termination options. The commercial lease-expiration schedule shows approximately $25.3 million of annualized rent, or 86.3% of scheduled commercial and retail rent, expiring in 2025.
- Rent regulation and litigation: New York rent laws restrict increases at regulated units. The Tribeca House Kuzmich litigation and a related Crowe action involve claims concerning rent stabilization and potential overcharges. A 2020 appellate ruling narrowed the method and period for calculating potential overcharges, but the amount remains undetermined; the company recorded no liability for these matters.
- Internal controls/restatement: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of a material weakness involving straight-line rent accounting and lease-term reassessment. Remediation was in progress and not yet fully tested; the auditor did not audit internal controls.
- Other exposures: The portfolio is concentrated entirely in New York City, debt is substantial, and variable-rate 1010 Pacific Street debt creates refinancing and interest-rate exposure. Rent deferrals to commercial tenants totaled $0.9 million at year-end; the allowance for doubtful accounts was $6.0 million, up from $3.4 million in 2019.
Important facts for investors to verify
- Review the restated 2020 quarterly filings and the accounting correction for the 141 Livingston Street lease; confirm remediation of the material weakness.
- Track 1010 Pacific Street refinancing and construction financing, as well as the outcome of the post-year-end 141 Livingston Street refinancing.
- Assess the City of New York’s 250 Livingston Street occupancy decision and the concentration of commercial rent tied to the 2025 expiration/termination date.
- Monitor COVID-related occupancy, achieved rents, collections, receivables and concessions, particularly at Tribeca House.
- Follow the Kuzmich and Crowe proceedings, including any quantified rent-overcharge or attorney-fee exposure; the filing does not provide a clear ultimate liability.
- Evaluate whether operating cash flow and AFFO support debt service, capital spending and distributions, especially given 2020 operating cash flow below total distributions.