Clipper Realty Inc. — Q2 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2017. Clipper Realty owns and operates residential and commercial properties in Manhattan and Brooklyn and has elected REIT status. Its portfolio expanded with the May purchase of the vacant 161-unit 107 Columbia Heights property for $87.5 million. The company completed its IPO in February and March, raising approximately $78.8 million net. At June 30, the company’s interest generally entitled it to 40.4% of the aggregate cash distributions, profits and losses of the property-owning LLCs.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $25.4 million | $22.2 million | $50.6 million | $43.9 million |
| Income from operations | $7.3 million | $6.1 million | $14.7 million | $12.1 million |
| Operating margin | 28.9% | 27.6% | 29.0% | 27.6% |
| Net loss | $(1.6) million | $(3.5) million | $(2.9) million | $(6.7) million |
| Net loss attributable to common stockholders | $(0.65) million | $(1.07) million | $(1.12) million | $(2.04) million |
| Basic and diluted loss per share | $(0.04) | $(0.10) | $(0.08) | $(0.18) |
For Q2, reported NOI was $14.0 million versus $11.8 million, FFO was $2.5 million versus a loss of $0.2 million, and AFFO was $4.1 million versus $2.0 million. For the first half, NOI was $27.6 million versus $22.8 million, FFO was $5.1 million versus a loss of $0.1 million, and AFFO was $8.1 million versus $3.9 million. These are company-defined non-GAAP measures and should not be treated as substitutes for GAAP earnings or cash flow.
Liquidity, cash flow and debt
- At June 30, cash and cash equivalents were $68.5 million, restricted cash was $13.4 million, and total assets were $1.027 billion.
- First-half operating cash flow was $4.3 million, compared with $5.0 million in 2016. Investing used $98.3 million, including the 107 Columbia Heights acquisition, capital spending and a $2.1 million refundable deposit for a proposed acquisition. Financing provided $124.9 million, principally from the IPO and new borrowing. Cash increased by $30.9 million.
- Debt principal was $822.9 million before $12.4 million of unamortized issuance costs; reported notes payable, net, were $810.5 million. Debt increased from $764.6 million at year-end 2016. Fair value of debt was $811.9 million.
- The largest near-term maturity is $410 million of Tribeca House debt due November 2018, with three one-year extension options. Management cited $26 million of expected capital projects for the remainder of 2017 and said refinancing is not assured on favorable terms or at all.
- Approximately $469 million of variable-rate debt is covered by interest-rate caps. Management estimated that a 1 percentage-point rate change on that amount would affect annual net income by approximately $4.7 million.
Material changes and management commentary
Revenue increased 14.2% in Q2 and 15.2% for the first half year over year. The filing’s same-property comparison excluding Aspen showed revenue growth of 6.7% in Q2 and 7.5% for the first half. Drivers included higher residential rents and occupancy at Flatbush Gardens, new leases at Tribeca House, and a new office lease at 250 Livingston Street. Flatbush Gardens’ reported base rent per square foot rose from $20.83 to $21.59, while leased occupancy increased from 96.5% to 97.0%.
Expenses also rose: for the first half, real estate taxes and insurance increased 12.8% and general and administrative expense increased 16.9% on the filing’s comparison excluding Aspen. Management attributed higher costs to increased property taxes following the cessation of abatements, staffing, transitional legal costs, an executive bonus and incentive compensation. Lower interest expense after prior refinancings helped reduce the net loss. The 107 Columbia Heights acquisition added a vacant property under redevelopment and a $59 million floating-rate mortgage; a construction loan may provide up to $14.7 million for eligible improvements and carrying costs.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said it expects operating cash flow to meet short-term liquidity needs, but expects long-term needs to exceed operating cash flow and anticipates using debt, equity and other capital sources.
- A July 2017 court ruling involving 41 tenants at 50 Murray Street and 53 Park Place found the tenants subject to rent stabilization related to 421-g tax abatements and referred potential overcharges for determination. The ruling was stayed, the company intends to appeal, and potential liability cannot be estimated clearly from the filing. Two other cases had similar decisions.
- New York City government leases represented approximately 20% of revenue in both reported periods. The portfolio is concentrated in Manhattan and Brooklyn; management also identifies rent regulation, tenant claims, refinancing, interest rates, property operating costs, development costs and access to capital as risks.
- Management states disclosure controls were effective at a reasonable assurance level, while also describing limited accounting personnel and systems that may not be sufficient to ensure effective internal financial reporting controls. No material change in internal control over financial reporting was identified during the quarter.
- The company reported no material off-balance-sheet arrangements. A proposed 10 West 65th Street acquisition remained conditional; its approximately $2.1 million deposit was refundable.
Important facts for investors to verify
- Progress, cost and financing of the 107 Columbia Heights redevelopment, including use and availability of the construction facility.
- Outcome and potential financial exposure from the rent-stabilization litigation, including the appeal and any rent-overcharge determination.
- Plans to refinance or extend the $410 million Tribeca House debt before its 2018 maturity, and the terms of other floating-rate borrowings.
- Whether rent growth and operating performance offset higher taxes, insurance, administrative costs and planned capital expenditures.
- Cash available for distributions after capital projects and debt service, and the impact of the IPO-related increase in common shares outstanding.
- Further detail on internal-control staffing and systems as public-company reporting obligations increase.