Clipper Realty Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company owns and operates residential and commercial real estate in Manhattan and Brooklyn and is taxed as a REIT. Financial statement amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $35.1 | $32.8 | $103.3 | $96.7 |
| Income from operations | $9.2 | $7.3 | $24.2 | $20.9 |
| Net loss | ($2.3) | ($2.8) | ($12.7) | ($9.2) |
| Net loss attributable to common stockholders | ($0.9) | ($1.1) | ($4.8) | ($3.5) |
| Basic and diluted loss per share | ($0.07) | ($0.08) | ($0.36) | ($0.26) |
| Net interest expense | $11.5 | $10.1 | $33.0 | $30.1 |
- Q3 revenue rose 7.1% year over year, led by residential rental income; commercial rental income was slightly lower. Operating income rose 26.1%, and operating margin was approximately 26.2% versus 22.2%.
- For the first nine months, revenue increased 6.8% and operating income increased 15.8%. Net loss widened, principally reflecting higher interest expense and a $3.9 million loss on extinguishment of debt. The 2023 debt loss related to early termination of the 1010 Pacific construction loan, including prepayment penalties and accelerated loan costs.
- Residential revenue increased with rent growth. Commercial revenue declined year to date, partly because 2022 included a revenue recovery related to tenant collectability at Tribeca House.
- Q3 FFO was $5.0 million and AFFO $6.3 million, compared with $4.0 million and $5.0 million, respectively. Nine-month FFO was $8.7 million versus $11.0 million; AFFO was $16.2 million versus $14.5 million. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $17.1 million, compared with $15.2 million in 2022. Investing cash outflow was $27.8 million versus $42.0 million, principally reflecting lower capital spending and no repeat of 2022 Dean Street land purchases. Financing cash inflow was $17.3 million versus $10.1 million.
- At September 30, 2023, cash and cash equivalents were $22.5 million and restricted cash was $14.9 million. Net notes payable were $1.197 billion; gross principal debt was $1.212 billion, compared with $1.171 billion at year-end 2022. Total liabilities were $1.226 billion and total equity $13.6 million.
- Management said cash on hand, operating cash flow and expected financing sources should meet obligations and distributions for at least 12 months, but gave no assurance of future refinancing. It expects long-term needs to require additional debt or equity, among other sources. A $5 million corporate credit line was undrawn at quarter-end.
- Debt refinancing and construction financing during 2023 included a Valley National Bank loan for 1010 Pacific Street and construction loans for Dean Street. Dean Street financing permits up to $115 million of senior borrowing and $8 million of mezzanine borrowing; the mezzanine rate was 15.33% at quarter-end. The 1010 Pacific additional $20 million borrowing carries a 6.37% rate.
- Scheduled principal maturities include $82.1 million in 2025, $44.7 million in 2026 and $33.5 million in 2027; $1.049 billion is due thereafter. The company reported $74.4 million of variable-rate debt; a one-percentage-point rate increase would raise annual net loss by approximately $0.7 million. No interest-rate caps were in place.
Material developments, outlook and risks
- In June 2023, Flatbush Gardens entered a 40-year Article 11 agreement. It provides a full property-tax exemption, with rent, tenant-service, affordable-unit and prevailing-wage obligations. The property also has a three-year capital-improvement plan estimated to cost up to $27 million; the company expects tax savings and enhanced rental assistance payments to offset those costs. The agreement includes a commitment to lease 249 units to formerly homeless families.
- Management cited residential rent growth and lower Flatbush Gardens property-tax costs as operating benefits. It said inflation had not materially affected reported results but could raise future acquisition, replacement and operating costs. No specific earnings or revenue guidance was provided.
- Commercial leases with New York City represented approximately 23% of revenue in both the quarter and nine-month period, creating tenant concentration exposure. The portfolio is concentrated in Manhattan and Brooklyn.
- Tenant rent-stabilization litigation continues, including the Crowe matter in settlement discussions after a September 2023 hearing and a separate Horn case scheduled for a preliminary conference in December 2023. The company previously recorded a $2.7 million litigation charge; it paid $0.4 million related to Crowe during the nine months.
- Other stated risks include refinancing access and cost, interest-rate and market movements, New York City regulation, rent-stabilization claims, operating-cost control, development financing and cost overruns, and property damage. Management reported no default on loan agreements, no material change to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Upcoming refinancing and repayment requirements, particularly the 2025 maturities and the company’s ability to refinance on acceptable terms.
- Actual cost and timing of Flatbush Gardens’ up-to-$27 million improvement plan, and whether tax and rental-assistance benefits offset spending as expected.
- Interest-rate exposure on floating-rate debt, including the absence of rate caps and the cost of Dean Street mezzanine financing.
- Progress and funding needs for Dean Street redevelopment and 1010 Pacific Street financing, including whether all committed loan proceeds and extension options remain available.
- Occupancy, rent collections, rent-stabilization litigation outcomes, and continued reliance on New York City as a major commercial tenant.
- Distribution sustainability relative to cash generation, capital spending and debt service; REIT distribution requirements do not themselves ensure that cash will be available.