Clipper Realty Inc. — Q3 2019 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2019. Clipper Realty owns and operates residential and commercial properties in Manhattan and Brooklyn. Residential properties generated 75% of revenue in the nine-month period; the company’s interest in the property-owning entities generally entitled it to 40.4% of their cash distributions and profits or losses.
Financial results and liquidity
Amounts below are in millions, except per-share data. Results are unaudited.
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $29.44 | $27.95 | $85.54 | $82.12 |
| Income from operations | $8.51 | $9.11 | $25.47 | $23.96 |
| Consolidated net income (loss) | $(0.18) | $1.25 | $(1.47) | $(7.44) |
| Net income (loss) attributable to common stockholders | $(0.07) | $0.51 | $(0.59) | $(3.00) |
| Basic and diluted EPS | $(0.01) | $0.02 | $(0.05) | $(0.18) |
| FFO / AFFO (non-GAAP) | $4.75 / $5.42 | $5.60 / $5.77 | $12.60 / $16.78 | $5.95 / $14.41 |
- Revenue and margins: Q3 revenue rose 5.3% year over year, led by residential rent; commercial rent was nearly flat. Operating income fell 6.6% in Q3 but rose 6.3% year to date. Operating margin was approximately 28.9% in Q3 versus 32.6% a year earlier, and 29.8% for 9M versus 29.2%.
- Expenses and earnings: Q3 operating expenses increased 11.1%, including higher property costs, real estate taxes and insurance, and depreciation. Q3 net results also compared with a 2018 period that included a $0.19 million insurance-related gain. For 9M, the smaller net loss mainly reflects a lower debt-extinguishment loss: $1.77 million in 2019 versus $6.98 million in 2018.
- Cash flow: 9M operating cash flow was $18.39 million, down from $23.81 million. Investing used $36.51 million, including $34.96 million of property additions and a $1.55 million acquisition deposit. Financing provided $32.89 million. Cash and cash equivalents were $43.55 million and restricted cash was $17.08 million at quarter end.
- Debt and liquidity: Debt was $973.49 million gross, or $963.22 million net of unamortized issuance costs, compared with $925.61 million gross at year-end 2018. Total liabilities were $989.93 million and total equity $148.38 million. Scheduled principal payments included $69.92 million in 2020; most debt maturities were thereafter. Management said cash flows and additional mortgage debt should support operations and obligations for at least 12 months, but gave no assurance of future refinancing or capital-market access.
- Distributions: The company paid $4.28 million in dividends and distributions in Q3 and $12.81 million for 9M. As a REIT, it generally must distribute at least 90% of taxable income.
Material changes, outlook and risks
- Management attributed residential revenue growth, excluding Clover House, to higher rents and occupancy at Flatbush Gardens and Tribeca House. At September 30, those properties were 99.5% and 98.2% leased, respectively. Clover House development was substantially complete and lease-up at market rents had begun; management anticipated full occupancy by year-end.
- On November 8, 2019, after quarter-end, the company refinanced Clover House debt with an $82 million, 10-year, fixed-rate mortgage at 3.53%, interest-only, and acquired 1010 Pacific Street in Brooklyn for $31 million. It plans a nine-story multifamily redevelopment there.
- New York’s Housing Stability and Tenant Protection Act, effective June 2019, permanently changed rent-stabilization rules, including eliminating vacancy decontrol and limiting certain rent increases. Management said the law will reduce its ability to raise rents on rent-stabilized units.
- A New York Court of Appeals ruling in a rent-regulation dispute involving 41 current or former tenants at 50 Murray Street and 53 Park Place was adverse to the company. The amount of any rent overcharges and attorneys’ fees remained undetermined; the company recorded no liability and said other tenants may bring similar claims. Proceedings were stayed pending appeal, and the company petitioned the U.S. Supreme Court.
- Commercial leases with New York City accounted for about 18% of Q3 revenue and 19% of 9M revenue, creating tenant-concentration exposure. The portfolio is concentrated in Manhattan and Brooklyn. A 1 percentage-point interest-rate change on $64.7 million of variable-rate debt was estimated to affect annual net income by about $0.6 million.
- No numerical earnings or operating guidance was provided. Management cited market conditions, refinancing and capital availability, New York regulation, tenant rent claims, operating costs, redevelopment execution and property risks among uncertainties. It reported no material change to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Track the 421-g rent-stabilization litigation, potential tenant claims, any eventual overcharge calculation and whether a liability is recognized.
- Assess the earnings and cash-flow effects of the 2019 rent-law changes, including limits on rent increases and the company’s rent-stabilized exposure.
- Review debt maturities, refinancing needs and post-quarter Clover House refinancing; distinguish restricted cash from funds available for general use.
- Monitor operating cash flow against capital spending and distributions; FFO and AFFO are non-GAAP measures and do not establish that cash is sufficient for debt principal, improvements and distributions.
- Verify Clover House lease-up and the financing, redevelopment plan and costs for 1010 Pacific Street, acquired after quarter-end.
- Consider the New York City portfolio concentration and the material contribution from the City of New York as a commercial tenant.