Clipper Realty Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company owns and operates residential and commercial real estate concentrated in Manhattan and Brooklyn and is organized as a REIT. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $32.8 | $30.6 | $96.7 | $92.0 |
| Income from operations | $7.3 | $7.0 | $20.9 | $20.1 |
| Net loss | $(2.8) | $(3.4) | $(9.2) | $(13.8) |
| Net loss attributable to common stockholders | $(1.1) | $(1.3) | $(3.5) | $(5.2) |
| Basic and diluted loss per share | $(0.08) | $(0.09) | $(0.26) | $(0.36) |
| Net operating income (NOI; non-GAAP) | $17.4 | $16.1 | $51.0 | $47.0 |
| Adjusted EBITDA (non-GAAP) | $14.9 | $14.2 | $44.0 | $41.4 |
- Q3 revenue rose 7.1% year over year: residential rental income increased 8.3% and commercial rental income increased 4.3%. Q3 NOI increased 7.8%; NOI margin was approximately 52.9%, versus 52.6% a year earlier.
- For the nine months, revenue rose 5.2% and net loss narrowed by $4.6 million. The comparison benefited in part from the absence of the $3.0 million debt-extinguishment loss recorded in 2021.
- Operating costs increased overall in Q3. For the nine months, real estate taxes and insurance increased 6.8%, general and administrative expense rose 20.2%, and property operating expenses declined 3.6%.
- Cash from operating activities was $15.2 million for the nine months, versus $13.5 million. Investing activities used $42.0 million, mainly for development and acquisitions; financing activities provided $10.1 million. Cash and cash equivalents declined to $20.0 million from $34.5 million at year-end; restricted cash was $15.5 million.
Balance sheet, debt and liquidity
- At September 30, total assets were $1.229 billion, total liabilities $1.185 billion, and total equity $44.0 million.
- Gross mortgage and other debt was $1.167 billion; carrying value net of unamortized issuance costs was $1.157 billion. Estimated fair value was $1.081 billion. Debt increased from $1.144 billion gross at December 31, 2021.
- Most property loans bear fixed rates, but $75.9 million of debt was variable-rate. Management estimated that a 1 percentage-point rate increase would affect annual net loss by approximately $0.8 million. The company reported no interest-rate caps.
- Scheduled principal payments include $37.5 million for the remainder of 2022 and $41.3 million in 2024. The Dean Street loan, with $37.0 million outstanding and a 7.10% rate, was due December 22, 2022, subject to two six-month extension options. 1010 Pacific Street development debt was $39.0 million, bore a variable rate of 6.2%, and matured in September 2024, with extension options.
- Management stated it expected operating cash and cash on hand, together with additional mortgage debt, to cover operations, contractual obligations and distributions for at least 12 months. It also said operating cash flow alone would not meet all long-term needs and that future capital access is not assured.
Changes, outlook and risks
- Management described recovery from the pandemic: residential portfolio leased occupancy reached 99.1%, compared with 97.7% in Q4 2019; weighted average rent was $37.36 per square foot, versus $36.47 pre-pandemic. New-tenant rents during 2022 were reported up more than 20% from prior rents and renewals up more than 9%. Management cautioned that these trends may not continue.
- The company invested in redevelopment at 1010 Pacific Street and Dean Street. Real estate under development rose to $134.8 million from $97.3 million at year-end. In 2022 it acquired additional Dean Street parcels and paid $2.5 million for a tenant to vacate a leased parcel.
- ASC 842 was adopted in Q1 2022. The transition produced a $6.0 million cumulative-effect reduction to equity; the company also recorded $2.3 million of 2022 revenue reductions for receivables deemed not collectible, partially offset by $1.1 million of revenue restoration after reassessing one tenant’s collectability.
- Litigation over rent-stabilization claims at Tribeca House resulted in a $2.7 million charge recorded in 2021. The company paid $2.3 million in Q3 2022 and reported $0.4 million remaining. Related tenant actions remained pending, with settlement discussions ongoing.
- New York City leases represented approximately 24% of revenue in both Q3 and the first nine months of 2022. The portfolio’s geographic concentration, rent regulation, inflation and interest rates, development costs, tenant collections, and refinancing availability are material risks. Management said it believed it was not in default on loan agreements.
- No formal financial guidance was provided. The board declared a $0.095-per-share dividend after quarter-end, payable November 25, 2022.
- Management reported disclosure controls and procedures were effective as of September 30, 2022. The filing’s forward-looking-risk discussion references a prior restatement and a recently identified material weakness; the supplied text does not clearly explain their status or how they relate to the controls conclusion.
Key facts for investors to verify
- Debt maturity and extension status, particularly the Dean Street loan, and the company’s ability to refinance or fund ongoing development.
- Current cash available after restricted balances, required capital spending, distributions, and near-term principal payments.
- Whether occupancy and rent growth persist, and the effect of rent regulation, tenant credit and collection trends on reported revenue.
- Potential exposure from pending Tribeca House rent-stabilization claims and any developments in related litigation.
- The status of the referenced restatement and material weakness, given the filing’s statement that disclosure controls were effective.
- Non-GAAP measures are management-defined supplemental measures and should be assessed alongside GAAP results and cash flows.