Clipper Realty Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company is a New York City-focused REIT with residential and commercial properties in Manhattan and Brooklyn; residential activities generated 75% of revenue. The company’s interest in the property-owning entities generally entitled it to 40.4% of their distributions and profits and losses.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $27.9 million | $26.0 million | $82.1 million | $76.6 million |
| Income from operations | $9.1 million | $7.4 million | $24.0 million | $22.0 million |
| Net income (loss) | $1.3 million | $(1.6) million | $(7.4) million | $(4.5) million |
| Net income (loss) attributable to common stockholders | $0.5 million | $(0.6) million | $(3.0) million | $(1.8) million |
| Basic and diluted EPS | $0.02 | $(0.04) | $(0.18) | $(0.11) |
| Operating margin | 32.6% | 28.3% | 29.2% | 28.8% |
| Operating cash flow | — | $24.8 million | $8.0 million |
Q3 revenue rose 7.5% year over year, including contribution from 10 West 65th Street, acquired in October 2017. Excluding that property, management reported revenue growth of 4.5%. Nine-month net loss included a $7.0 million debt-extinguishment charge related to February refinancing. Q3 included a $0.2 million gain on insurance proceeds for fire-damaged units.
For the nine-month period, company-reported non-GAAP measures were FFO of $5.9 million versus $7.6 million, AFFO of $14.4 million versus $12.1 million, Adjusted EBITDA of $38.7 million versus $36.5 million, and NOI of $44.6 million versus $41.6 million. These measures are not substitutes for GAAP results or cash flow.
At September 30, 2018, total assets were $1.07 billion, cash and cash equivalents were $12.4 million, and restricted cash was $12.7 million. Notes payable were $883.7 million gross and $873.1 million net of issuance costs, up from $855.1 million gross at year-end 2017. Total liabilities were $900.6 million and total equity was $167.0 million. Capital expenditures were $28.5 million in the first nine months; dividends and distributions totaled $12.8 million.
Material changes and financing
- Residential rental income increased 8.7% in Q3 and 8.2% year to date, partly reflecting higher rents and occupancy at Flatbush Gardens. Commercial income declined 1.8% in both comparisons. Tenant recoveries and garage and other income increased.
- Q3 operating expenses were broadly lower excluding the newer 10 West 65th Street property, with lower general and administrative costs; property operating costs and depreciation increased. Year-to-date real estate taxes and insurance rose 6.0% excluding that property.
- Interest expense declined year over year following February refinancing of Flatbush Gardens and Tribeca House. The company replaced the prior loans with a $246 million Flatbush Gardens loan and a $360 million Tribeca House loan, both maturing in 2028. The company reported no debt maturing in 2018; scheduled principal payments include $69.5 million in 2020.
- Operating cash flow improved, while investing cash use was $27.8 million, primarily for property capital projects. Financing cash flow was $7.5 million, reflecting refinancing proceeds and repayments, issuance and extinguishment costs, and distributions.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management said it expects operating cash flow to meet short-term liquidity needs, but does not expect operating cash flow alone to meet all long-term needs; future capital may come from additional debt, equity, or property sales. Management cautioned that access to financing is not assured.
- The company was negotiating renewal of City of New York leases at 250 Livingston Street, expiring in August 2020. Proposed terms could raise rents from a blended $27.71 per square foot to the low-to-mid $40 range, but there is no assurance of an agreement. City leases accounted for about 19% of revenue in the 2018 periods.
- Touro College exercised an option to terminate leases for 40 apartments at 10 West 65th Street effective January 31, 2019. Management planned to reposition and re-lease the apartments at market rates.
- An appeal remained possible in the rent-stabilization case involving 41 current or former tenants at 50 Murray Street and 53 Park Place. An appellate court had ruled for the company, but leave to appeal was granted; potential liability was not estimable. The filing also disclosed an Americans with Disabilities Act claim at 141 Livingston Street, which management did not expect to have a material adverse effect.
- Portfolio concentration in New York City, rent regulation, property operating costs, refinancing and interest-rate exposure are notable risks. A 1% change in rates on $63.5 million of variable-rate debt was estimated to affect annual net income by about $0.6 million.
Important facts for investors to verify
- Progress and final economics of the City lease renewal negotiations, including the space measurement and proposed rent rate.
- Re-leasing, timing, and any vacancy or renovation costs for the 40 Touro College apartments.
- Outcome and potential financial exposure of the rent-stabilization appeal and other legal claims.
- Debt maturities, refinancing options, variable-rate exposure, and the company’s capacity to fund capital spending and distributions with cash and available financing.
- Whether reported operating-cash-flow improvement is sustainable, given working-capital movements and ongoing capital requirements.