Clipper Realty Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Clipper Realty is a self-managed REIT focused on residential and commercial properties in Manhattan and Brooklyn; its portfolio comprised eight properties, with 1010 Pacific Street under development.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $116.2 million | $110.0 million |
| Income from operations | $33.5 million | $32.5 million |
| Net loss | $4.1 million | $9.0 million |
| Net loss attributable to common stockholders | $1.7 million; $0.11 per share | $3.6 million; $0.22 per share |
| Cash flow from operating activities | $23.8 million | $22.4 million |
| FFO / AFFO (non-GAAP) | $15.5 million / $22.0 million | $9.0 million / $19.8 million |
| NOI / Adjusted EBITDA (non-GAAP) | $62.8 million / $56.1 million | $60.0 million / $52.1 million |
Revenue increased 5.6%, led by residential rents; commercial rental income was essentially flat. Operating expenses rose 6.6%, including a 12.0% increase in real estate taxes and insurance. Operating margin was approximately 28.8% (29.5% in 2018), calculated as income from operations divided by revenue. Net loss narrowed partly because 2018 included $8.9 million of debt-extinguishment losses, versus $2.4 million in 2019. FY2019 included $1.0 million of non-recurring litigation-related expense.
For Q4 2019, revenue was $30.6 million versus $27.9 million in Q4 2018; operating income was $8.0 million versus $8.5 million, and net loss was $2.7 million versus $1.6 million.
At year-end, cash and cash equivalents were $42.5 million and restricted cash was $14.4 million. Property-level debt was $1,009.4 million gross ($997.9 million net of unamortized debt costs); the company reported no corporate debt. Total liabilities were $1,024.4 million and total equity was $141.8 million. Operating cash flow was below the $43.8 million spent on capital projects and the $17.1 million of distributions; investing cash outflow totaled $74.9 million, funded in part by financing cash inflow of $62.2 million. Annual dividends were $0.38 per common share, unchanged from 2018.
Material changes and operating developments
- Portfolio occupancy was approximately 98% at December 31, 2019. Residential rental income rose to $87.4 million from $81.1 million; commercial rental income was $28.8 million versus $28.9 million.
- The company acquired 1010 Pacific Street for approximately $31.1 million, financed with a $18.6 million mortgage and a pre-development facility of up to approximately $3.0 million. It plans a 175-unit, approximately 119,000-square-foot building, with 30% of units designated affordable; construction was expected to start in 2020 and take about two years.
- At 250 Livingston Street, the City of New York signed a renewed ten-year office lease beginning after the existing leases expire in August 2020. Management cited an initial 57% increase in blended rent per square foot and a 16% increase in measured rentable area. The company also refinanced the property in 2019.
- Clover House completed renovation and was refinanced in November 2019. At 141 Livingston Street, the City’s lease provides for a 25% annual rent increase beginning in 2020.
- Residential rents and occupancy improved at major properties, while property operating costs, taxes and insurance increased. Capital spending was approximately $43.8 million, compared with $39.9 million in 2018.
Outlook, risks and contingencies
- Management said operating cash flow, together with additional mortgage financing, should be sufficient for operations, contractual obligations and distributions for at least the next 12 months, but gave no specific earnings or revenue guidance and did not assure future refinancing or distributions.
- The Housing Stability and Tenant Protection Act of 2019 restricts rent increases and deregulation for rent-regulated apartments. Management said the full effect was not yet measurable; regulated renewal increases were generally capped at 1.5% for one-year leases and 2.5% for two-year leases, effective October 1, 2019.
- A New York Court of Appeals decision held that apartments in buildings receiving 421-g tax benefits are not eligible for luxury deregulation. The dispute concerns 41 present or former Tribeca House tenants and potential rent overcharges and attorneys’ fees. The U.S. Supreme Court denied the company’s petition in January 2020; an appellate stay delayed the referee hearing. The company had recorded no liability because timing and amount remained uncertain. Similar claims by other tenants are possible.
- Debt is secured at the property level. Contractual principal and interest payments total approximately $64.7 million in 2020, including $24.7 million of principal. The 1010 Pacific Street floating-rate loans mature December 24, 2020, with a one-year extension option. Some other loans become subject to variable rates after their initial fixed-rate periods.
- Risks include concentrated exposure to New York City, reliance on City agencies for approximately 15% of annualized portfolio rent, rent regulation, refinancing and interest-rate exposure, construction cost and approval risks, and property-level debt covenants. Continuing investors held 59.6% of the company on a fully diluted basis and approximately 66.8% of voting power.
- The company’s 2019 distributions were characterized as 100% return of capital for federal tax purposes. REIT qualification requires ongoing compliance and generally annual distributions of at least 90% of taxable income.
Investor facts to verify
- Track the rent-overcharge litigation, any resulting liability, and potential claims beyond the 41 named tenants.
- Confirm progress, total projected cost, financing and schedule for the 1010 Pacific Street redevelopment, including the 2020 loan maturity and extension conditions.
- Review debt maturities, amortization, covenants and variable-rate exposure; reconcile gross debt with the balance-sheet net amount.
- Assess whether rent-regulation changes and rising taxes, insurance and operating costs affect rent growth, NOI and distributions.
- Evaluate the sustainability of distributions against cash flow after capital expenditures and debt service; FFO, AFFO, NOI and Adjusted EBITDA are non-GAAP measures, not substitutes for GAAP results or cash flow.
- Consider the City of New York tenant concentration, governance and voting control, and related-party arrangements disclosed in the filing.