Clipper Realty Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are to the corresponding 2016 periods unless noted. Amounts are in millions of dollars except per-share data. Clipper Realty owns and operates residential and commercial properties in Manhattan and Brooklyn and elected REIT status. The company consolidates entities in which it is the primary beneficiary; its interest generally entitled it to 40.4% of the underlying LLCs’ cash distributions and profits and losses at quarter-end.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $26.0 | $24.8 | $76.6 | $68.8 |
| Income from operations | $7.4 | $7.3 | $22.0 | $19.5 |
| Operating margin | 28.3% | 29.6% | 28.7% | 28.3% |
| Interest expense, net | $8.9 | $9.9 | $26.5 | $28.7 |
| Net loss | $(1.6) | $(2.5) | $(4.5) | $(9.3) |
| Net loss attributable to common stockholders | $(0.6) | $(0.8) | $(1.8) | $(2.8) |
| Basic and diluted loss per share | $(0.04) | $(0.07) | $(0.11) | $(0.25) |
| FFO | $2.5 | $1.5 | $7.6 | $1.4 |
| AFFO | $4.0 | $3.3 | $12.1 | $7.2 |
| Adjusted EBITDA | $12.3 | $12.2 | $36.5 | $32.2 |
| NOI | $14.0 | $13.8 | $41.6 | $36.6 |
FFO, AFFO, Adjusted EBITDA and NOI are company-presented non-GAAP measures; the filing cautions they are not substitutes for GAAP results or cash flows and may not be comparable across REITs.
- Revenue and costs: Q3 revenue rose 4.7%; operating expenses rose 6.7%, leaving operating income nearly flat. Nine-month revenue increased 11.4%, while operating expenses rose 10.8%.
- Balance sheet at September 30: Total assets were $1,023.4, including net real estate of $914.8. Notes payable were $821.4 gross principal ($810.0 net of unamortized loan costs), versus $764.6 gross at December 31, 2016. Total equity was $190.2.
- Liquidity: Cash and cash equivalents were $54.8 and restricted cash was $17.8. Management said it used approximately $38 million of cash toward the subsequent 10 West 65th Street acquisition. The filing states management believes resources are sufficient for short-term needs, but operating cash is not expected to cover all long-term needs.
- Cash flow, nine months: Operating activities provided $8.0, investing activities used $109.8, and financing activities provided $119.0. Cash increased $17.2 to $54.8. Investing outflows included $87.6 for 107 Columbia Heights, an $8.1 acquisition deposit, and $14.1 of property additions. Financing included $78.7 of IPO proceeds and $59.3 of mortgage proceeds; distributions were $12.3.
Changes versus the prior comparable period
- Residential rental revenue increased 5.0% in Q3 and 10.7% for the nine months, with the nine-month comparison including Aspen, acquired in June 2016. Excluding Aspen, nine-month residential revenue increased 5.2%; Flatbush Gardens rent per square foot rose from $21.04 to $22.20, and leased occupancy increased from 96.6% to 97.3%.
- Commercial rental revenue increased 12.1% in Q3 and 18.6% for the nine months; management cited a new 250 Livingston Street office lease that commenced in January 2017. Excluding Aspen, nine-month commercial revenue rose 13.2%.
- Q3 real estate taxes and insurance increased 13.4%; management cited higher taxes at Flatbush Gardens and Tribeca House, partly due to the cessation of tax abatements. Nine-month taxes and insurance rose 13.6% excluding Aspen.
- Interest expense declined 9.7% in Q3 and 7.8% for the nine months, reflecting lower balances and rates after refinancing Tribeca House and, for the nine-month comparison, 141 Livingston Street, as well as lower loan-cost amortization.
- Common shares outstanding increased to 17.8 million from 11.4 million at year-end 2016 following the February/March IPO of 6.39 million shares at $13.50. The company also redeemed its preferred stock in June 2017.
Outlook, risks and unusual items
- Guidance: The filing provides no specific earnings, revenue, FFO or occupancy guidance. Management expects short-term needs to be met principally with operating cash flow and anticipates long-term needs will require cash, equity and/or additional secured or unsecured debt. It gives no assurance that capital will be available on favorable terms.
- Debt and refinancing: $410.0 million of Tribeca House debt matures in November 2018, with three one-year extension options. Another $59.3 million matures in May 2020, with two one-year extensions. The company cautions it may not be able to refinance debt on favorable terms or at all. Scheduled principal requirements show $416.7 million in 2018, largely reflecting the Tribeca House maturity.
- Interest-rate exposure: Approximately $469.3 million of debt was variable rate and covered by interest-rate caps at stated LIBOR thresholds. A 1 percentage-point rate change on that debt would affect annual net income by approximately $4.7 million.
- Concentration: Properties are all in Manhattan and Brooklyn. New York City leases represented approximately 20% of revenue in both Q3 and the first nine months of 2017; the filing flags the risk associated with a single government tenant.
- Rent-stabilization litigation: A court ruled for 41 current or former tenants at 50 Murray Street and 53 Park Place, finding rent-stabilization requirements applied and referring possible overcharges and fees to further determination. Two other cases had similar decisions. The ruling was stayed; the company intends to appeal and says potential liability cannot currently be estimated with specificity.
- Acquisitions: The company acquired 107 Columbia Heights for $87.5 million in May 2017; the vacant 161-unit property was under redevelopment, with up to $14.7 million of construction financing available. After quarter-end, on October 27, the company acquired 10 West 65th Street for $79.0 million and obtained a $34.35 million mortgage.
- Controls and operations: Management described limited accounting personnel, systems and supervisory resources, and possible need for additional controls and finance staff as a public company. Management nevertheless concluded disclosure controls were effective at a reasonable-assurance level at September 30, 2017. No material changes in internal control over financial reporting were reported for the quarter.
- Other identified risks include rent regulation changes, operating-cost control, property damage and severe weather, redevelopment costs and execution, tenant concessions and capital needs, competition, and REIT qualification. The filing reports no material change to the risk factors in the 2016 Form 10-K.
Important facts for investors to verify
- Track the refinancing plan and extension conditions for the $410 million Tribeca House debt due in November 2018, and the effect of floating-rate borrowing costs.
- Follow the rent-stabilization appeals, any determination of tenant overcharges or legal fees, and whether other similar cases expand exposure.
- Assess the performance, redevelopment spending and financing of 107 Columbia Heights, and the post-quarter 10 West 65th Street acquisition’s funding and contribution.
- Reconcile growth in rents and occupancy with higher property taxes, operating expenses and capital expenditures, and distinguish GAAP results from non-GAAP FFO/AFFO.
- Monitor liquidity after acquisitions, required distributions under REIT rules, access to future debt or equity, and the company’s development of public-company financial controls.