CLIPPER REALTY INC. You should read the following discussion of our financial condition and results of operations in conjunction with the more detailed information set forth under the captions "Selected Financial Data" and "Cautionary Note Concerning Forward-Looking Statements," and in our financial statements and the related notes thereto appearing elsewhere in this Annual Report on Form 10-K. The financial statements for periods and as of dates prior to the formation transactions represent consolidated historical financials of the Predecessor. Overview of Our CompanyClipper Realty Inc. (the "Company" or "we") is a self-administered and self-managed real estate company that acquires, owns, manages, operates and repositions multifamily residential and commercial properties in theNew York metropolitan area, with a current portfolio inManhattan andBrooklyn . Our primary focus is to own, manage and operate our portfolio and to acquire and reposition additional multifamily residential and commercial properties in theNew York metropolitan area. The Company has been organized and operates in conformity with the requirements for qualification and taxation as a real estate investment trust ("REIT") under theU.S. federal income tax law and elected to be treated as a REIT commencing with the taxable year endedDecember 31, 2015 . 44
-------------------------------------------------------------------------------- The Company was incorporated onJuly 7, 2015 . OnAugust 3, 2015 , we closed a private offering of shares of our common stock, in which we raised net proceeds of approximately$130.2 million . In connection with the private offering, we consummated a series of investment and other formation transactions that were designed, among other things, to enable us to qualify as a REIT forU.S. federal income tax purposes. InFebruary 2017 , the Company sold 6,390,149 primary shares of common stock (including the exercise of the over-allotment option, which closed onMarch 10, 2017 ) to investors in an initial public offering ("IPO") at$13.50 per share. The proceeds, net of offering costs, were approximately$78.7 million . The Company contributed the IPO proceeds to theOperating Partnership in exchange for units in theOperating Partnership .
On
On
On
As of
• two neighboring residential/retail rental properties at
53 Park Place in the Tribeca neighborhood ofManhattan ;
• one residential property complex in the East Flatbush neighborhood of
consisting of 59 buildings;
• two primarily commercial properties in
includes 36 residential apartment units);
• one residential/retail rental property at
• one residential rental property at 107
Heights neighborhood of Brooklyn ;
• one residential rental property at
neighborhood of Manhattan ; and
• one property at
Brooklyn , to be redeveloped as a residential rental building.
These properties are located in the most densely populated major city in
The Company's ownership interest in its initial portfolio of properties, which includes the Tribeca House,Flatbush Gardens and the twoLivingston Street properties, was acquired in the formation transactions in connection with the private offering. These properties are owned by the LLC subsidiaries, which are managed by the Company through theOperating Partnership .The Operating Partnership's interests in the LLC subsidiaries generally entitle theOperating Partnership to all cash distributions from, and the profits and losses of, the LLC subsidiaries other than the preferred distributions to the continuing investors who holdClass B LLC units in these LLC subsidiaries. The continuing investors own an aggregate amount of 26,317,396Class B LLC units, representing 59.6% of the Company's common stock on a fully diluted basis. Accordingly, theOperating Partnership's interests in the LLC subsidiaries entitle theOperating Partnership to receive 40.4% of the aggregate distributions from the LLC subsidiaries. The Company, through theOperating Partnership , owns all of the ownership interests in theAspen property, the Clover House property, the10 West 65th Street property and the1010 Pacific Street property. How We Derive Our Revenue
Our revenue consists primarily of rents received from our residential, commercial and, to a lesser extent, retail tenants.
45
--------------------------------------------------------------------------------Trends During 2019, 2018 and 2017, the Company's properties generally experienced increasing demand. At the141 Livingston Street property, in the downtownBrooklyn neighborhood, theCity of New York confirmed inOctober 2019 that it will continue its commercial lease at the property through expiration at the end of 2025; per the terms of the lease, the annual rent will increase 25% at the end of 2020. At the nearby250 Livingston Street property, theCity of New York signed a lease inMay 2019 for renewal of its commercial leases at the property; the new lease will have a ten-year term commencing upon expiration of the current leases inAugust 2020 , and provides for an initial 57% increase in blended rent per square foot and a 16% increase in rentable square feet through a remeasurement. The Company continues to benefit from renters' increasing preference to live in or near urban centers and the flexibility that rental apartments offer. At theFlatbush Gardens residential apartment complex, the Company increased average rent per square foot from$20.63 atDecember 31, 2015 , to$21.24 atDecember 31, 2016 , to$22.47 atDecember 31, 2017 , to$23.77 atDecember 31, 2018 , to$24.61 atDecember 31, 2019 . At the Tribeca House property, the Company increased average residential rent per square foot from$65.50 atDecember 31, 2015 , to$68.05 atDecember 31, 2016 , to$69.18 atDecember 31, 2017 , to$69.58 atDecember 31, 2018 , to$70.52 atDecember 31, 2019 . At theAspen property, the Company increased average residential rent per square foot from$30.72 at acquisition inJune 2016 , to$33.05 atDecember 31, 2016 , to$35.07 atDecember 31, 2017 , to$36.26 atDecember 31, 2018 , to$36.60 atDecember 31, 2019 . The Company did not have any significant retail lease renewals during this time period. Throughout 2019, 2018 and 2017, we continued to benefit from relatively low interest rates. Our weighted average interest rate as ofDecember 31, 2019 , was approximately 3.9% per annum. Interest rates continue to be at relatively low levels versus historical norms.
Factors that May Influence Future Results of Operations
We derive approximately 75% of our revenues from rents received from residents in our apartment rental properties and the remainder from commercial and retail rental customers. We believe that we have expertise in operating, renovating and repositioning our properties. As we grow, we will likely add personnel as necessary to provide outstanding customer service to our residents in order to maintain or increase occupancy levels at our apartment communities and to preserve the ability to increase rents. This is likely to result in an increase in our operating and general and administrative expenses over time. A majority of the leases at our apartment communities are for approximately one-year terms, which generally enables us to seek increased rents upon renewal of existing leases or commencement of new leases. This may offset the potential adverse effect of inflation or deflation on rental revenue, although residents may leave without penalty at the end of their lease terms for any reason. Our ability to seek increased rents at ourFlatbush Gardens property, ourAspen property and a portion of our10 West 65th Street property is limited, however, as a result of the rent stabilization laws and regulations ofNew York City , including the Housing Stability and Tenant Protection Act of 2019, which was signed into law inNew York inJune 2019 . These regulations generally limit rental increases that we can charge at ourFlatbush Gardens property, ourAspen property and a portion of our10 West 65th Street property upon lease renewal; effectiveOctober 1, 2019 , such increases are 1.5% for a one-year lease and 2.5% for a two-year lease. The regulations also limit the maximum rent we can charge at ourFlatbush Gardens property, ourAspen property and a portion of our10 West 65th Street property on new leases. At ourAspen property, the residential units are subject to regulations established by the HDC, under which there are no rental restrictions on approximately 55% of the units and low- and middle-income restrictions on approximately 45% of the units. There are no rent stabilization restrictions at ourTribeca House properties, our250 Livingston Street property, ourClover House property and a portion of our10 West 65th Street property. We also incur costs on turnover of residents when one resident moves out and we prepare the apartment for a new resident. The costs include the costs of repainting and repairing apartment units, replacing obsolete or damaged appliances and re-leasing the units. While we budget for turnover and the costs associated therewith, our turnover cost may be affected by certain factors we cannot control. Excessive turnover and failure to properly manage turnover cost may adversely affect our operations and could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock. 46 -------------------------------------------------------------------------------- We seek earnings growth primarily through increasing rents and occupancy at existing properties, and acquiring additional apartment communities in markets complementing our existing portfolio locations. Our apartment and commercial operating properties are concentrated in six neighborhoods within the boroughs ofManhattan andBrooklyn inNew York City , which makes us susceptible to adverse developments in these markets. As a result, we are particularly affected by the local economic conditions in these markets, including, but not limited to, changes in supply of or demand for apartment units in our markets, competition for real property investments in our markets, changes in government rules, regulations and fiscal policies, including those governing real estate usage and tax, and any environmental risks related to the presence of hazardous or toxic substances or materials at or in the vicinity of our properties, which could negatively affect our overall performance. We may be unable to accurately predict future changes in national, regional or local economic, demographic or real estate market conditions. For example, continued volatility and uncertainty in the global, national, regional and local economies could make it more difficult for us to lease apartment, commercial and retail space and may require us to lease our apartment, commercial and retail space at lower rental rates than projected and may lead to an increase in resident defaults. In addition, these conditions may also lead to a decline in the value of our properties and make it more difficult for us to dispose of these properties at competitive prices. These conditions, or others we cannot predict, could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock. As a public company with shares listed on aU.S. exchange, we incur general and administrative expenses, including legal, accounting and other expenses, related to corporate governance, public reporting and compliance with various provisions of the Sarbanes-Oxley Act, related regulations of theSEC , including compliance with the reporting requirements of the Exchange Act, and the requirements of the national securities exchange on which our stock is listed. Results of Operations Our focus throughout the years endedDecember 31, 2019 , 2018 and 2017, has been to manage our properties to optimize revenues and control costs, while continuing to renovate and reposition certain properties. The discussion below highlights the specific properties contributing to the changes in the results of operations, and focuses on the properties that the Company owned and operated for the full period in each comparison. Income Statement for the Years EndedDecember 31, 2019 and 2018 (in thousands) 2019 excluding Less: Clover Increase 2019 Clover House House 2018 (decrease) % Revenues Residential rental income$ 87,386 $ 1,759 $ 85,627 $ 81,117 $ 4,510 5.6 % Commercial rental income 28,779 2 28,777 28,880 (103 ) (0.4 )% Total revenues 116,165 1,761 114,404 109,997 4,407 4.0 % Operating Expenses Property operating expenses 28,887 673 28,214 27,267 947 3.5 % Real estate taxes and insurance 24,966 442 24,524 22,293 2,231 10.0 % General and administrative 9,167 221 8,946 9,873 (927 ) (9.4 )% Acquisition and other - - - 101 (101 ) NM Depreciation and amortization 19,649 775 18,874 18,005 869 4.8 % Total operating expenses 82,669 2,111 80,558 77,539 3,019 3.9 % Income from operations 33,496 (350 ) 33,846 32,458 1,388 4.3 % Interest expense, net (35,187 ) (1,056 ) (34,131 ) (32,781 ) 1,350 4.1 % Loss on extinguishment of debt (2,432 ) (661 ) (1,771 ) (8,872 ) (7,101 ) (80.0 )% Gain on involuntary conversion - - - 194 (194 ) NM Net loss$ (4,123 ) $ (2,067 ) $ (2,056 ) $ (9,001 ) $ 6,945 (77.2 )%
The dollar amounts in the narrative disclosure below are in thousands, other than per square foot figures.
Revenue. Residential rental income, excludingClover House , increased from$81,117 for the year endedDecember 31, 2018 , to$85,627 for the year endedDecember 31, 2019 , primarily due to increases in rental rates atFlatbush Gardens and increases in rental rates and occupancy at Tribeca House. Base rent per square foot increased at theFlatbush Gardens property from$23.77 atDecember 31, 2018 , to$24.61 atDecember 31, 2019 . Base rent per square foot increased at the Tribeca House property from$69.58 (95.5% leased occupancy) atDecember 31, 2018 , to$70.52 (98.2% leased occupancy) atDecember 31, 2019 . 47 --------------------------------------------------------------------------------
Commercial rental income, excluding
Property operating expenses. Property operating expenses include property-level costs such as compensation costs for property-level personnel, repairs and maintenance, supplies, utilities and landscaping. Property operating expenses, excludingClover House , increased from$27,267 for the year endedDecember 31, 2018 , to$28,214 for the year endedDecember 31, 2019 , primarily due to a higher provision for bad debts and a larger amount of make-ready apartment improvements at the Tribeca House andFlatbush Gardens properties.
Real estate taxes and insurance. Real estate taxes and insurance expenses,
excluding
General and administrative. General and administrative expenses, excludingClover House , decreased from$9,873 for the year endedDecember 31, 2018 , to$8,946 for the year endedDecember 31, 2019 , primarily due to decreases in overhead costs, executive cash bonuses and LTIP amortization expense, partially offset by non-recurring litigation-related expenses, which increased from$0 for the year endedDecember 31, 2018 , to$966 for the year endedDecember 31, 2019 . Depreciation and amortization. Depreciation and amortization expense, excludingClover House , increased from$18,005 for the year endedDecember 31, 2018 , to$18,874 for the year endedDecember 31, 2019 , due to additions to real estate, partially offset by reduced intangibles amortization at the10 West 65th Street property. Interest expense, net. Interest expense, net, excludingClover House , increased from$32,781 for the year endedDecember 31, 2018 , to$34,131 for the year endedDecember 31, 2019 . The increase in interest expense from theMay 2019 andDecember 2018 refinancings of the250 Livingston Street property was partially offset by the lower interest rate and loan amount obtained in refinancing the Tribeca House property inFebruary 2018 and increased interest expense capitalization in connection with property development. Interest expense, excludingClover House , included amortization of loan costs and changes in fair value of interest rate caps of$1,472 and$1,081 for the years endedDecember 31, 2019 and 2018, respectively. Loss on extinguishment of debt. Loss on extinguishment of debt, excludingClover House , for the year endedDecember 31, 2019 , related to the refinancing of the250 Livingston Street loan inMay 2019 ; the amount included the write-off of unamortized debt costs. Loss on extinguishment of debt for the year endedDecember 31, 2018 , related to the refinancings of theFlatbush Gardens andTribeca House loans inFebruary 2018 and the defeasance of the250 Livingston Street loan inDecember 2018 ; the amount included charges for early extinguishment of the debt and the write-off of unamortized debt costs.
Gain on involuntary conversion. Gain on involuntary conversion represented
insurance proceeds in excess of the carrying value of assets disposed of related
to fire damage suffered by two units at the
Net loss. As a result of the foregoing, net loss, excluding
48
--------------------------------------------------------------------------------
Income Statement for the Years Ended December 31, 2018 and 2017 (in thousands)
2018 2017
Less: excluding Less: excluding
10 West 10 West 10 West 10 West Increase
2018 65th Street 65th Street 2017 65th Street 65th Street (decrease) %
Revenues
Residential rental
income $ 81,117 $ 2,997 $ 78,120 $
74,859 $ 544
28,880 14 28,866 29,093 - 29,093 (227 ) (0.8 )%
Total revenues 109,997 3,011 106,986 103,952 544 103,408 3,578 3.5 %
Operating Expenses
Property operating
expenses 27,267 461 26,806 27,029 95 26,934 (128 ) (0.5 )%
Real estate taxes
and insurance 22,293 837 21,456 20,685 143 20,542 914 4.5 %
General and
administrative 9,873 286 9,587 9,944 19 9,925 (338 ) (3.4 )%
Acquisition and
other 101 (8 ) 109 69 16 53 56 105.7 %
Depreciation and
amortization 18,005 1,083 16,922 16,721 375 16,346 576 3.5 %
Total operating
expenses 77,539 2,659 74,880 74,448 648 73,800 1,080 1.5 %
Income from
operations 32,458 352 32,106 29,504 (104 ) 29,608 2,498 8.4 %
Interest expense,
net (32,781 ) (1,246 ) (31,535 ) (35,505 ) (227 ) (35,278 ) (3,743 ) (10.6 )%
Loss on extinguishment of debt (8,872 ) - (8,872 ) - - - 8,872 NM Gain on involuntary conversion 194 - 194 - - - 194 NM Net loss$ (9,001 ) $ (894 ) $ (8,107 ) $ (6,001 ) $ (331 ) $ (5,670 ) $ (2,437 ) (43.0 )%
The dollar amounts in the narrative disclosure below are in thousands, other than per square foot figures.
Revenue. Residential rental income, excluding10 West 65th Street , increased from$74,315 for the year endedDecember 31, 2017 , to$78,120 for the year endedDecember 31, 2018 , primarily due to increases in rental rates and occupancy at theFlatbush Gardens andTribeca House properties. Base rent per square foot increased at theFlatbush Gardens property from$22.47 (96.4% leased occupancy) atDecember 31, 2017 , to$23.77 (98.4% leased occupancy) atDecember 31, 2018 . Base rent per square foot increased at the Tribeca House property from$69.18 (91.1% leased occupancy) atDecember 31, 2017 , to$69.58 (95.5% leased occupancy) atDecember 31, 2018 . Commercial rental income, excluding10 West 65th Street , was essentially flat for the year endedDecember 31, 2018 , compared to the year endedDecember 31, 2017 . Property operating expenses. Property operating expenses include property-level costs such as compensation costs for property-level personnel, repairs and maintenance, supplies, utilities and landscaping. Property operating expenses, excluding10 West 65th Street , decreased slightly from$26,934 for the year endedDecember 31, 2017 , to$26,806 for the year endedDecember 31, 2018 . Real estate taxes and insurance. Real estate taxes and insurance expenses, excluding10 West 65th Street , increased from$20,542 for the year endedDecember 31, 2017 , to$21,456 for the year endedDecember 31, 2018 , primarily due to increased real estate taxes at all properties, substantially offset by the cessation of amortization of real estate tax intangible assets relating to the purchase of the Tribeca House property. General and administrative. General and administrative expenses, excluding10 West 65th Street , decreased from$9,925 for the year endedDecember 31, 2017 , to$9,587 for the year endedDecember 31, 2018 , primarily due to a decrease in LTIP amortization expense, partially offset by an increase in other fees and expenses. Depreciation and amortization. Depreciation and amortization expense, excluding10 West 65th Street , increased from$16,346 for the year endedDecember 31, 2017 , to$16,922 for the year endedDecember 31, 2018 , due to additions to real estate. Interest expense, net. Interest expense, net, excluding10 West 65th Street , decreased from$35,278 for the year endedDecember 31, 2017 , to$31,535 for the year endedDecember 31, 2018 . The decrease resulted from lower rates obtained in refinancing the Tribeca House andFlatbush Gardens properties inFebruary 2018 , partially offset by an increase in debt outstanding and a higher rate from the refinancing of the250 Livingston Street property inDecember 2018 , and lower amortization of loan costs. Interest expense, excluding10 West 65th Street , included amortization of loan costs and changes in fair value of interest rate caps of$993 and$3,146 for the year endedDecember 31, 2018 and 2017, respectively. 49
-------------------------------------------------------------------------------- Loss on extinguishment of debt. Loss on extinguishment of debt related to the repayment of theFlatbush Gardens andTribeca House loans inFebruary 2018 and the defeasance of the250 Livingston Street loan inDecember 2018 . The amount included charges for early extinguishment of the debt and the write-off of unamortized debt costs.
Gain on involuntary conversion. Gain on involuntary conversion represented
insurance proceeds in excess of the carrying value of assets disposed of related
to fire damage suffered by two units at the
Net loss. As a result of the foregoing, net loss, excluding
Liquidity and Capital Resources
As ofDecember 31, 2019 , we had$997.9 million of indebtedness (net of unamortized issuance costs) secured by our properties,$42.5 million of cash and cash equivalents, and$14.4 million of restricted cash. See Note 7 of the accompanying "Notes to Consolidated Financial Statements" for a discussion of the Company's property-level debt. As a REIT, we are required to distribute at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and excluding net capital gains, to stockholders on an annual basis. We expect that these needs will be met from cash generated from operations and other sources, including proceeds from secured mortgages and unsecured indebtedness, proceeds from additional equity issuances and cash generated from the sale of property.
Short-Term and Long-Term Liquidity Needs
Our short-term liquidity needs will primarily be to fund operating expenses,
recurring capital expenditures, property taxes and insurance, interest and
scheduled debt principal payments, general and administrative expenses and
distributions to stockholders and unit holders. We generally expect to meet our
short-term liquidity requirements through net cash provided by operations, and
we believe we will have sufficient resources to meet our short-term liquidity
requirements.
Our principal long-term liquidity needs will primarily be to fund additional
property acquisitions, major renovation and upgrading projects, and debt
payments and retirements at maturity. We do not expect that net cash provided by
operations will be sufficient to meet all of these long-term liquidity needs. We
anticipate meeting our long-term liquidity requirements by using cash as an
interim measure and funds from public and private equity offerings and long-term
secured and unsecured debt offerings.
We believe that as a publicly traded REIT, we will have access to multiple
sources of capital to fund our long-term liquidity requirements. These sources
include the incurrence of additional debt and the issuance of additional equity.
However, we cannot provide assurance that this will be the case. Our ability to
secure additional debt will depend on a number of factors, including our cash
flow from operations, our degree of leverage, the value of our unencumbered
assets and borrowing restrictions that may be imposed. Our ability to access the
equity capital markets will depend on a number of factors as well, including
general market conditions for REITs and market perceptions about our Company.
We believe that our current cash flows from operations, coupled with additional
mortgage debt, will be sufficient to allow us to continue operations, satisfy
our contractual obligations and make distributions to our stockholders and the
members of our LLC subsidiaries for at least the next twelve months. However, no
assurance can be given that we will be able to refinance any of our outstanding
indebtedness in the future on favorable terms or at all.
50
--------------------------------------------------------------------------------Property-Level Debt
The mortgages, loans and mezzanine notes payable collateralized by the properties, or the Company's interest in the entities that own the properties and assignment of leases, are as follows (in thousands):
December 31,
Property Maturity Interest Rate 2019125,000
141 Livingston Street, Brooklyn, NY 6/1/2028 3.875% 75,817 Tribeca House, Manhattan, NY 3/6/2028 4.506% 360,000 Aspen, Manhattan, NY 7/1/2028 3.68% 66,862 Clover House, Brooklyn, NY 12/1/2029 3.53% 82,000 10 West 65th Street, Manhattan, NY 11/1/2027 3.375%
34,295
1010 Pacific Street, Brooklyn, NY 12/24/2020 LIBOR + 3.60% 19,457
$ 1,009,431
Flatbush Gardens
There is $246.0 million of mortgage debt secured by Flatbush Gardens , as of
December 31, 2019 , in the form of a mortgage note to New York Community Bank .
The note matures on March 1, 2028 , and bears interest at 3.5% through February
2023 , and thereafter at the prime rate plus 2.75% with an option to fix the rate
subject to the payment of a fee that fluctuates depending on the date the
election is made. The loan requires interest-only payments through August 2020 ,
and monthly principal and interest payments thereafter based on a 30-year
amortization schedule. We have the option to prepay all (but not less than all)
of the unpaid balance of the loan prior to the maturity date, subject to certain
prepayment premiums, as defined.
250 Livingston Street
There is $125.0 million in mortgage debt secured by 250 Livingston Street , as of
December 31, 2019 , in the form of a mortgage note to Citi Real Estate Funding
Inc. The note matures on June 6, 2029 , bears interest at 3.63% and requires
interest-only payments for the entire term. We have the option to prepay all
(but not less than all) of the unpaid balance of the loan within three months of
maturity, without a prepayment premium.
141 Livingston Street
There is $75.8 million in mortgage debt secured by 141 Livingston Street , as of
December 31, 2019 , in the form of a mortgage note to New York Community Bank .
The note matures on June 1, 2028 , and bears interest at 3.875%. The note
required interest-only payments through June 2017 , and monthly principal and
interest payments of approximately $374,000 thereafter based on a 30-year
amortization schedule. We may prepay the debt in whole or in part, subject to a
prepayment premium.
Tribeca House
There is a $360.0 million loan secured by the Tribeca House properties, as of
December 31, 2019 , through Deutsche Bank AG. The loan matures on March 6, 2028 ,
bears interest at 4.506% and requires interest-only payments for the entire
term. We have the option to prepay all (but not less than all) of the unpaid
balance of the loan prior to the maturity date, subject to a prepayment premium
if it occurs prior to December 6, 2027 .
Aspen
There is $66.9 million in mortgage debt secured by Aspen , as of December 31,
2019 , in the form of a mortgage note to Capital One Multifamily Finance LLC . The
note matures on July 1, 2028 , and bears interest at 3.68%. The note required
interest-only payments through July 2017 , and monthly principal and interest
payments of approximately $321,000 thereafter based on a 30-year amortization
schedule. We have the option to prepay the loan prior to the maturity date,
subject to a prepayment premium.
Clover House
There is $82.0 million in mortgage debt secured by Clover House as of December
31, 2019 , in the form of a mortgage note to MetLife Investment Management . The
note matures on December 1, 2029 , bears interest at 3.53% and requires
interest-only payments for the entire term. The Company has the option,
commencing on January 1, 2024 , to prepay the note prior to the maturity date,
subject to a prepayment premium if it occurs prior to September 2, 2029 .
51
--------------------------------------------------------------------------------10 West 65th Street There is$34.3 million in mortgage debt secured by10 West 65th Street as ofDecember 31, 2019 , in the form of a mortgage note toNew York Community Bank , entered into in connection with the acquisition of the property. The note matures onNovember 1, 2027 , and bears interest at 3.375% throughOctober 2022 , and thereafter at the prime rate plus 2.75%, subject to an option to fix the rate. The note required interest-only payments throughOctober 2019 , and monthly principal and interest payments of approximately$152,000 thereafter based on a 30-year amortization schedule. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note prior to the maturity date, subject to certain prepayment premiums, as defined.1010 Pacific Street There is$18.6 million in mortgage debt secured by1010 Pacific Street as ofDecember 31, 2019 , in the form of a mortgage note toCIT Bank, N.A ., entered into in connection with the acquisition of the property. There is also a pre-development bridge loan secured by the property with the same lender that will provide up to$3.0 million for 100% of eligible pre-development and carrying costs, of which approximately$857,000 was drawn as ofDecember 31, 2019 . The notes mature onDecember 24, 2020 , are subject to a one-year extension option, require interest-only payments and bear interest at one-month LIBOR plus 3.60% (5.4% as ofDecember 31, 2019 ).
Contractual Obligations and Commitments
The following table summarizes principal and interest payment requirements on
our debt under terms as of
(in thousands)
Principal Interest Total
2020 $ 24,700 $ 39,989 $ 64,689
2021 8,553 38,585 47,138
2022 8,866 38,272 47,138
2023 9,191 37,947 47,138
2024 9,521 37,630 47,151
Thereafter 948,600 131,969 1,080,569
Total
The Company is obligated to provide parking availability through
Distributions In order to qualify as a REIT for Federal income tax purposes, we must currently distribute at least 90% of our taxable income to our shareholders. During the years endedDecember 31, 2019 , 2018 and 2017, we paid dividends and distributions on our common shares,Class B LLC units and LTIP units totaling$17.1 million ,$17.0 million and$16.6 million , respectively. Cash Flows for the Years endedDecember 31, 2019 and 2018 (in thousands) Year Ended December 31, 2019 2018 Operating activities$ 23,772 $ 22,362 Investing activities (74,903 ) (39,295 ) Financing activities 62,199 41,127
Cash flows provided by (used in) operating activities, investing activities and
financing activities for the years ended
52
--------------------------------------------------------------------------------
Net cash provided by operating activities was $23,772 for the year ended
December 31, 2019 , compared to $22,362 for the year ended December 31, 2018 . The
net increase during the 2019 period reflected a decrease of approximately $32 of
cash generated by operating assets and liabilities (including reductions in
tenant and other receivables), plus an increase of approximately $1,378 of cash
flow from operating results.
Net cash used in investing activities was $74,903 for the year ended December
31, 2019 , compared to $39,295 for the year ended December 31, 2018 . We spent
approximately $43,774 and $39,877 on capital projects for the years ended
December 31, 2019 and 2018, respectively. For the year ended December 31, 2019 ,
we funded approximately $31,129 for the acquisition of the 1010 Pacific Street
property. For the year ended December 31, 2018 , we received approximately $226
of insurance proceeds from the disposal of assets damaged in a fire at a
property and approximately $356 of net proceeds from the sale and purchase of
interest rate caps.
Net cash provided by financing activities was $62,199 for the year ended
December 31, 2019 , compared to $41,127 for the year ended December 31, 2018 .
Cash was primarily provided in the year ended December 31, 2019 , by proceeds
from new loans on the 250 Livingston Street , Clover House and 1010 Pacific
street properties ($226,457 ) offset by repayment of existing loans on the 250
Livingston Street and Clover House ($139,731 ) and loan issuance and
extinguishment costs ($4,531 ) ; and in the year ended December 31, 2018 , by
proceeds from new loans on the Flatbush Gardens , Tribeca House and 250
Livingston Street properties ($681,000 ), offset by repayment of existing loans
on the Flatbush Gardens and Tribeca House properties and defeasance of the
existing loan on the 250 Livingston Street property (approximately $611,000 ) and
loan issuance and extinguishment costs ($12,325 ). The Company paid distributions
of $17,089 and $17,038 in the years ended December 31, 2019 and 2018,
respectively.
Cash Flows for the Years ended December 31, 2018 and 2017 (in thousands)
Year Ended
December 31,
2018 2017
Operating activities $ 22,362 $ 13,065
Investing activities (39,295 ) (187,656 )
Financing activities 41,127 147,609
Cash flows provided by (used in) operating activities, investing activities and
financing activities for the years ended
Net cash provided by operating activities was$22,362 for the year endedDecember 31, 2018 , compared to$13,065 for the year endedDecember 31, 2017 . The net increase during the 2018 period reflected an increase of approximately$6,148 of cash generated by operating assets and liabilities (including reductions in tenant and other receivables), plus an increase of approximately$3,149 of cash flow from operating results. Net cash used in investing activities was$39,295 for the year endedDecember 31, 2018 , compared to$187,656 for the year endedDecember 31, 2017 . We spent approximately$39,877 and$20,276 on capital projects for the years endedDecember 31, 2018 and 2017, respectively. For the year endedDecember 31, 2018 , we received approximately$226 of insurance proceeds from the disposal of assets damaged in a fire at a property and approximately$356 of net proceeds from the sale and purchase of interest rate caps. For the year endedDecember 31, 2017 , we funded approximately$87,600 for the acquisition of the Clover House property and approximately$79,800 for the acquisition of the10 West 65th Street property. Net cash provided by financing activities was$41,127 for the year endedDecember 31, 2018 , compared to$147,609 for the year endedDecember 31, 2017 . Cash was primarily provided in the year endedDecember 31, 2018 , by proceeds from new loans on theFlatbush Gardens ,Tribeca House and250 Livingston Street properties ($681,000 ), offset by repayment of existing loans on theFlatbush Gardens andTribeca House properties and defeasance of the existing loan on the250 Livingston Street property (approximately$611,000 ) and loan issuance and extinguishment costs ($12,325 ); and in the year endedDecember 31, 2017 , by the IPO completed in February and March ($78,685 ) and proceeds from new loans in connection with the Clover House and10 West 65th Street acquisitions (approximately$94,400 ), offset by loan issuance costs ($4,888 ). The Company paid distributions of$17,038 and$16,565 in the years endedDecember 31, 2018 and 2017, respectively. 53
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Income Taxes No provision has been made for income taxes since all of the Company's operations are held in pass-through entities and accordingly the income or loss of the Company is included in the individual income tax returns of the partners or members. We elected to be treated as a REIT forU.S. federal income tax purposes, beginning with our first taxable three months endedMarch 31, 2015 . As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate tax rates. We believe that we are organized and operate in a manner that will enable us to qualify and be taxed as a REIT and we intend to continue to operate so as to satisfy the requirements for qualification as a REIT for federal income tax purposes. Inflation Inflation inthe United States has been relatively low in recent years and did not have a significant impact on the results of operations for the Company's business for the periods shown in the consolidated financial statements. We do not believe that inflation currently poses a material risk to the Company. The leases at our residential rental properties, which comprise approximately 75% of our revenue, are short-term in nature. Our longer-term commercial and retail leases would generally allow us to recover some increased costs in the event of significant inflation. Although the impact of inflation has been relatively insignificant in recent years, it does remain a factor inthe United States economy and could increase the cost of acquiring or replacing properties in the future.
Off-Balance Sheet Arrangements
As ofDecember 31, 2019 , we do not have any off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures. Non-GAAP Financial Measures In this Annual Report on Form 10-K, we disclose and discuss funds from operations ("FFO"), adjusted funds from operations ("AFFO"), adjusted earnings before interest, income taxes, depreciation and amortization ("Adjusted EBITDA") and net operating income ("NOI"), all of which meet the definition of "non-GAAP financial measure" set forth in Item 10(e) of Regulation S-K promulgated by theSEC . While management and the investment community in general believe that presentation of these measures provides useful information to investors, neither FFO, AFFO, Adjusted EBITDA nor NOI should be considered as an alternative to net income or income from operations as an indication of our performance. We believe that to understand our performance further, FFO, AFFO, Adjusted EBITDA and NOI should be compared with our reported net income or income from operations and considered in addition to cash flows computed in accordance with GAAP, as presented in our consolidated financial statements.
Funds from Operations and Adjusted Funds from Operations
FFO is defined by theNational Association of Real Estate Investment Trusts ("NAREIT") as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property and impairment adjustments, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT. AFFO is defined by us as FFO excluding amortization of identifiable intangibles incurred in property acquisitions, straight-line rent adjustments to revenue from long-term leases, amortization costs incurred in originating debt, interest rate cap mark-to-market adjustments, amortization of non-cash equity compensation, acquisition and other costs, loss on extinguishment of debt, gain on involuntary conversion and non-recurring litigation-related expenses, less recurring capital spending. 54
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Historical cost accounting for real estate assets implicitly assumes that the
value of real estate assets diminishes predictably over time. In fact, real
estate values have historically risen or fallen with market conditions. FFO is
intended to be a standard supplemental measure of operating performance that
excludes historical cost depreciation and valuation adjustments from net income.
We consider FFO useful in evaluating potential property acquisitions and
measuring operating performance. We further consider AFFO useful in determining
funds available for payment of distributions. Neither FFO nor AFFO represent net
income or cash flows from operations computed in accordance with GAAP. You
should not consider FFO and AFFO to be alternatives to net income as reliable
measures of our operating performance; nor should you consider FFO and AFFO to
be alternatives to cash flows from operating, investing or financing activities
(computed in accordance with GAAP) as measures of liquidity.
Neither FFO nor AFFO measure whether cash flow is sufficient to fund all of our
cash needs, including principal amortization, capital improvements and
distributions to stockholders. FFO and AFFO do not represent cash flows from
operating, investing or financing activities computed in accordance with GAAP.
Further, FFO and AFFO as disclosed by other REITs might not be comparable to our
calculations of FFO and AFFO.
The following table sets forth a reconciliation of FFO and AFFO for the periods
presented to net loss, computed in accordance with GAAP (amounts in thousands):
Years ended December 31,
2019 2018 2017
FFO
Net loss $ (4,123 ) $ (9,001 ) $ (6,001 )
Real estate depreciation and amortization 19,649 18,005 16,721
FFO $ 15,526 $ 9,004 $ 10,720
AFFO
FFO $ 15,526 $ 9,004 $ 10,720
Amortization of real estate tax intangible 482 475 1,568
Amortization of above- and below-market leases (1,180 ) (1,917 )
(1,729 ) Straight-line rent adjustments 1,211 1,029
311
Amortization of debt origination costs 1,687 1,289
2,899
Interest rate cap mark-to-market adjustments - (208 ) 261 Amortization of LTIP awards 1,510 1,940 3,110 Acquisition and other - 101 69 Loss on extinguishment of debt 2,432 8,872
-
Gain on involuntary conversion - (194 )
-
Non-recurring litigation-related expenses 966 - - Recurring capital spending (593 ) (573 ) (527 ) AFFO$ 22,041 $ 19,818 $ 16,682
Adjusted Earnings Before Interest, Income Taxes, Depreciation and Amortization
We believe that Adjusted EBITDA is a useful measure of our operating performance. We define Adjusted EBITDA as net income (loss) before allocation to non-controlling interests, plus real estate depreciation and amortization, amortization of identifiable intangibles, straight-line rent adjustments to revenue from long-term leases, amortization of non-cash equity compensation, interest expense (net), acquisition and other costs, loss on extinguishment of debt and non-recurring litigation-related expenses, less gain on involuntary conversion.
We believe that this measure provides an operating perspective not immediately apparent from GAAP income from operations or net income (loss). We consider Adjusted EBITDA to be a meaningful financial measure of our core operating performance.
However, Adjusted EBITDA should only be used as an alternative measure of our
financial performance. Further, other REITs may use different methodologies for
calculating Adjusted EBITDA, and accordingly, our Adjusted EBITDA may not be
comparable to that of other REITs.
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The following table sets forth a reconciliation of Adjusted EBITDA for the
periods presented to net loss, computed in accordance with GAAP (amounts in
thousands):
Years ended December 31,
2019 2018 2017
Adjusted EBITDA
Net loss $ (4,123 ) $ (9,001 ) $ (6,001 )
Real estate depreciation and amortization 19,649 18,005 16,721
Amortization of real estate tax intangible 482 475
1,568
Amortization of above- and below-market leases (1,180 ) (1,917 )
(1,729 ) Straight-line rent adjustments 1,211 1,029 311 Amortization of LTIP awards 1,510 1,940 3,110 Interest expense, net 35,187 32,781 35,505 Acquisition and other - 101 69 Loss on extinguishment of debt 2,432 8,872
-
Gain on involuntary conversion - (194 )
-
Non-recurring litigation-related expenses 966 - - Adjusted EBITDA$ 56,134 $ 52,091 $ 49,554 Net Operating Income We believe that NOI is a useful measure of our operating performance. We define NOI as income from operations plus real estate depreciation and amortization, general and administrative expenses, acquisition and other costs, amortization of identifiable intangibles and straight-line rent adjustments to revenue from long-term leases. We believe that this measure is widely recognized and provides an operating perspective not immediately apparent from GAAP income from operations or net income (loss). We use NOI to evaluate our performance because NOI allows us to evaluate the operating performance of our Company by measuring the core operations of property performance and capturing trends in rental housing and property operating expenses. NOI is also a widely used metric in valuation of properties.
However, NOI should only be used as an alternative measure of our financial performance. Further, other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to that of other REITs.
The following table sets forth a reconciliation of NOI for the periods presented
to income from operations, computed in accordance with GAAP (amounts in
thousands):
Years ended December 31,
2019 2018 2017
NOI
Income from operations $ 33,496 $ 32,458 $ 29,504
Real estate depreciation and amortization 19,649 18,005 16,721
General and administrative expenses 9,167 9,873
9,944
Acquisition and other - 101
69
Amortization of real estate tax intangible 482 475
1,568
Amortization of above- and below-market leases (1,180 ) (1,917 )
(1,729 ) Straight-line rent adjustments 1,211 1,029 311 NOI$ 62,825 $ 60,024 $ 56,388
Recent Accounting Pronouncements
See Note 3, "Significant Accounting Policies" of our consolidated financial statements included in Item 15 for a discussion of recent accounting pronouncements.
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