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 caption, "Cautionary Note Concerning Forward-Looking Statements," and in our financial statements and the related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. 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 . 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 downtown
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
OnMay 8, 2020 , the Company refinanced the existingFlatbush Gardens loan with a$329 million , twelve-year secured first mortgage note withNew York Community Bank . The note matures onJune 1, 2032 , and bears interest at 3.125% throughMay 2027 and thereafter at the prime rate plus 2.75%, subject to an option to fix the rate. The note requires interest-only payments throughMay 2027 , and monthly principal and interest payments 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. 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. COVID-19 Pandemic Recently, the COVID-19 pandemic has adversely impacted global economic activity and contributed to significant declines and volatility in financial markets. The COVID-19 pandemic and associated government actions intended to curb its spread are creating disruption in, and adversely impacting, many industries and could negatively impact our business in a number of ways, including affecting our tenants' ability or willingness to pay rents and reducing demand for housing in theNew York metropolitan area. In some cases, we may restructure rent obligations on terms that are less favorable to us than those currently in place. Additionally, the outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown which may ultimately decrease occupancy levels and pricing across our portfolio as residents reduce their spending. The rapid development and fluidity with which the situation is developing precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic on our business. Nevertheless, COVID-19 presents uncertainty and risk with respect to the Company's tenants, which could adversely affect the Company's business, financial condition, liquidity and results of operations. 22 -------------------------------------------------------------------------------- Despite these very challenging circumstances, our business has remained durable. Our properties have remained open and operational throughout the pandemic. We are taking the necessary steps to keep our employees and tenants safe in compliance with state and local shelter-in-place orders, and we continue to provide typical services to our residents. OurApril 2020 rent collections were equal to 94% of ourMarch 2020 rent collections, prior to the impact of COVID-19. We expect our properties and theNew York City market to remain desirable to a broad range of tenants and our operations to return to a more normal state over time. Results of Operations Our focus throughout 2019 and year-to-date 2020 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 Three Months EndedMarch 31, 2020 and 2019 (in thousands) 2020 Less: excluding Clover Clover Increase 2020 House House 2019 (decrease) % Revenues Residential rental income$ 23,718 $ 1,722 $ 21,996 $ 20,772 $ 1,224 5.9 % Commercial rental income 7,168 5 7,163 6,880 283 4.1 % Total revenues 30,886 1,727 29,159 27,652 1,507 5.4 % Operating Expenses Property operating expenses 7,159 239 6,920 7,563 (643 ) (8.5 )% Real estate taxes and insurance 6,864 369 6,495 5,731 764 13.3 % General and administrative 2,323 145 2,178 1,668 510 30.6 % Depreciation and amortization 5,558 582 4,976 4,549 427 9.4 % Total operating expenses 21,904 1,335 20,569 19,511 1,058 5.4 % Income from operations 8,982 392 8,590 8,141 449 5.5 % Interest expense, net (9,788 ) (755 ) (9,033 ) (8,274 ) 759 9.2 % Net loss$ (806 ) $ (363 ) $ (443 ) $ (133 ) $ (310 ) 233.1 % Revenue. Residential rental income, excludingClover House , increased from$20,772 for the three months endedMarch 31, 2019 , to$21,996 for the three months endedMarch 31, 2020 , primarily due to increases in rental rates at theFlatbush Gardens andTribeca House properties. Base rent per square foot increased at theFlatbush Gardens property from$24.04 atMarch 31, 2019 , to$24.95 atMarch 31, 2020 . Base rent per square foot increased at the Tribeca House property from$69.14 atMarch 31, 2019 , to$70.75 atMarch 31, 2020 . Commercial rental income, excludingClover House , increased from$6,880 for the three months endedMarch 31, 2019 , to$7,163 for the three months endedMarch 31, 2020 , primarily due to adjustments in straight line rent and amortization of below market leases. 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 , decreased from$7,563 for the three months endedMarch 31, 2019 , to$6,920 for the three months endedMarch 31, 2020 , primarily due to lower legal expenses and lower utility expenses across the portfolio. Real estate taxes and insurance. Real estate taxes and insurance expenses, excludingClover House , increased from$5,731 for the three months endedMarch 31, 2019 , to$6,495 for the three months endedMarch 31, 2020 , due to increased real estate taxes and property insurance across the portfolio. General and administrative. General and administrative expenses, excludingClover House , increased from$1,668 for the three months endedMarch 31, 2019 , to$2,178 for the three months endedMarch 31, 2020 , primarily due to increases in legal expenses (including non-recurring litigation-related expenses). Depreciation and amortization. Depreciation and amortization expense, excludingClover House , increased from$4,549 for the three months endedMarch 31, 2019 , to$4,976 for the three months endedMarch 31, 2020 , due to additions to real estate across the portfolio. 23
-------------------------------------------------------------------------------- Interest expense, net. Interest expense, net, excludingClover House , increased from$8,274 for the three months endedMarch 31, 2019 , to$9,033 for the three months endedMarch 31, 2020 . The increase primarily resulted from the refinancing of the 250 Livingston property inMay 2019 and lower interest income related to the construction at Clover House. Interest expense, excludingClover House , included amortization of loan costs and changes in fair value of interest rate caps of$272 and$504 for the three months endedMarch 31, 2020 and 2019, respectively.
Net loss. As a result of the foregoing, net loss, excluding
Liquidity and Capital Resources
As ofMarch 31, 2020 , we had$997.8 million of indebtedness (net of unamortized issuance costs) secured by our properties,$36.3 million of cash and cash equivalents, and$17.6 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. 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 three months endedMarch 31, 2020 and 2019, we paid dividends and distributions on our common shares,Class B LLC units and LTIP units totaling$4.3 million and$4.3 million , respectively. 24 -------------------------------------------------------------------------------- Cash Flows for the Three Months EndedMarch 31, 2020 and 2019 (in thousands) Three Months Ended March 31, 2020 2019 Operating activities$ 9,050 $ 11,950 Investing activities (7,115 ) (10,208 ) Financing activities (4,997 ) (4,972 ) Cash flows provided by (used in) operating activities, investing activities and financing activities for the three months endedMarch 31, 2020 and 2019, were as follows: Net cash flow provided by operating activities was$9,050 for the three months endedMarch 31, 2020 , compared to$11,950 for the three months endedMarch 31, 2019 . The net decrease during the 2020 period reflected an increase of$30 of cash flow from operating results, offset by a decrease of$2,930 of cash generated by operating assets and liabilities. Net cash used in investing activities was$7,115 for the three months endedMarch 31, 2020 , compared to$10,208 for the three months endedMarch 31, 2019 . The cash in the respective periods was spent on capital projects (with$14 spent on the purchase of an interest rate cap in the 2020 period). Net cash used in financing activities was$4,997 for the three months endedMarch 31, 2020 , compared to$4,972 for the three months endedMarch 31, 2019 . Cash was used in the three months endedMarch 31, 2020 , for scheduled debt amortization ($897 ) partially offset by additional borrowings related to the development at1010 Pacific Street ($176 ); and in the three months endedMarch 31, 2019 , primarily for scheduled debt amortization ($711 ). The Company paid distributions of$4,276 and$4,261 in the three months endedMarch 31, 2020 and 2019, respectively. 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 77% 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 ofMarch 31, 2020 , 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. 25 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
In this Quarterly Report on Form 10-Q, 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 the
SEC .
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 (loss) 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. 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 (loss) 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. 26
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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):
Three Months Ended
March 31,
2020 2019
FFO
Net loss $ (806 ) $ (133 )
Real estate depreciation and amortization 5,558 4,549
FFO $ 4,752 $ 4,416 AFFO
FFO$ 4,752 $ 4,416 Amortization of real estate tax intangible 119 119
Amortization of above- and below-market leases (99 ) (424 ) Straight-line rent adjustments
201 634
Amortization of debt origination costs 304 504
Amortization of LTIP awards 158 156
Non-recurring litigation-related expenses 264 -
Recurring capital spending (145 ) (153 )
AFFO $ 5,554 $ 5,252 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.
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):
Three Months Ended
March 31,
2020 2019
Adjusted EBITDA
Net loss $ (806 ) $ (133 )
Real estate depreciation and amortization 5,558 4,549
Amortization of real estate tax intangible 119 119
Amortization of above- and below-market leases (99 ) (424 ) Straight-line rent adjustments
201 634
Amortization of LTIP awards 158 156
Interest expense, net 9,788 8,274
Non-recurring litigation-related expenses 264 -
Adjusted EBITDA $ 15,183 $ 13,175
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.
27--------------------------------------------------------------------------------
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):
Three Months Ended
March 31,
2020 2019
NOI
Income from operations $ 8,982 $ 8,141
Real estate depreciation and amortization 5,558 4,549
General and administrative expenses 2,323 1,668
Amortization of real estate tax intangible 119 119
Amortization of above- and below-market leases (99 ) (424 ) Straight-line rent adjustments
201 634
NOI $ 17,084 $ 14,687
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these consolidated
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses.
Management bases its estimates on historical experience and assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We believe that there
have been no material changes to the items that we disclosed as our critical
accounting policies under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," in our Form 10-K for the year
ended December 31, 2019 .
Recent Accounting Pronouncements
See Note 3, "Significant Accounting Policies" of our consolidated financial statements for a discussion of recent accounting pronouncements.
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