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.
Overview of Our Company
The Company was incorporated on
In
On
On
On
During the period
As of
• two neighboring residential/retail rental properties at50 Murray Street and53 Park Place in the Tribeca neighborhood ofManhattan ; • one residential property complex in the East Flatbush neighborhood ofBrooklyn consisting of 59 buildings; • two primarily commercial properties inDowntown Brooklyn (one of which includes 36 residential apartment units); • one residential/retail rental property at1955 1st Avenue inManhattan ; • one residential rental property at 107Columbia Heights in theBrooklyn Heights neighborhood ofBrooklyn ; • one residential rental property at10 West 65th Street in the UpperWest Side neighborhood ofManhattan ; 41
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• one property at1010 Pacific Street in theProspect Heights neighborhood ofBrooklyn , being redeveloped as a residential rental building; and • theDean Street property, to be redeveloped as a residential/retail 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,
COVID-19 Pandemic
The Company is making substantial progress in recovering from the effects of the
COVID-19 pandemic. In 2022, the Company recorded steadily increasing quarterly
revenue culminating in record levels in the fourth quarter of 2022 of
Business conditions in 2022 contrast with those in 2020 and 2021, where
government actions intended to curb the spread of COVID-19 created disruptions
in many industries and negatively impacted the Company's business in several
ways, including reducing our tenants' ability or willingness to pay rents and
reducing demand for housing in the
How We Derive Our Revenue
Our revenue consists primarily of rents received from our residential, commercial and, to a lesser extent, retail tenants.
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Trends
During 2022, several of the Company's residential properties, which had
experienced declines in demand and rental rates as a result of the COVID-19
pandemic, experienced a renewed increase in demand and rental rates, as a result
of a robust rental market in the
Throughout 2022 and 2021, we continued to benefit from relatively low interest
rates. Our weighted average interest rate as of
Factors that May Influence Future Results of Operations
We derive approximately 70% 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, in a rising market, 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 and, in a falling market, may require us to receive
decreased rents upon renewal of existing leases or commencement of new leases.
Our ability to seek increased rents at our
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.
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
of
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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 a
Significant Accounting Policies
Segments
At
Basis of Consolidation
The consolidated financial statements of the Company included elsewhere herein
are prepared in accordance with generally accepted accounting principles in
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management adjusts such estimates when facts and circumstances dictate. The most significant estimates made include the recoverability of accounts receivable, allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed, and the useful lives of long-lived assets. Actual results could materially differ from these estimates.
Investment in Real Estate
Real estate assets held for investment are carried at historical cost and consist of land, buildings and improvements, furniture, fixtures and equipment and real estate under development. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as betterment or the life of the related asset will be substantially extended beyond the original life expectancy.
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The Company evaluates each acquisition of real estate or in-substance real estate to determine if the integrated set of assets and activities acquired meets the definition of a business and needs to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:
• Substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets? or
• The integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., revenue generated before and after the transaction).
An acquired process is considered substantive if:
• The process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce) that is skilled, knowledgeable and experienced in performing the process?
• The process cannot be replaced without significant cost, effort or delay? or
• The process is considered unique or scarce.
Generally, the Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.
Upon acquisition of real estate, the Company assesses the fair values of acquired tangible and intangible assets including land, buildings, tenant improvements, above and below-market leases, in-place leases and any other identified intangible assets and assumed liabilities. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their fair values. In estimating fair value of tangible and intangible assets acquired, the Company assesses and considers fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates, estimates of replacement costs, net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
The Company records acquired above-market and below-market lease values initially based on the present value, using a discount rate which reflects the risks associated with the leases acquired based on the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management's estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed renewal options for the below-market leases. Other intangible assets acquired include amounts for in-place lease values and tenant relationship values (if any) that are based on management's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commission, legal and other related expenses.
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. A property's value is impaired if management's estimate of the
aggregate future cash flows (undiscounted and without interest charges) to be
generated by the property is less than the carrying value of the property. To
the extent impairment has occurred, a write-down is recorded and measured by the
amount of the difference between the carrying value of the asset and the fair
value of the asset. Management of the Company does not believe that any of its
properties within the portfolio are impaired as of
For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the assets less estimated cost to sell is less than the carrying value of the assets. Properties classified as real estate held for sale generally represent properties that are actively marketed or contracted for sale with closing expected to occur within the next twelve months. Real estate held for sale is carried at the lower of cost, net of accumulated depreciation, or fair value less cost to sell, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held for sale properties are charged to expense as incurred. Expenditures for improvements, renovations, and replacements related to held-for-sale properties are capitalized at cost. Depreciation is not recorded on real estate held for sale.
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If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balances of the related intangibles are written off. The tenant improvements and origination costs are amortized to expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).
Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Building and improvements 10 - 44 years Tenant improvements Shorter of useful life or lease term
Furniture, fixtures and equipment 3 - 15 years
Capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. The value of in-place leases is amortized to expense over the remaining initial terms of the respective leases.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and in banks, plus all short-term investments with a maturity of three months or less when purchased. The Company maintains some of its cash in bank deposit accounts, which, at times, may exceed the federally insured limit. No losses have been experienced related to such accounts.
Restricted Cash
Restricted cash generally consists of escrows for future real estate taxes and insurance expenditures, repairs, capital improvements, loan reserves and security deposits.
Tenant and Other Receivables and Allowance for Doubtful Accounts
Tenant and other receivables are comprised of amounts due for monthly rents and
other charges less allowance for doubtful accounts. As described more fully
under Revenue Recognition below, in the first quarter of 2022 the Company
adopted Accounting Standards Codification ("ASC") 842 "Leases" which replaced
guidance under ASC 840 and provided for transition from balances at
Deferred Costs
Deferred lease costs consist of fees incurred to initiate and renew operating leases. Lease costs are being amortized using the straight-line method over the terms of the respective leases. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are amortized over the term of the financing and are recorded in interest expense in the combined financial statements. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions which do not close are expensed in the period the financing transaction is terminated.
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Revenue Recognition
As mentioned above under Tenant and Other Receivables and Allowance for Doubtful
Accounts, effective the first quarter of 2022, the Company has adopted ASC 842,
"Leases" which replaces the guidance under ASC 840. ASC 842 applies to the
Company principally as lessor; as a lessee, the Company's leases are immaterial.
The Company has determined that all its leases as lessor are operating leases.
The Company has elected to not bifurcate lease and non-lease components under a
practical expedient provision. With respect to collectability, beginning the
first quarter of 2022, the Company has written off all receivables not probable
of collection and related deferred rent, and has recorded income for those
tenants on a cash basis. When the probability assessment has changed for these
receivables, the Company has recognized lease income to the extent of the
difference between the lease income that would have been recognized if
collectability had always been assessed as probable and the lease income
recognized to date. For remaining receivables probable of collection, the
Company has recorded a general reserve under ASC 450. In the year-ended
In accordance with the provisions of ASC 842, rental revenue for commercial leases is recognized on a straight-line basis over the terms of the respective leases. Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Rental income attributable to residential leases and parking is recognized as earned, which is not materially different from the straight-line basis. Leases entered by residents for apartment units are generally for one-year terms, renewable upon consent of both parties on an annual or monthly basis.
Reimbursements for operating expenses due from tenants pursuant to their lease agreements are recognized as revenue in the period the applicable expenses are incurred. These costs generally include real estate taxes, utilities, insurance, common area maintenance costs and other recoverable costs and are recorded as part of commercial rental income in the condensed consolidated statements of operations.
Stock-based Compensation
The Company accounts for stock-based compensation pursuant to
Transaction Pursuit Costs
Transaction pursuit costs primarily reflect costs incurred for abandoned acquisition, disposition or other transaction pursuits.
Income Taxes
The Company elected to be taxed and to operate in a manner that will allow it to
qualify as a REIT under the Code. To qualify as a REIT, the Company is required
to distribute dividends equal to at least 90% of the REIT taxable income
(computed without regard to the dividends paid deduction and net capital gains)
to its stockholders, and meet the various other requirements imposed by the Code
relating to matters such as operating results, asset holdings, distribution
levels and diversity of stock ownership. Provided the Company qualifies for
taxation as a REIT, it is generally not subject to
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In accordance with FASB ASC Topic 740, the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that, if successfully challenged, could result in a material impact on its financial position or results of operations. The prior three years' income tax returns are subject to review by the Internal Revenue Service.
Fair Value Measurements
Refer to Note 9, "Fair Value of Financial Instruments".
Derivative Financial Instruments
FASB derivative and hedging guidance establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by FASB guidance, the Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation.
Derivatives used to hedge the exposure to changes in the fair value of an asset,
liability, or firm commitment attributable to a particular risk, such as
interest rate risk, are considered fair value hedges. Derivatives used to hedge
the exposure to variability in expected future cash flows, or other types of
forecast transactions, are considered cash flow hedges. For derivatives
designated as fair value hedges, changes in the fair value of the derivative and
the hedged item related to the hedged risk are recognized in earnings. For
derivatives designated as cash flow hedges, the effective portion of changes in
the fair value of the derivative is initially reported in other comprehensive
income (loss) (outside of earnings) and subsequently reclassified to earnings
when the hedged transaction affects earnings, and the ineffective portion of
changes in the fair value of the derivative is recognized directly in earnings.
The Company assesses the effectiveness of each hedging relationship by comparing
the changes in the fair value or cash flows of the derivative hedging instrument
with the changes in the fair value or cash flows of the designated hedged item
or transaction. For derivatives not designated as hedges, changes in fair value
would be recognized in earnings. As of
Loss Per Share
Basic and diluted net loss per share is computed by dividing net loss
attributable to common stockholders by the weighted average common shares
outstanding. As of
The effect of the conversion of the 26,317
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Results of Operations
Our focus throughout the years ended
Income Statement for the Years Ended
Increase
2022 2021 (decrease) %
Revenues
Residential rental income $ 90,262 $ 85,771 $ 4,491 5.2 %
Commercial rental income 39,484 36,958 2,526 6.8 %
Total revenues 129,746 122,729 7,017 5.7 %
Operating Expenses
Property operating expenses 29,306 28,997 309 1.1 %
Real estate taxes and
insurance 32,561 30,449 2,112 6.9 %
General and administrative 12,752 10,570 2,182 20.6 %
Transaction pursuit costs 506 60 446 743.3 %
Depreciation and
amortization 26,985 25,762 1,223 4.7 %
Total operating expenses 102,110 95,838 6,272 6.5 %
Litigation settlement and
other - (2,730 ) 2,730 100.0 %
Income from operations 27,636 24,161 3,475 14.4 %
Interest expense, net (40,207 ) (41,284 ) 1,077 2.6 %
Loss on
modification/extinguishment
of debt - (3,034 ) 3,034 100.0 %
Gain on involuntary
conversion - 139 (139 ) (100.0 )%
Net loss $ (12,571 ) $ (20,018 ) $ 7,447 37.2 %
The dollar amounts in the narrative disclosure below are in thousands, other than the base rent per square foot figures.
Revenue. Residential rental income increased to
Commercial rental income increased to
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
increased to
Real estate taxes and insurance. Real estate taxes and insurance expenses
increased to
General and administrative. General and administrative expenses increased to
Transaction pursuit costs. Transaction pursuit costs primarily reflect costs incurred for abandoned acquisition disposition or other transaction pursuits.
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Depreciation and amortization. Depreciation and amortization expense increased
to
Litigation settlement and other. Litigation settlement in 2021 represents a
non-recurring expense that the Company incurred in relation to the settlement of
litigation related to Real Property Tax Law ("RPTL") 421-g. The charge is based
on
Interest expense, net. Interest expense, net, decreased to
Loss on modification/extinguishment of debt. Loss on
modification/extinguishment of debt in 2021 related to the refinancing of the
Gain on involuntary conversion. Gain on involuntary conversion in 2021
represented insurance proceeds in excess of the carrying value of assets
disposed of related to fire damage suffered by units at the
Net loss. As a result of the foregoing, net loss decreased to
For comparison of the year ended
Liquidity and Capital Resources
As of
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 cash on hand, 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.
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We believe that our current cash flows from operations and cash on hand, 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.
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 2022
Flatbush Gardens, Brooklyn, NY 6/1/2032 3.125 % $ 329,000
250 Livingston Street, Brooklyn, NY 6/6/2029 3.63 % 125,000
141 Livingston Street, Brooklyn, NY 3/6/2031 3.21 % 100,000
Tribeca House, Manhattan, NY 3/6/2028 4.506 % 360,000
Aspen, Manhattan, NY 7/1/2028 3.68 % 62,554
Clover House, Brooklyn, NY 12/1/2029 3.53 % 82,000
10 West 65th Street, Manhattan, NY 11/1/2027 SOFR + 2.50 % 32,222
1010 Pacific Street, Brooklyn, NY 9/1/2024 LIBOR + 3.60 % 43,477
953 Dean Street, Brooklyn, NY 6/22/2023 Prime Rate + 1.60 % 36,985
$ 1,171,238
Flatbush Gardens
There is
250 Livingston Street
There is
141 Livingston Street
There is
Tribeca House
There is a
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Aspen
There is
Clover House
There is
10 West 65th Street
There is
1010 Pacific Street
As of
On
Dean Street
There is
The Company has provided a limited guaranty for the mortgage notes at several of its properties. The Company's loan agreements contain customary representations, covenants and events of default. Certain loan agreements require the Company to comply with affirmative and negative covenants, including the maintenance of debt service coverage and debt yield ratios. In the event that they are not compliant, certain lenders may require cash sweeps of rent until the conditions are cured. The Company is not in default on any of its loan agreements.
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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
2023 $ 38,972 $ 47,268 $ 86,240
2024 45,548 43,978 89,526
2025 2,170 41,764 43,934
2026 2,268 41,666 43,934
2027 33,175 51,207 84,382
Thereafter 1,049,105 159,365 1,208,470
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 ended
Cash Flows for the Years ended December 31, 2022 and 2021 (in thousands)
Year Ended
December 31,
2022 2021
Operating activities $ 20,139 $ 10,822
Investing activities (51,476 ) (77,944 )
Financing activities 9,779 30,314
Cash flows provided by (used in) operating activities, investing activities and
financing activities for the years ended
Net cash provided by operating activities was
Net cash used in investing activities was
Net cash provided by financing activities was
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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 for
Inflation
Inflation has recently become a factor in
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 measures" set forth in Item 10(e) of Regulation S-K promulgated by the
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 (loss) 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 the
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 modification/extinguishment of debt, gain on involuntary conversion, gain on termination of lease and certain litigation-related expenses, less recurring capital spending.
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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 (loss) 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.
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,
2022 2021
FFO
Net loss $ (12,571 ) $ (20,018 )
Real estate depreciation and amortization 26,985 25,762
FFO $ 14,414 $ 5,744 AFFO
FFO$ 14,414 $ 5,744 Amortization of real estate tax intangible 481 481 Amortization of above- and below-market leases (35 ) (104 ) Straight-line rent adjustments (163 ) (202 ) Amortization of debt origination costs 1,252 1,247 Amortization of LTIP awards 2,920 2,611 Transaction pursuit costs 506 60 Loss on modification/extinguishment of debt - 3,034 Gain on involuntary conversion - (139 ) Litigation settlement and other - 2,730 Certain litigation-related expenses 188 299 Recurring capital spending (326 ) (205 ) AFFO$ 19,237 $ 15,556
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 modification/extinguishment of debt and certain litigation-related expenses, less gain on involuntary conversion and gain on termination of lease.
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,
2022 2021
Adjusted EBITDA
Net loss $ (12,571 ) $ (20,018 )
Real estate depreciation and amortization 26,985 25,762
Amortization of real estate tax intangible 481 481
Amortization of above- and below-market leases (35 ) (104 )
Straight-line rent adjustments (163 ) (202 )
Amortization of LTIP awards 2,920 2,611
Interest expense, net 40,207 41,284
Transaction pursuit costs 506 60
Loss on modification/extinguishment of debt - 3,034
Gain on involuntary conversion - (139 )
Litigation settlement and other - 2,730
Certain litigation-related expenses 188 299
Adjusted EBITDA $ 58,518 $ 55,798
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, less gain on termination of lease. 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,
2022 2021
NOI
Income from operations $ 27,636 $ 24,161
Real estate depreciation and amortization 26,985 25,762
General and administrative expenses 12,752 10,570
Transaction pursuit costs 506 60
Amortization of real estate tax intangible 481 481
Amortization of above- and below-market leases (35 ) (104 )
Straight-line rent adjustments (163 ) (202 )
Litigation settlement and other - 2,730
NOI $ 68,162 $ 63,458 Recent Accounting Pronouncements
See Note 2, "Significant Accounting Policies" of our consolidated financial statements included in Item 15 for a discussion of recent accounting pronouncements.
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