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 Company
As of
• two neighboring residential/retail rental properties at50 Murray Street and53 Park Place in theTribeca 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 ; and • 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. 21
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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,
Results of Operations
Our focus throughout 2022 and year-to-date 2023 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, 2023 and 2022 (in thousands) Increase 2023 2022 (decrease) % Revenues Residential rental income$ 23,940 $ 21,462 $ 2,478 11.5 % Commercial rental income 9,727 10,588 (861 ) (8.1 )% Total revenues 33,667 32,050 1,617 5.0 % Operating Expenses Property operating expenses 8,099 7,539 560 7.4 % Real estate taxes and insurance 8,536 7,931 605 7.6 % General and administrative 3,293 2,942 351 11.9 % Transaction pursuit costs - 424 (424 ) (100.0 )% Depreciation and amortization 6,825 6,705 120 1.8 % Total operating expenses 26,753 25,541 1,212 4.7 % Income from operations 6,914 6,509 405 6.2 % Interest expense, net (10,135 ) (9,985 ) (150 ) (1.5 )% Loss on extinguishment of debt (3,868 ) - (3,868 ) (100.0 )% Net loss$ (7,089 ) $ (3,476 ) $ (3,613 ) (103.9 )%
Revenue. Residential rental income increased to
Commercial rental income decreased to
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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 an abandoned acquisition.
Depreciation and amortization. Depreciation and amortization expense increased
to
Interest expense, net. Interest expense, net, increased to
Loss on extinguishment of debt.
Loss on the extinguishment of debt consists of costs related to the early termination of our construction loan at 1010 Pacific. Additionally, we accelerated the remaining unamortized loan costs from the prior loan.
Net loss
As a result of the foregoing, net loss increased to
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 debt payments 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.
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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, market conditions for REITs and market perceptions about our company.
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.
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. On
Cash Flows for the Three Months EndedMarch 31, 2023 and 2022 (in thousands) Three Months Ended March 31, 2023 2022 Operating activities$ 7.421 $ 6,587 Investing activities (12,494 ) (17,851 ) Financing activities 12,231 2,875
Cash flows provided by (used in) operating activities, investing activities and
financing activities for the three months ended
Net cash flow provided by operating activities was
Net cash used in investing activities was
Net cash provided by financing activities was
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
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Inflation
Inflation has recently become a factor in
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 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, transaction pursuit 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.
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.
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The following table sets forth a reconciliation of the Company's FFO and AFFO for the periods presented to net loss, computed in accordance with GAAP (amounts in thousands): Three Months Ended March 31, 2023 2022 FFO Net loss$ (7,089 ) $ (3,476 ) Real estate depreciation and amortization 6,825 6,705 FFO$ (264 ) $ 3,229
AFFO
FFO$ (264 ) $ 3,229 Amortization of real estate tax intangible 120 120 Amortization of above- and below-market leases (9 ) (9 ) Straight-line rent adjustments (5 ) (189 ) Amortization of debt origination costs 313 313 Amortization of LTIP awards 648 495 Transaction pursuit costs - 424 Loss on extinguishment / modification of debt 3,868 - Certain litigation-related expenses - 86 Recurring capital spending (195 ) (49 ) AFFO$ 4,476 $ 4,420
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, transaction pursuit 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.
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, 2023 2022 Adjusted EBITDA Net loss$ (7,089 ) $ (3,476 ) Real estate depreciation and amortization 6,825 6,705 Amortization of real estate tax intangible 120 120 Amortization of above- and below-market leases (9 ) (9 ) Straight-line rent adjustments (5 ) (189 ) Amortization of LTIP awards 648 495 Interest expense, net 10,135 9,985 Transaction pursuit costs - 424 Loss on modification/extinguishment of debt 3,868 - Certain litigation-related expenses - 86 Adjusted EBITDA$ 14,493 $ 14,141 26
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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, transaction pursuit 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): Three Months Ended March 31, 2023 2022 NOI Income from operations$ 6,914 $ 6,509 Real estate depreciation and amortization 6,825 6,705 General and administrative expenses 3,293 2,942 Transaction pursuit costs - 424 Amortization of real estate tax intangible 120 120 Amortization of above- and below-market leases (9 ) (9 ) Straight-line rent adjustments (5 ) (189 ) NOI$ 17,138 $ 16,502 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
Recent Accounting Pronouncements
See Note 2, "Significant Accounting Policies" of our consolidated financial statements for a discussion of recent accounting pronouncements.
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