Clipper Realty(CLPR) - 2019 Q4 - Annual Report

PART I ITEM 1. BUSINESS Clipper Realty Inc. is a self-managed REIT focused on acquiring and managing multifamily and commercial properties in the New York metropolitan area, with 75% of revenue from residential rents - Clipper Realty Inc. is a self-managed real estate company acquiring and repositioning multifamily and commercial properties in the New York metropolitan area, with a portfolio in Manhattan and Brooklyn[11] - The Company was incorporated in 2015, closed a private offering in August 2015, and completed an IPO on February 9, 2017, raising approximately $78.7 million[12][13] - As of December 31, 2019, the portfolio includes Tribeca House, Flatbush Gardens, 141 Livingston Street, 250 Livingston Street, Aspen, Clover House, 10 West 65th Street, and 1010 Pacific Street (under redevelopment)[16][18] - Approximately 75% of revenues are from residential rents, with the remainder from commercial and retail tenants, and City of New York agencies lease 16% of rentable square feet, representing 15% of total annualized rent[21] ITEM 1A. RISK FACTORS The company faces significant risks from New York City market conditions, rent stabilization laws, dependence on key tenants, substantial debt, and the need to maintain REIT qualification - Unfavorable market and economic conditions in New York City could adversely affect occupancy, rental rates, collections, operating expenses, and property values[54][55][62] - The Housing Stability and Tenant Protection Act of 2019 significantly limits the company's ability to raise rents on rent-stabilized units and convert them to market-rate, potentially impairing portfolio value and stock price[56][59] - Dependence on the City of New York as the sole office tenant (16% of rentable square feet, 15% of annualized rent) poses a risk if the City faces financial difficulties, potentially leading to defaults or lease non-renewals[64][65][66] - The company has substantial property-level debt ($1,009.4 million as of December 31, 2019), which may limit financial and operating activities, affect the ability to incur additional debt, and increase vulnerability to economic downturns[119][168][169] - Failure to maintain REIT qualification would result in significant adverse consequences, including corporate-level income tax and reduced distributions to stockholders[192][195] CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS This section warns that forward-looking statements are subject to significant business, economic, and regulatory risks, including market conditions and rent stabilization changes - The report contains forward-looking statements that are inherently subject to significant business, economic, competitive, regulatory, and other risks, contingencies, and uncertainties[231] - Key factors influencing future results include market and economic conditions, rent stabilization regulations, operating costs, risks of property damage (natural disasters, climate change, terrorist attacks), financing and development risks, competition, and potential changes in key personnel[231] ITEM 2. PROPERTIES The company's portfolio as of December 31, 2019, included eight properties totaling 3.2 million rentable square feet, 98% leased, with additional development underway - As of December 31, 2019, the company's portfolio consisted of eight properties totaling approximately 3.2 million rentable square feet (plus an approximate 119,000 rentable square feet under development) and was approximately 98% leased[234] Company's Portfolio Summary as of December 31, 2019 | Address \nMultifamily | Submarket | Year Built | Leasable Sq. Ft. | Units | Percent Leased | Base Annual Rental Revenue (millions) | Net Square | Effective Rent Per Occupied Foot | |:----------------------|:----------|:-----------|:-----------------|:--------|:---------------|:--------------------------------------|:-----------|:---------------------------------| | 50 Murray Street | Manhattan | 1964 | 396,528 | 390 | 97.7% | $27.3 | $70.32 | | | 53 Park Place | Manhattan | 1921 | 86,288 | 116 | 100.0% | $6.2 | $71.41 | | | Flatbush Gardens complex | Brooklyn | 1950 | 1,749,405 | 2,496 | 97.6% | $42.0 | $24.61 | | | 250 Livingston Street | Brooklyn | 1920 | 26,819 | 36 | 100.0% | $1.3 | $47.69 | | | Aspen | Manhattan | 2004 | 165,542 | 232 | 98.7% | $5.8 | $36.60 | | | 10 West 65th Street | Manhattan | 1939 | 75,678 | 82 | 98.8% | $3.4 | $45.97 | | | Clover House | Brooklyn | 1959 | 102,131 | 158 | 94.3% | $6.5 | $69.09 | | | Total Multifamily | | | 2,602,391 | 3,510 | 97.7% | $92.5 | $36.48 | | | Commercial | | | | | | | | | | 141 Livingston Street | Brooklyn | 1959 | 206,084 | 1 | 100.0% | $8.2 | $40.00 | | | 250 Livingston Street | Brooklyn | 1920 | 294,144 | 1 | 100.0% | $8.2 | $27.71 | | | Total Commercial | | | 500,228 | 2 | 100.0% | $16.4 | $32.77 | | | Retail | | | | | | | | | | 50 Murray Street (retail) | Manhattan | | 44,436 | 7 | 100.0% | $2.4 | $54.87 | | | 50 Murray Street (parking) | Manhattan | | 24,200 | 1 | 100.0% | $1.2 | $50.67 | | | 53 Park Place (retail) | Manhattan | | 8,600 | 1 | 100.0% | $0.4 | $42.52 | | | 141 Livingston Street (parking/other) | Brooklyn | | 14,853 | 1 | 100.0% | $0.4 | $26.12 | | | 250 Livingston Street (retail) | Brooklyn | | 990 | 1 | 100.0% | $0.1 | $118.58 | | | 250 Livingston Street (parking) | Brooklyn | | — | — | — | $0.2 | — | | | Aspen (retail) | Manhattan | | 21,060 | 3 | 82.0% | $0.8 | $48.39 | | | Aspen (parking) | Manhattan | | — | — | — | $0.3 | — | | | Total Retail | | | 114,139 | 14 | 96.7% | $5.8 | $53.86 | | | Total Portfolio | | | 3,216,758 | 3,526 | 98.0% | $114.7 | $34.42 | | Commercial and Retail Lease Expirations (2020-Thereafter) | Year | Number of Tenants | Total Square Feet | Annualized Rental Revenue | % of Annualized Rental Revenue Expiring | |:-----|:------------------|:------------------|:--------------------------|:----------------------------------------| | 2020 | 2 | 10,047 | 604,124 | 2.0% | | 2021 | — | — | — | — | | 2022 | 3 | 57,200 | 2,354,243 | 7.7% | | 2023 | 2 | 10,812 | 672,264 | 2.2% | | 2024 | 1 | 1,500 | 123,750 | 0.4% | | 2025 | 2 | 548,580 | 25,693,317 | 83.8% | | 2026 | — | — | — | — | | 2027 | 1 | 7,568 | 325,000 | 1.1% | | 2028 | — | — | — | — | | 2029 | — | — | — | — | | Thereafter | 3 | 12,809 | 862,454 | 2.8% | | Total | 14 | 648,516 | $30,635,152 | 100.0% | ITEM 3. LEGAL PROCEEDINGS The company faces a significant legal proceeding regarding rent stabilization at Tribeca House, with an appeal underway for rent overcharges and attorney's fees, while other claims are not material - The New York Court of Appeals ruled against the Company on June 25, 2019, holding that apartments in buildings receiving RPTL 421-g tax benefits are not subject to luxury deregulation, impacting 41 present or former tenants at Tribeca House[266] - The Company's motion for reargument was denied, and the matter was remitted for a special referee to determine rent overcharges and attorney's fees; an appeal for a stay of the hearing was granted on January 7, 2020, with the appeal scheduled for May 2020[266] - The U.S. Supreme Court denied the Company's Petition for a Writ of Certiorari on January 13, 2020, making the Court of Appeals' order final, and the Company has not recorded any liability for potential settlement due to uncertainty of timing and ultimate resolution[266] - Other legal proceedings, including an ADA claim at 141 Livingston Street, are not expected to have a material adverse effect on the Company's financial position[268] ITEM 4. MINE SAFETY DISCLOSURE This item is not applicable to the company PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock trades on the NYSE, with 1,226 holders as of February 2020, and future dividends are discretionary based on financial performance and REIT requirements - The company's common stock is traded on the NYSE under the ticker symbol CLPR, with trading commencing on February 10, 2017[271] - As of February 19, 2020, there were 1,226 holders of record of the company's common stock[273] - There is no guarantee of quarterly cash distributions; they are authorized at the discretion of the board and depend on cash from operations, financial condition, capital requirements, and REIT distribution requirements[275] ITEM 6. SELECTED FINANCIAL DATA This section presents selected consolidated financial data for 2015-2019, including statements of operations, balance sheets, cash flows, and non-GAAP measures like FFO and NOI Selected Consolidated Statement of Operations Data (in thousands) | Indicator | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---| | Total revenues | $116,165 | $109,997 | $103,952 | $93,005 | $84,604 | | Total operating expenses | $82,669 | $77,539 | $74,448 | $67,208 | $56,101 | | Income from operations | $33,496 | $32,458 | $29,504 | $25,797 | $28,503 | | Interest expense, net | $(35,187) | $(32,781) | $(35,505) | $(38,136) | $(36,703) | | Net loss | $(4,123) | $(9,001) | $(6,001) | $(12,339) | $(8,200) | | Net loss attributable to common stockholders | $(1,665) | $(3,633) | $(2,365) | $(3,754) | $(1,365) | | Basic and diluted net loss per share | $(0.11) | $(0.22) | $(0.15) | $(0.34) | $(0.12) | | Cash dividends per share | $0.38 | $0.38 | $0.37 | $0.26 | $0.04 | Selected Consolidated Balance Sheet Data (in thousands) | Indicator | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---|\ | Investment in real estate, net | $1,080,533 | $1,025,737 | $996,892 | $823,077 | $726,107 | | Cash and cash equivalents | $42,500 | $37,028 | $7,940 | $37,547 | $125,332 | | Total assets | $1,166,207 | $1,101,008 | $1,052,085 | $905,208 | $881,118 | | Notes payable, net of unamortized debt costs | $997,903 | $913,564 | $843,946 | $754,459 | $713,440 | | Total liabilities | $1,024,424 | $939,523 | $866,494 | $778,992 | $734,741 | | Total equity | $141,783 | $161,485 | $185,591 | $126,216 | $146,377 | Selected Non-GAAP Financial Measures (in thousands) | Indicator | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---|\ | FFO | $15,526 | $9,004 | $10,720 | $2,956 | $4,321 | | AFFO | $22,041 | $19,818 | $16,682 | $9,998 | $9,247 | | Adjusted EBITDA | $56,134 | $52,091 | $49,554 | $43,743 | $41,531 | | Net Operating Income (NOI) | $62,825 | $60,024 | $56,388 | $49,625 | $46,118 | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses financial performance, including revenue, expenses, net loss, liquidity, debt, and cash flow, along with non-GAAP measures and the impact of taxes and inflation - Residential rental income (excluding Clover House) increased by 5.6% from $81,117 thousand in 2018 to $85,627 thousand in 2019, driven by higher rental rates at Flatbush Gardens and increased rates and occupancy at Tribeca House[307] - Net loss decreased significantly from $9,001 thousand in 2018 to $4,123 thousand in 2019, primarily due to a substantial decrease in loss on extinguishment of debt (from $8,872 thousand to $2,432 thousand)[307][315][316] - The company's short-term liquidity needs are met by cash from operations, while long-term needs for acquisitions and major renovations are expected to be funded by external financing sources like equity offerings and debt[331][332] Cash Flow Summary (in thousands) | Activity | 2019 | 2018 | 2017 | |:---|:---|:---|:---|\ | Operating activities | $23,772 | $22,362 | $13,065 | | Investing activities | $(74,903) | $(39,295) | $(187,656) | | Financing activities | $62,199 | $41,127 | $147,609 | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risk is interest rate fluctuations on its variable rate debt, with a 100 basis point increase hypothetically raising annual interest expense by $0.2 million, managed through interest rate caps - The principal market risk is related to interest rate fluctuations, with $19.5 million of uncapped variable rate debt as of December 31, 2019[379][380] - A 100 basis point increase in interest rates would result in a hypothetical increase of approximately $0.2 million in annual interest expense[380] - The company uses interest rate caps to manage risk, including a new cap purchased on January 7, 2020, for up to $21.6 million of 1010 Pacific Street debt, providing protection if one-month LIBOR exceeds 3.6%[379][380] Fair Value of Notes Payable (in millions) | Date | Carrying Amount | Estimated Fair Value | |:---|:---|:---|\ | December 31, 2019 | $1,009.4 | $1,058.1 | | December 31, 2018 | $925.6 | $927.6 | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section incorporates consolidated financial statements and supplementary data by reference, including auditor's report, balance sheets, statements of operations, equity, cash flows, and notes - The financial statements and supplementary data are incorporated by reference, starting on page F-1 of the Annual Report on Form 10-K[382] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure during the reported period ITEM 9A. CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes during the quarter - As of December 31, 2019, management, with CEO and CFO participation, concluded that disclosure controls and procedures are designed at a reasonable assurance level and are effective[384] - No material changes in internal control over financial reporting were identified during the last quarter of the fiscal year[385] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[386] ITEM 9B. OTHER INFORMATION This section states that there is no other information required to be disclosed PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding directors, executive officers, and corporate governance will be provided in the company's Proxy Statement, to be filed no later than 120 days after the fiscal year-end ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation will be provided in the company's Proxy Statement, to be filed no later than 120 days after the fiscal year-end ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS This section details equity compensation plans, including securities authorized for future issuance and outstanding options, with further ownership information in the Proxy Statement Equity Compensation Plan Information | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |:---|:---|:---|:---|\ | Equity compensation plans approved by security holders | | | | | 2015 Omnibus Plan | 689,423 | — | 310,577 | | 2015 Director Plan | 193,559 | — | 156,441 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 882,982 | - | 467,018 | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding certain relationships, related transactions, and director independence will be provided in the company's Proxy Statement, to be filed no later than 120 days after the fiscal year-end ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information regarding principal accounting fees and services will be provided in the company's Proxy Statement, to be filed no later than 120 days after the fiscal year-end PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES This section lists all exhibits and financial statement schedules, including consolidated financial statements and an exhibit index detailing corporate documents and agreements - The section includes a list of exhibits, financial statement schedules, and consolidated financial statements[400] - The Exhibit Index details various corporate documents such as Articles of Amendment and Restatement, Bylaws, LLC Agreements, Registration Rights Agreements, Employment Agreements, and Loan Agreements[402][403][404][405][406] SIGNATURES This section contains the required signatures for the Annual Report on Form 10-K from key executives and directors, affirming compliance with the Securities Exchange Act of 1934 - The report is signed by David Bistricer (Co-Chairman and CEO), Michael C. Frenz (CFO), Sam Levinson (Co-Chairman), and other directors, affirming compliance with the Securities Exchange Act of 1934[408][410][413] Index to Consolidated Financial Statements and Schedule This index lists the consolidated financial statements and schedules, including the auditor's report, balance sheets, statements of operations, equity, cash flows, notes, and Schedule III - The index lists the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Equity, and Cash Flows, and Notes to Consolidated Financial Statements[415] - It also includes Financial Statement Schedule III – Real Estate and Accumulated Depreciation[415] Report of Independent Registered Public Accounting Firm BDO USA, LLP issued an unqualified opinion on the consolidated financial statements for 2017-2019, affirming fair presentation in conformity with GAAP, without auditing internal control over financial reporting - BDO USA, LLP issued an unqualified opinion, stating that the consolidated financial statements for the three years ended December 31, 2019, present fairly the financial position, results of operations, and cash flows in conformity with GAAP[417] - The audit assessed risks of material misstatement but did not include an audit of internal control over financial reporting, as the company is an 'emerging growth company'[419][388] Consolidated Balance Sheets The consolidated balance sheets for 2019 and 2018 show total assets increasing to $1,166,207 thousand in 2019, driven by real estate investment, while total equity decreased Consolidated Balance Sheet Highlights (in thousands) | Item | December 31, 2019 | December 31, 2018 | |:---|:---|:---|\ | Investment in real estate, net | $1,080,533 | $1,025,737 | | Cash and cash equivalents | $42,500 | $37,028 | | Total assets | $1,166,207 | $1,101,008 | | Notes payable, net | $997,903 | $913,564 | | Total liabilities | $1,024,424 | $939,523 | | Total stockholders' equity | $57,234 | $65,182 | | Total equity | $141,783 | $161,485 | - Investment in real estate, net, increased from $1,025,737 thousand in 2018 to $1,080,533 thousand in 2019[424] - Total equity decreased from $161,485 thousand in 2018 to $141,783 thousand in 2019[424] Consolidated Statements of Operations The consolidated statements of operations for 2017-2019 show a decrease in net loss attributable to common stockholders in 2019, with increasing total revenues and operating expenses Consolidated Statements of Operations Highlights (in thousands) | Item | 2019 | 2018 | 2017 | |:---|:---|:---|:---|\ | Total Revenues | $116,165 | $109,997 | $103,952 | | Total Operating Expenses | $82,669 | $77,539 | $74,448 | | Income From Operations | $33,496 | $32,458 | $29,504 | | Interest expense, net | $(35,187) | $(32,781) | $(35,505) | | Net loss | $(4,123) | $(9,001) | $(6,001) | | Net loss attributable to common stockholders | $(1,665) | $(3,633) | $(2,365) | | Basic and diluted net loss per share | $(0.11) | $(0.22) | $(0.15) | - Net loss attributable to common stockholders decreased from $(3,633) thousand in 2018 to $(1,665) thousand in 2019[427] - Total revenues increased from $109,997 thousand in 2018 to $116,165 thousand in 2019, while total operating expenses increased from $77,539 thousand to $82,669 thousand[427] Consolidated Statements of Equity The consolidated statements of equity for 2017-2019 show total equity decreasing to $141,783 thousand in 2019, primarily due to net loss and distributions Consolidated Statements of Equity Highlights (in thousands) | Item | December 31, 2019 | December 31, 2018 | December 31, 2017 | |:---|:---|:---|:---|\ | Total stockholders' equity | $57,234 | $65,182 | $74,912 | | Non-controlling interests | $84,549 | $96,303 | $110,679 | | Total equity | $141,783 | $161,485 | $185,591 | | Net loss | $(4,123) | $(9,001) | $(6,001) | | Dividends and distributions | $(17,089) | $(17,038) | $(16,565) | | Amortization of LTIP grants | $1,510 | $1,940 | $3,110 | - Total equity decreased from $161,485 thousand at December 31, 2018, to $141,783 thousand at December 31, 2019[431] - Dividends and distributions totaled $17,089 thousand in 2019, $17,038 thousand in 2018, and $16,565 thousand in 2017[431] Consolidated Statements of Cash Flows The consolidated statements of cash flows for 2017-2019 show increased net cash from operating activities in 2019, while investing activities used more cash due to property acquisitions Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | 2019 | 2018 | 2017 | |:---|:---|:---|:---|\ | Net cash provided by operating activities | $23,772 | $22,362 | $13,065 | | Net cash used in investing activities | $(74,903) | $(39,295) | $(187,656) | | Net cash provided by financing activities | $62,199 | $41,127 | $147,609 | | Net increase (decrease) in cash and cash equivalents and restricted cash | $11,068 | $24,194 | $(26,982) | - Net cash provided by operating activities increased to $23,772 thousand in 2019 from $22,362 thousand in 2018[434] - Net cash used in investing activities increased to $74,903 thousand in 2019, primarily due to the acquisition of the 1010 Pacific Street property for $31,129 thousand and capital projects[434][551] Notes to Consolidated Financial Statements The notes detail the company's organization, accounting policies, acquisitions, debt, rental income, fair value, commitments, related-party transactions, segment reporting, and multiemployer union agreements - The company operates as a REIT, generally not subject to U.S. federal corporate-level income tax on distributed earnings, and aims to distribute at least 90% of its taxable income[476] - As of December 31, 2019, the company had $1,009,431 thousand in total debt, primarily mortgage notes secured by its properties, with various maturity dates and interest rates[509] - The company's revenue streams are primarily from residential (75% in 2019) and commercial (25% in 2019) rental income, with commercial leases to the City of New York comprising a significant portion[536][519] - The company is subject to multiemployer union agreements for certain employees, with contributions made to defined benefit pension and other plans[542] Schedule III – Real Estate and Accumulated Depreciation Schedule III details the company's real estate assets and accumulated depreciation as of December 31, 2019, summarizing activity for 2017-2019, including property costs and encumbrances Investment in Real Estate and Accumulated Depreciation (in thousands) | Item | 2019 | 2018 | 2017 | |:---|:---|:---|:---|\ | Balance at beginning of period (Investment in real estate) | $1,116,199 | $1,070,606 | $881,251 | | Acquisition of real estate | $31,129 | — | $166,630 | | Additions during period | $42,623 | $45,642 | $22,725 | | Balance at end of period (Investment in real estate) | $1,189,951 | $1,116,199 | $1,070,606 | | Balance at beginning of period (Accumulated depreciation) | $90,462 | $73,714 | $58,174 | | Depreciation expense | $18,956 | $16,765 | $15,540 | | Balance at end of period (Accumulated depreciation) | $109,418 | $90,462 | $73,714 | - Total investment in real estate increased from $1,116,199 thousand in 2018 to $1,189,951 thousand in 2019, including $31,129 thousand for the acquisition of 1010 Pacific Street[551] - Accumulated depreciation increased from $90,462 thousand in 2018 to $109,418 thousand in 2019, with depreciation expense of $18,956 thousand for the year[551]