Clipper Realty(CLPR) - 2021 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS This section highlights forward-looking statements regarding the Company's financial position, strategy, and future operations, noting associated risks - Forward-looking statements are identified by words such as "may," "will," "should," "expect," "anticipate," "believe," "estimate," "project," "predict," "intend," "continue," "potential," "plan," "goal"[6] - Key risks include the impact of the COVID-19 pandemic on tenant rent payments and housing demand, general market and economic conditions, regulatory developments in New York City, changes in rent stabilization, ability to control operating costs, property damage risks, financing risks, competition, and identified material weakness in internal control over financial reporting[6] ITEM 1. CONDENSED FINANCIAL STATEMENTS This section presents unaudited condensed consolidated financial statements, including balance sheets, operations, equity, cash flows, and detailed notes Consolidated Balance Sheets The consolidated balance sheets present the company's financial position as of September 30, 2021, and December 31, 2020, detailing assets, liabilities, and equity Consolidated Balance Sheet (in thousands) | Metric | Sep 30, 2021 (Unaudited) | Dec 31, 2020 | | :-------------------------- | :----------------------- | :----------- | | Total Assets | $1,211,616 | $1,207,866 | | Total Liabilities | $1,131,908 | $1,103,752 | | Total Stockholders' Equity | $30,211 | $39,462 | | Non-controlling Interests | $49,497 | $64,652 | | Total Equity | $79,708 | $104,114 | - Investment in real estate, net, increased from $1,090,498 thousand at December 31, 2020, to $1,095,907 thousand at September 30, 2021[10] - Notes payable, net, increased from $1,079,458 thousand at December 31, 2020, to $1,102,492 thousand at September 30, 2021[10] Consolidated Statements of Operations The consolidated statements of operations show an increased net loss for the three and nine months ended September 30, 2021, driven by stable revenues but higher expenses Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total Revenues | $30,631 | $30,040 | $91,953 | $92,513 | | Total Operating Expenses | $23,673 | $23,561 | $71,882 | $67,687 | | Income From Operations | $6,958 | $7,317 | $20,071 | $25,664 | | Interest Expense, Net | $(10,375) | $(10,207) | $(30,958) | $(29,974) | | Net Loss | $(3,417) | $(2,890) | $(13,782) | $(8,453) | | Net Loss Attributable to Common Stockholders | $(1,295) | $(1,167) | $(5,224) | $(3,413) | | Basic and Diluted Net Loss Per Share | $(0.09) | $(0.08) | $(0.36) | $(0.21) | Consolidated Statements of Changes in Equity The consolidated statements of changes in equity detail movements in common stock, paid-in capital, accumulated deficit, and non-controlling interests, showing a decrease in total equity Consolidated Statements of Changes in Equity (in thousands) | Metric | Balance Dec 31, 2020 | Balance Sep 30, 2021 | | :----------------------------------- | :------------------- | :------------------- | | Total Stockholders' Equity | $39,462 | $30,211 | | Non-controlling Interests | $64,652 | $49,497 | | Total Equity | $104,114 | $79,708 | | Dividends and distributions (9 months) | | $(4,188) | | Net loss (9 months) | | $(3,417) | Consolidated Statements of Cash Flows The consolidated statements of cash flows show increased net cash from operations, decreased cash used in investing, and significantly decreased cash from financing activities Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------- | :----------------------------- | :----------------------------- | | Net Cash Provided by Operating Activities | $13,489 | $10,246 | | Net Cash Used in Investing Activities | $(20,653) | $(24,788) | | Net Cash Provided by Financing Activities | $6,366 | $62,583 | | Net (Decrease) Increase in Cash and Cash Equivalents and Restricted Cash | $(798) | $48,041 | | Cash and Cash Equivalents and Restricted Cash - End of Period | $88,234 | $104,973 | Notes to Condensed Consolidated Financial Statements These notes provide essential details and explanations for the condensed consolidated financial statements, covering organization, accounting policies, and specific financial disclosures Introduction to the Condensed Consolidated Financial Statements The introduction clarifies that these unaudited condensed consolidated financial statements are prepared under SEC rules and GAAP, with certain information condensed or omitted - Financial statements are unaudited and prepared under SEC rules and GAAP, with certain disclosures condensed or omitted[23] - Results for interim periods are not necessarily indicative of a full year's operations[24] 1. Organization Clipper Realty Inc., organized in Maryland in 2015, operates as a REIT through its Operating Partnership, owning a portfolio of residential and commercial properties - Company organized in Maryland on July 7, 2015, and elected to be taxed as a REIT[25][28] - Property 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)[25] - As of September 30, 2021, the Company's interest in the LLCs that own the properties generally entitles it to 37.9% of aggregate cash distributions, profits, and losses[29] 2. Repurchase of Common Stock In August 2020, the Board adopted and completed a stock repurchase program for up to $10.0 million of common stock, retiring 1,751,444 shares - Stock repurchase program for up to $10.0 million adopted in August 2020 and completed on November 24, 2020[30] - During the year ended December 31, 2020, 1,751,444 shares were repurchased and retired for approximately $10.0 million[30] 3. Significant Accounting Policies This section outlines significant accounting policies, including segment reporting, consolidation, estimates, real estate investment, cash, receivables, deferred costs, and revenue recognition Segments The Company operates two reportable segments: Residential Rental Properties and Commercial Rental Properties, with data reviewed on a property basis - Company has two reportable operating segments: Residential Rental Properties and Commercial Rental Properties[31] Basis of Consolidation Consolidated financial statements are prepared under GAAP, including all controlled entities, with intercompany balances eliminated and non-controlling interests recorded - Consolidated financial statements include accounts of all entities with a controlling interest, with intercompany balances eliminated[32] Use of Estimates Financial statement preparation requires management estimates and assumptions impacting reported amounts, with actual results potentially differing materially - Management makes estimates and assumptions affecting reported amounts of assets, liabilities, revenues, and expenses; actual results may differ materially[33] Investment in Real Estate Real estate assets are carried at historical cost, with improvements capitalized and depreciated, and acquisitions evaluated for business qualification and asset impairment - Real estate assets are carried at historical cost, with improvements capitalized and depreciated over estimated useful lives (e.g., buildings 10-44 years)[35][44] - Acquisitions are assessed to determine if they meet the definition of a business; generally, real estate acquisitions are not expected to qualify[36][38] - Long-lived assets are reviewed for impairment when circumstances indicate carrying amount may not be recoverable; no properties were deemed impaired as of September 30, 2021[41] Cash and Cash Equivalents Cash and cash equivalents include cash on hand and short-term investments with maturities of three months or less - Cash and cash equivalents include cash on hand and short-term investments with maturities of three months or less[47] Restricted Cash Restricted cash primarily consists of escrows for real estate taxes, insurance, repairs, capital improvements, loan reserves, and security deposits - Restricted cash consists of escrows for real estate taxes, insurance, repairs, capital improvements, loan reserves, and security deposits[48] Tenant and Other Receivables and Allowance for Doubtful Accounts Tenant and other receivables represent amounts due for rents and charges, net of an allowance for doubtful accounts, with periodic collectability reviews - Tenant and other receivables are net of an allowance for doubtful accounts, with periodic reviews for collectability[49] Deferred Costs Deferred costs include lease origination costs amortized straight-line over lease terms and deferred financing costs amortized over the financing term - Deferred lease costs are amortized straight-line over lease terms[50] - Deferred financing costs are amortized over the term of financing and recorded in interest expense, net[51] Comprehensive Income (Loss) Comprehensive income (loss) equals net income (loss) as the Company had no financial instruments with unrealized gains/losses not reported in net income - Comprehensive income (loss) was equal to net income (loss) for the three and nine months ended September 30, 2021 and 2020, as no financial instruments had changes in value not reported in net income[53] Revenue Recognition Commercial rental revenue is recognized on a straight-line basis, residential rental income as earned, and tenant reimbursements as expenses are incurred - Commercial rental revenue is recognized on a straight-line basis; residential rental income is recognized as earned[54] - Tenant reimbursements for operating expenses are recognized as revenue when applicable expenses are incurred[55] Stock-based Compensation Stock-based compensation is expensed over the vesting period based on fair value at grant date, with LTIP units granted in March 2021 and $2.9 million unrecognized cost remaining - Stock-based compensation is expensed over the vesting period based on fair value at grant date[56] - In March 2021, 222,298 LTIP units were granted to employees and 102,894 to non-employee directors[57] - As of September 30, 2021, $2.9 million of total unrecognized compensation cost related to unvested share-based compensation, with a weighted-average period of approximately one year[58] Transaction Pursuit Costs Transaction pursuit costs reflect expenses incurred for abandoned acquisition, disposition, or other transaction pursuits - Transaction pursuit costs reflect expenses for abandoned acquisition, disposition, or other transaction pursuits[59] Income Taxes The Company elected REIT taxation, requiring distribution of at least 90% of taxable income and generally avoiding U.S. federal corporate income tax - Company elected to be taxed as a REIT, requiring distribution of at least 90% of taxable income and meeting other Code requirements[60] - As a REIT, the Company is generally not subject to U.S. federal corporate-level income tax on distributed earnings[60] Fair Value Measurements Fair value measurements are classified into three levels based on input observability, using quoted market prices or multiple valuation sources - Fair value measurements are classified into Level 1 (quoted prices in active markets), Level 2 (quoted prices for similar instruments or model-derived valuations with observable inputs), and Level 3 (unobservable inputs)[98] Derivative Financial Instruments All derivatives are recorded at fair value on the consolidated balance sheets, with accounting for changes depending on designation; no hedge accounting applied as of September 30, 2021 - All derivatives are recorded at fair value on the consolidated balance sheets[65] - As of September 30, 2021, the Company had no derivatives for which it applies hedge accounting[66] Loss Per Share Basic and diluted net loss per share are calculated using net loss attributable to common stockholders and weighted-average common shares outstanding, including unvested LTIP units - Basic and diluted net loss per share are computed by dividing net loss attributable to common stockholders by weighted-average common shares outstanding[67] - Unvested LTIP units are considered participating securities and included in the computation using the two-class method[67] Loss Per Share (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss attributable to common stockholders | $(1,295) | $(1,167) | $(5,224) | $(3,413) | | Less: income attributable to participating securities | $(161) | $(134) | $(491) | $(344) | | Subtotal | $(1,456) | $(1,301) | $(5,715) | $(3,757) | | Weighted-average common shares outstanding | 16,063 | 17,811 | 16,063 | 17,814 | | Basic and diluted net loss per share | $(0.09) | $(0.08) | $(0.36) | $(0.21) | Recently Issued Pronouncements This section discusses recent FASB ASUs on lease concessions and accounting improvements, generally not expected to materially impact financial statements, with ASU 2016-02 effective January 1, 2022 - FASB issued ASU 2021-01 and ASU 2020-04 regarding Reference Rate Reform (LIBOR transition), not expected to have a material impact[72][73] - FASB issued ASU 2019-01 and ASU 2018-20 for Leases (Topic 842) improvements, not expected to have a material impact[74][75] - ASU 2016-02, 'Leases,' will be adopted effective January 1, 2022; as a lessor, no material impact on revenue recognition is expected, but as a lessee, right-of-use assets and lease liabilities will be recorded[77] 4. Deferred Costs and Intangible Assets Deferred costs and intangible assets, net, decreased from $7,720 thousand at December 31, 2020, to $7,261 thousand at September 30, 2021, including lease origination and tax abatements Deferred Costs and Intangible Assets (in thousands) | Metric | Sep 30, 2021 (Unaudited) | Dec 31, 2020 | | :-------------------------------------- | :----------------------- | :----------- | | Total deferred costs and intangible assets | $11,068 | $10,996 | | Less accumulated amortization | $(3,807) | $(3,276) | | Total deferred costs and intangible assets, net | $7,261 | $7,720 | - Amortization of deferred costs, lease origination costs, and in-place lease intangible assets was $170 thousand for the nine months ended September 30, 2021[78] - Amortization of real estate tax abatements was $361 thousand for the nine months ended September 30, 2021[78] 5. Below-Market Leases, Net Below-market leases, net, significantly decreased from $157 thousand at December 31, 2020, to $61 thousand at September 30, 2021, due to amortization and write-offs Below-Market Leases, Net (in thousands) | Metric | Sep 30, 2021 (Unaudited) | Dec 31, 2020 | | :------------------------ | :----------------------- | :----------- | | Below-market leases | $297 | $785 | | Less accumulated amortization | $(236) | $(628) | | Below-market leases, net | $61 | $157 | - Rental income included amortization of below-market leases of $96 thousand for the nine months ended September 30, 2021[81] - $488 thousand of fully amortized below-market leases were written off during the nine months ended September 30, 2021[81] 6. Notes Payable Total debt, net of unamortized debt issuance costs, increased to $1,102,492 thousand at September 30, 2021, driven by new financings and refinancings Notes Payable (in thousands) | Metric | Sep 30, 2021 (Unaudited) | Dec 31, 2020 | | :--------------------------------------- | :----------------------- | :----------- | | Total debt | $1,114,595 | $1,089,720 | | Unamortized debt issuance costs | $(12,103) | $(10,262) | | Total debt, net of unamortized debt issuance costs | $1,102,492 | $1,079,458 | - Refinanced $79,500 mortgage note for 141 Livingston Street with a new $100,000 note at 3.21% interest, maturing March 6, 2031[85] - Refinanced 1010 Pacific Street loan with new loans providing up to $52,500 for development, bearing interest at 30-day LIBOR plus 3.60%, maturing September 1, 2024[92] - Recognized a loss on extinguishment of debt of $3,034 thousand during the nine months ended September 30, 2021, due to the 141 Livingston Street refinancing[94] 7. Rental Income under Operating Leases The Company's commercial properties are leased under non-cancelable operating leases, with minimum future cash rents receivable totaling $130,050 thousand Minimum Future Cash Rents Receivable (in thousands) | Year | Minimum Future Cash Rents Receivable | | :----------------- | :----------------------------------- | | 2021 (Remainder) | $7,452 | | 2022 | $30,279 | | 2023 | $29,042 | | 2024 | $28,663 | | 2025 | $22,976 | | Thereafter | $11,638 | | Total | $130,050 | - Commercial leases with the City of New York comprised approximately 25% of total revenues for the nine months ended September 30, 2021[97] 8. Fair Value of Financial Instruments The Company measures financial instruments at fair value, classified into three levels, with notes payable fair value estimated at $1,175,689 thousand as of September 30, 2021 - Fair value measurements are classified into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[98] - Carrying amounts of cash, restricted cash, receivables, prepaid expenses, accounts payable, and security deposits approximate fair value[101] Fair Value of Notes Payable (in thousands) | Metric | Sep 30, 2021 (Unaudited) | Dec 31, 2020 | | :--------------------------------------- | :----------------------- | :----------- | | Carrying amount of notes payable | $1,114,595 | $1,089,720 | | Estimated fair value of notes payable | $1,175,689 | $1,204,201 | 9. Commitments and Contingencies This section details legal proceedings, primarily the 'Kuzmich' rent stabilization case, and addresses commitments and contingencies related to the COVID-19 pandemic and property concentration - The 'Kuzmich' case involves claims of rent overcharges at Tribeca House due to RPTL 421-g tax abatements, with the New York Court of Appeals ruling in favor of tenants[107] - The Appellate Division reversed the lower court's 'default formula' for overcharge calculation, limiting financial exposure by setting a four-year base date and comparing rents to Rent Guidelines Board increases[107] - The COVID-19 pandemic has caused temporary declines in leased occupancy and residential rental rates, and some commercial tenants received partial rent deferrals[113] - The Company's properties are concentrated in Manhattan and Brooklyn, exposing it to greater economic risks[115] Revenue Type Breakdown | Revenue Type | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Commercial | 30% | 27% | 30% | 25% | | Residential | 70% | 73% | 70% | 75% | | Total | 100% | 100% | 100% | 100% | 10. Related-Party Transactions The Company incurred office, overhead, and payroll expenses with a related company, and paid legal and advisory fees to firms where directors were principals - Office and overhead expenses with a related company were $66 thousand for the three months and $200 thousand for the nine months ended September 30, 2021[117] - Legal and advisory fees of $200 thousand (three months) and $604 thousand (nine months) were paid to firms where directors were principals/partners in 2021[118] 11. Segment Reporting The Company reports operations across Commercial and Residential Rental Properties segments, showing varied income from operations and asset trends for the periods Segment Revenues and Income From Operations (in thousands) | Metric (Three Months Ended Sep 30) | Commercial 2021 | Residential 2021 | Total 2021 | Commercial 2020 | Residential 2020 | Total 2020 | | :--------------------------------- | :-------------- | :--------------- | :--------- | :-------------- | :--------------- | :--------- | | Total Revenues | $9,290 | $21,341 | $30,631 | $8,092 | $21,948 | $30,040 | | Income From Operations | $4,307 | $2,651 | $6,958 | $4,637 | $2,680 | $7,317 | Segment Revenues and Income From Operations (in thousands) | Metric (Nine Months Ended Sep 30) | Commercial 2021 | Residential 2021 | Total 2021 | Commercial 2020 | Residential 2020 | Total 2020 | | :-------------------------------- | :-------------- | :--------------- | :--------- | :-------------- | :--------------- | :--------- | | Total Revenues | $27,435 | $64,518 | $91,953 | $23,168 | $69,345 | $92,513 | | Income From Operations | $13,021 | $7,050 | $20,071 | $11,782 | $13,882 | $25,664 | Total Assets by Segment (in thousands) | Total Assets (as of) | Commercial Sep 30, 2021 | Residential Sep 30, 2021 | Total Sep 30, 2021 | Commercial Dec 31, 2020 | Residential Dec 31, 2020 | Total Dec 31, 2020 | | :------------------- | :---------------------- | :----------------------- | :----------------- | :---------------------- | :----------------------- | :----------------- | | Total Assets | $310,278 | $901,338 | $1,211,616 | $282,789 | $925,077 | $1,207,866 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses the Company's financial condition and results, including business overview, COVID-19 impact, comparative analysis of revenues and expenses, liquidity, and non-GAAP measures Overview of Our Company Clipper Realty Inc. is a self-managed REIT focused on acquiring, owning, and operating multifamily residential and commercial properties in the New York metropolitan area - Clipper Realty Inc. is a self-administered and self-managed REIT focused on multifamily residential and commercial properties in the New York metropolitan area[124] - The Company completed an IPO in February 2017, raising approximately $78.7 million[126] - As of September 30, 2021, the Company owns properties including Tribeca House, Flatbush Gardens, two Livingston Street properties, Aspen, Clover House, 10 West 65th Street, and 1010 Pacific Street (under redevelopment)[129] - The Operating Partnership's interest in the LLC subsidiaries generally entitles it to 37.9% of aggregate distributions, profits, and losses[132] COVID-19 Pandemic The COVID-19 pandemic negatively impacted the Company's business, causing declines in occupancy and rental rates, though properties maintained high rent collection and leased occupancy - COVID-19 caused temporary declines in leased occupancy and residential rental rates at properties like Tribeca House and Flatbush Gardens[133] - Some commercial tenants received partial rent deferrals, totaling $0.7 million at September 30, 2021[113] - Rent collection rate was 96% during Q3 2021, and properties were 94% leased at September 30, 2021[134] Results of Operations The Company's results of operations for the three and nine months ended September 30, 2021, show an increased net loss, driven by decreased residential income and higher operating and interest expenses Three Months Ended September 30, 2021 and 2020 For the three months ended September 30, 2021, residential rental income decreased by 2.8%, commercial rental income increased by 14.8%, and net loss increased by 18.2% Income Statement for the Three Months Ended September 30, 2021 and 2020 (in thousands) | Metric | 2021 | 2020 | Increase (decrease) | % Change | | :----------------------------------- | :------- | :------- | :------------------ | :------- | | Residential rental income | $21,341 | $21,948 | $(607) | (2.8)% | | Commercial rental income | $9,290 | $8,092 | $1,198 | 14.8% | | Total revenues | $30,631 | $30,040 | $(591) | (2.0)% | | Property operating expenses | $6,684 | $7,867 | $(1,183) | (15)% | | Real estate taxes and insurance | $7,853 | $7,463 | $390 | 5.2% | | General and administrative | $2,684 | $2,297 | $387 | 16.8% | | Depreciation and amortization | $6,452 | $5,934 | $518 | 8.7% | | Total operating expenses | $23,673 | $23,561 | $112 | 0.5% | | Income from operations | $6,958 | $7,317 | $(359) | (4.9)% | | Interest expense, net | $(10,375) | $(10,207) | $168 | 1.7% | | Net loss | $(3,417) | $(2,890) | $(527) | (18.2)% | - Residential rental income decreased due to lower rental rates at Clover House (from $67.56 to $61.63 per sq ft) and decreased occupancy at Flatbush Gardens (from 96.3% to 92.6%)[138] - Commercial rental income increased primarily due to the commencement of a new lease at 250 Livingston Street in August 2020[139] Nine Months Ended September 30, 2021 and 2020 For the nine months ended September 30, 2021, residential rental income decreased by 7.0%, commercial rental income increased by 18.4%, and net loss increased by 63.1% Income Statement for the Nine Months Ended September 30, 2021 and 2020 (in thousands) | Metric | 2021 | 2020 | Increase (decrease) | % Change | | :--------------------------------------- | :-------- | :-------- | :------------------ | :------- | | Residential rental income | $64,518 | $69,345 | $(4,827) | (7.0)% | | Commercial rental income | $27,435 | $23,168 | $4,267 | 18.4% | | Total revenues | $91,953 | $92,513 | $(560) | (0.6)% | | Property operating expenses | $22,547 | $21,894 | $653 | 3.0% | | Real estate taxes and insurance | $22,528 | $21,105 | $1,423 | 6.7% | | General and administrative | $7,779 | $7,324 | $455 | 6.2% | | Transaction pursuit costs | $60 | $— | $60 | 100% | | Depreciation and amortization | $18,968 | $17,364 | $1,604 | 9.2% | | Total operating expenses | $71,882 | $67,687 | $4,195 | 6.2% | | Income from operations | $20,071 | $25,664 | $(5,593) | (21.8)% | | Interest expense, net | $(30,958) | $(29,974) | $984 | 3.3% | | Loss on modification/extinguishment of debt | $(3,034) | $(4,228) | $(1,194) | (28.2)% | | Net loss | $(13,782) | $(8,453) | $(5,329) | (63.1)% | - Residential rental income decreased due to lower rental rates at Clover House and decreased occupancy at Flatbush Gardens[148] - Commercial rental income increased due to a new lease at 250 Livingston Street, partially offset by lease terminations at Tribeca House[149] - Loss on modification/extinguishment of debt related to refinancing of 141 Livingston Street (2021) and Flatbush Gardens (2020) loans[156] Liquidity and Capital Resources As of September 30, 2021, the Company had $1,102.5 million in indebtedness, $59.1 million in cash, and $29.1 million in restricted cash, with sufficient cash flows for operations - As of September 30, 2021, the Company had $1,102.5 million of indebtedness, $59.1 million of cash and cash equivalents, and $29.1 million of restricted cash[158] - Short-term liquidity needs (operating expenses, taxes, interest, distributions) are expected to be met by net cash from operations and cash on hand[160] - Long-term liquidity needs (acquisitions, major renovations, debt payments) are anticipated to be met by public/private equity offerings and long-term secured/unsecured debt[161] - The Company believes current cash flows from operations and cash on hand will be sufficient for at least the next twelve months[163] Distributions To maintain REIT qualification, the Company must distribute at least 90% of its taxable income, with total distributions of $12.6 million for the nine months ended September 30, 2021 - To qualify as a REIT, the Company must distribute at least 90% of its taxable income to shareholders[165] - Dividends and distributions totaled $12.6 million for the nine months ended September 30, 2021, compared to $12.9 million in the prior year[165] Cash Flows Net cash provided by operating activities increased, while net cash used in investing activities decreased, and net cash from financing activities significantly decreased Cash Flow Activity (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------- | :----------------------------- | :----------------------------- | | Operating activities | $13,489 | $10,246 | | Investing activities | $(20,653) | $(24,788) | | Financing activities | $6,366 | $62,583 | - Net cash provided by operating activities increased by $3,243 thousand, reflecting a decrease in cash flow from operating results but an increase from operating assets and liabilities[166] - Net cash provided by financing activities decreased significantly due to lower net proceeds from mortgage notes, despite new loans for 141 Livingston Street and 1010 Pacific Street[168] Income Taxes No provision for income taxes has been made as the Company operates as a REIT and holds operations in pass-through entities - No provision for income taxes has been made as the Company operates as a REIT and holds operations in pass-through entities[169][170] Inflation Inflation has not significantly impacted the Company's operations and is not considered a material risk, with short-term residential leases allowing for quick adjustments - Inflation has not significantly impacted operations and is not considered a material risk[172] - Residential leases (approximately 69% of revenue) are short-term, allowing for quick adjustments to inflation[172] Off-Balance Sheet Arrangements As of September 30, 2021, the Company has no off-balance sheet arrangements likely to materially affect its financial condition or operations - As of September 30, 2021, the Company has no material off-balance sheet arrangements[174] Non-GAAP Financial Measures This section presents and reconciles non-GAAP financial measures, including FFO, AFFO, Adjusted EBITDA, and NOI, used by management and investors to evaluate operating performance - FFO, AFFO, Adjusted EBITDA, and NOI are non-GAAP financial measures used to provide useful information to investors but should not be considered alternatives to GAAP net income (loss) or income from operations[175][176] Funds From Operations and Adjusted Funds From Operations (FFO & AFFO) FFO and AFFO are supplemental measures of operating performance, with FFO at $5.2 million and AFFO at $11.2 million for the nine months ended September 30, 2021 - FFO is defined as net income excluding gains/losses from property sales and impairment, plus depreciation and amortization, adjusted for unconsolidated partnerships[177] - AFFO is FFO excluding amortization of identifiable intangibles, straight-line rent adjustments, debt origination costs, interest rate cap adjustments, non-cash equity compensation, transaction pursuit costs, loss on debt modification/extinguishment, gain on involuntary conversion/lease termination, litigation expenses, less recurring capital spending[178] Funds From Operations and Adjusted Funds From Operations (in thousands) | Metric (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(3,417) | $(2,890) | $(13,782) | $(8,453) | | FFO | $3,035 | $3,044 | $5,186 | $8,911 | | AFFO | $4,052 | $2,850 | $11,201 | $13,859 | Adjusted Earnings Before Interest, Income Taxes, Depreciation and Amortization (Adjusted EBITDA) Adjusted EBITDA is a non-GAAP measure of operating performance, defined as net loss before non-controlling interests, plus various non-cash expenses and adjustments - Adjusted EBITDA is defined as net income (loss) before allocation to non-controlling interests, plus real estate depreciation and amortization, identifiable intangibles amortization, straight-line rent adjustments, non-cash equity compensation, interest expense (net), acquisition/other costs, transaction pursuit costs, loss on debt modification/extinguishment, and litigation expenses, less gain on involuntary conversion and lease termination[183] Adjusted Earnings Before Interest, Income Taxes, Depreciation and Amortization (in thousands) | Metric (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(3,417) | $(2,890) | $(13,782) | $(8,453) | | Adjusted EBITDA | $14,165 | $12,814 | $41,384 | $43,365 | Net Operating Income (NOI) NOI is a non-GAAP measure evaluating property-level operating performance, defined as income from operations plus real estate depreciation and amortization and other adjustments - NOI is defined as income from operations plus real estate depreciation and amortization, general and administrative expenses, acquisition/other costs, transaction pursuit costs, amortization of identifiable intangibles, and straight-line rent adjustments, less gain on termination of lease[187] Net Operating Income (in thousands) | Metric (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Income from operations | $6,958 | $7,317 | $20,071 | $25,664 | | NOI | $16,109 | $14,479 | $47,018 | $48,830 | Critical Accounting Policies Management's discussion relies on GAAP-prepared financial statements requiring estimates, with no material changes to critical accounting policies from the 2020 Form 10-K - No material changes to critical accounting policies disclosed in the 2020 Form 10-K[190] Recent Accounting Pronouncements Refer to Note 3, 'Significant Accounting Policies,' for a discussion of recent accounting pronouncements and their expected impact - Refer to Note 3 for a discussion of recent accounting pronouncements[191] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk is interest rate fluctuations, impacting income, cash flows, and fair value of financial instruments, with notes payable fair value at $1,175.7 million - The principal market risk is interest rate fluctuations[192] - A one percent change in interest rates on $21.1 million of variable rate debt would impact annual net income by approximately $0.2 million[193] - The estimated fair value of notes payable was approximately $1,175.7 million as of September 30, 2021[193] ITEM 4. CONTROLS AND PROCEDURES Management concluded disclosure controls were effective as of September 30, 2021, and a previously identified material weakness in internal control over financial reporting has been remediated - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of September 30, 2021[194] - A material weakness in internal control over financial reporting, related to misapplication of guidance for commercial lease modification, has been remediated through additional review procedures[196][197] PART II – OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section refers to Note 9, 'Commitments and Contingencies,' for a discussion of legal proceedings, primarily concerning rent stabilization claims - Refer to Note 9, 'Commitments and Contingencies,' for a discussion of legal proceedings[199] ITEM 1A. RISK FACTORS Risk factors from the Company's 2020 Form 10-K remain relevant, with no material changes for the current period, though many risks may be exacerbated by COVID-19 - Risk factors from the Annual Report on Form 10-K for December 31, 2020, remain relevant, with no material changes[200] - Many risks may be more likely to impact the Company due to the COVID-19 pandemic[200] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This item is not applicable to the current report ITEM 4. MINE SAFETY DISCLOSURE This item is not applicable to the current report ITEM 6. EXHIBITS This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer - Exhibits include Rule 13a-14(a)/15d-14(a) Certifications of Principal Executive Officer and Principal Financial Officer[203] - Exhibits also include Certifications pursuant to 18 U.S.C. Section 1350 and various Inline XBRL documents[203] SIGNATURES The report is signed on behalf of Clipper Realty Inc. by David Bistricer, Co-Chairman and Chief Executive Officer, as of November 9, 2021 - The report is signed by David Bistricer, Co-Chairman and Chief Executive Officer, on November 9, 2021[207]