Clipper Realty(US:CLPR)2024-03-13 16:00PART I Business Clipper Realty Inc. is a self-managed REIT focused on acquiring, owning, and operating multifamily and commercial properties in Manhattan and Brooklyn - The company is a REIT focused on multifamily and commercial real estate in the New York metropolitan area, specifically Manhattan and Brooklyn31 - Core business strategies include increasing below-market rents, opportunistic acquisitions, proactive management to boost occupancy and rental rates, and selective redevelopment of properties394041 - The company's portfolio as of year-end 2023 includes notable properties such as Flatbush Gardens, Tribeca House, 141 Livingston Street, and 250 Livingston Street3335 Revenue and Tenant Concentration (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Revenue from Residential Rents | ~70% | | Revenue from Commercial/Retail Rents | ~30% | | Portfolio Sq. Ft. Leased by NYC Agencies | ~16% | | Annualized Rent from NYC Agencies | ~19% | Risk Factors The company faces diverse risks concentrated in real estate, business operations, organizational structure, indebtedness, and its REIT status Risks Related to Real Estate - All company properties are located in New York City (Manhattan and Brooklyn), creating significant exposure to adverse local economic conditions, regulatory changes like the Housing Stability and Tenant Protection Act of 2019, and other localized risks58344 - The company is heavily dependent on agencies of the City of New York as a single government tenant. The City of New York has notified the company of its intent to terminate its lease at the 250 Livingston Street property effective August 23, 2025, which will make 342,496 sq. ft. of commercial space available and could adversely affect financial results59319324 - New York's rent stabilization regulations, particularly the Housing Stability and Tenant Protection Act of 2019, limit the company's ability to raise rents on regulated units, potentially impairing the value of its portfolio56342343 - The company engages in development and redevelopment activities (e.g., 1010 Pacific Street, Dean Street), exposing it to risks such as financing availability, regulatory approvals, cost overruns, and construction delays328329330 - The portfolio's revenue is concentrated, with eight properties generating all revenue in 2023. The Tribeca House and Flatbush Gardens properties alone accounted for 28.8% and 31.1% of total revenue, respectively321 Risks Related to Our Business and Operations - Capital and credit market volatility, along with higher interest rates, may adversely affect access to and cost of capital, impacting business activities, earnings, and stock price104101 - High inflation rates in the U.S. economy have increased operating expenses and interest expense on variable rate debt, which could outpace the company's ability to increase rents105 - The company is exposed to cybersecurity threats, including ransomware and data breaches, which could disrupt IT systems, cause data loss, and result in significant expenses and reputational damage28114115 Risks Related to Our Organization and Structure - Continuing investors hold special voting stock that gives them approximately 69.9% of the total voting power, allowing them to significantly influence board composition, management, and business conduct122123125 - The company's charter and Maryland law contain provisions that may discourage or prevent a change of control, such as the board's ability to issue stock without shareholder approval and a 9.8% ownership limit126127130 - Potential conflicts of interest exist as officers have outside business interests and are not required to present certain investment opportunities to the company, such as for-sale conversions or projects outside the New York metro area138143 Risks Related to Our Indebtedness and Financing - The company has substantial indebtedness, totaling $1.219 billion as of December 31, 2023, which may limit financial flexibility and dedicate a significant portion of cash flow to debt service154147 - As of December 31, 2023, the company had approximately $82.0 million of variable rate debt, exposing it to increased interest expense in a rising rate environment159 - Mortgage debt exposes the company to foreclosure risk. A foreclosure would be treated as a taxable sale of the property, which could generate taxable income without cash proceeds and impact the ability to meet REIT distribution requirements164165 Risks Related to Our Status as a REIT - Failure to maintain REIT qualification would result in entity-level corporate income tax, significantly reducing funds available for distribution and adversely affecting the stock value173177 - To comply with REIT requirements, the company must distribute at least 90% of its taxable income annually, which could hinder its ability to reinvest cash for growth and may require it to borrow or sell assets at unfavorable times179185193 - The company may be subject to a 100% penalty tax on gains from "prohibited transactions," such as property held primarily for sale, which could cause it to forego otherwise attractive dispositions or conduct them through a taxable REIT subsidiary (TRS)182183192 Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None208 Cybersecurity The company's cybersecurity risk management and strategy rely on third-party service providers for threat identification and management - Cybersecurity risk management is handled by third-party service providers, who monitor the threat environment210211 - Oversight is provided by the Board of Directors and the Audit Committee, with management leading the implementation of cybersecurity processes213214 - The company is not aware of any risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect the company212 Properties As of December 31, 2023, the company's portfolio comprised nine properties in Manhattan and Brooklyn, totaling approximately 3.4 million rentable square feet, with an overall occupancy of 98% (excluding development) Portfolio Overview (as of Dec 31, 2023) | Segment | Square Feet | Units/Tenants | % Leased | Annualized Base Rent (millions) | | :--- | :--- | :--- | :--- | :--- | | Multifamily | 2,716,754 | 3,683 | 97.7% | $105.0 | | Commercial | 548,580 | 2 | 100.0% | $25.7 | | Retail | 105,655 | 17 | 86.5% | $4.7 | | Total | 3,370,989 | 3,702 | 97.7% | $135.4 | | Under Development | 154,468 | 242 | N/A | N/A | - A significant lease expiration risk exists in 2025, when leases representing $25.8 million, or 85.3% of the total annualized commercial and retail rental revenue, are set to expire226222 Descriptions of Our Properties - Tribeca House: Comprises two luxury rental buildings with 506 residential units and retail space. It is encumbered by a $360.0 million loan maturing in March 2028 with a fixed interest rate of 4.506%227223230 - Flatbush Gardens: A 59-building complex with 2,494 residential units in Brooklyn. It is encumbered by a $329.0 million mortgage note maturing in June 2032 with a fixed interest rate of 3.125% through May 2027224231232 - 141 Livingston Street: A 15-story office building in Downtown Brooklyn primarily leased to the City of New York. It is encumbered by a $100 million mortgage note maturing in March 2031 with a fixed rate of 3.21%233236 - 250 Livingston Street: A 12-story mixed-use building with office space leased to the City of New York until 2025. It is encumbered by a $125.0 million mortgage note maturing in June 2029 with a fixed rate of 3.63%23784238 - 1010 Pacific Street: A newly redeveloped 175-unit residential building in Brooklyn, encumbered by $80.0 million in mortgage debt maturing in September 2025 with blended interest rates24985 - Dean Street: A property under redevelopment in Brooklyn, planned as a 240-unit residential building. It is financed with a senior construction loan of up to $115 million and a mezzanine loan of up to $8 million251257 Legal Proceedings The company has been involved in several legal proceedings, primarily tenant lawsuits concerning rent stabilization laws at its Tribeca House property - The company faced lawsuits from tenants at its Tribeca House property alleging rent overcharges related to RPTL 421-g tax abatements. Rulings have determined overcharge amounts and legal fees, with remaining issues in settlement discussions625650626 - An investigation by the NY Attorney General's Office into tenant screening practices was resolved in April 2022 through an Assurance of Discontinuance, which had no financial impact on the company628 Mine Safety Disclosure This item is not applicable to the company's business - Not applicable260 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the New York Stock Exchange (NYSE) under the ticker symbol "CLPR" - The company's common stock is listed on the NYSE under the ticker "CLPR"262 - As a REIT, the company must distribute at least 90% of its taxable income annually. The dividend policy is subject to board discretion and may be impacted by operating results, debt service, and other financial needs264266 Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, the company experienced strong performance in its residential portfolio, while the commercial portfolio faced headwinds, contributing to an increased net loss of $15.6 million for the year - The residential rental market remained robust in 2023, leading to increased rental rates at key properties like Tribeca House and Clover House. The urban office market has been negatively impacted by remote work, but the company's long-term leases with the City of New York have mitigated this impact, although the upcoming 2025 lease termination at 250 Livingston presents a significant future risk281 - The company's weighted average interest rate on its debt was approximately 4.2% per annum as of December 31, 2023284 Results of Operations Comparison of Operations (Years Ended Dec 31, 2023 vs 2022) | Metric (in thousands) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $138,205 | $129,746 | +6.5% | | Residential Rental Income | $99,716 | $90,262 | +10.5% | | Commercial Rental Income | $38,489 | $39,484 | -2.5% | | Total Operating Expenses | $105,035 | $102,110 | +2.9% | | Income from Operations | $33,170 | $27,636 | +20.0% | | Interest Expense, net | $44,867 | $40,207 | +11.6% | | Net Loss | ($15,565) | ($12,571) | +23.8% | - The increase in net loss was primarily driven by higher interest expense and a $3.9 million loss on the modification/extinguishment of debt related to the 1010 Pacific Street construction loan refinancing411435 Liquidity and Capital Resources - As of December 31, 2023, the company had $1.206 billion of net indebtedness, $22.2 million of cash and cash equivalents, and $14.1 million of restricted cash413 - Short-term liquidity needs are expected to be met by cash from operations, while long-term needs like acquisitions and debt maturities will likely require external capital from debt or equity offerings450437 Cash Flow Summary (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $26,185 | $20,139 | | Net Cash used in Investing Activities | ($41,357) | ($51,476) | | Net Cash from Financing Activities | $20,731 | $9,779 | Non-GAAP Financial Measures Reconciliation of Key Non-GAAP Metrics (in thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Loss | ($15,565) | ($12,571) | | FFO | $13,374 | $14,414 | | AFFO | $22,550 | $19,237 | | Adjusted EBITDA | $66,148 | $58,518 | | NOI | $76,312 | $68,162 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuation, with a hypothetical 1% change impacting annual net income by approximately $0.8 million - The principal market risk is from interest rate fluctuations on its $82.0 million of variable rate debt366367 - A 1% change in interest rates on this variable debt would impact annual net income by approximately $0.8 million367 Financial Statements and Supplementary Data This section incorporates by reference the company's consolidated financial statements and supplementary data, which begin on page F-1 of the Annual Report - The financial statements are incorporated by reference and begin on page F-1 of the report369 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None369 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that disclosure controls and procedures are effective as of December 31, 2023370 - Management concluded that internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework372 - The independent auditor, PKF O'Connor Davies, LLP, audited and provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting375515 Other Information The company reports no other information under this item - None356 Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Not applicable357 PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10 through 14 will be incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's forthcoming Proxy Statement396459482 PART IV Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Annual Report on Form 10-K, including consolidated financial statements, schedules, and an index of exhibits - This item provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K507462508 Form 10-K Summary The company did not provide a summary under this item - None464