Business Overview and History
Clipper Realty Inc. (CLPR) is a leading owner and operator of multifamily residential and commercial properties in the New York metropolitan area. With a focus on strategic acquisitions, property repositioning, and operational excellence, Clipper Realty has established itself as a formidable player in the highly competitive New York real estate market.
Clipper Realty Inc. is a self-administered and self-managed real estate company that was formed in 2015 with the goal of acquiring, owning, and operating high-quality real estate assets in the New York metro area. The company's initial portfolio was formed through the acquisition of several properties, including the iconic Tribeca House in Manhattan, the Flatbush Gardens complex in Brooklyn, and two commercial properties on Livingston Street in downtown Brooklyn. These properties were owned by LLC subsidiaries and managed by Clipper Realty through its operating partnership.
Over the years, Clipper Realty has steadily grown its portfolio, adding residential and commercial properties such as Aspen in Manhattan, Clover House in Brooklyn, and 10 West 65th Street, also in Manhattan. The company's recent acquisition of the Dean Street property in Brooklyn, which it plans to redevelop into a mixed-use residential and retail building, further demonstrates its commitment to strategic growth and diversification. All of Clipper Realty's properties are located in densely populated areas of New York City with easy access to mass transportation.
Clipper Realty's success can be attributed to its disciplined approach to investment and its focus on properties with strong fundamentals and growth potential. However, the company has faced some challenges along the way. In 2022, Clipper Realty was ordered to pay $1.2 million in rent overcharges and legal costs to a group of tenants at its Tribeca House property due to litigation related to rent stabilization laws. Additionally, the company is currently undergoing an audit by the New York City Department of Citywide Administrative Services regarding its operating expense escalation charges, although it believes it has adequate reserves to cover any adverse conclusions.
More recently, Clipper Realty has had to contend with the City of New York's decision to terminate its lease at the 250 Livingston Street property effective August 2025, which represented approximately 23% of its total revenues. The company is actively seeking solutions to mitigate the impact of this lease termination. Furthermore, Clipper Realty is in negotiations for a five-year extension of its current lease at the 141 Livingston Street property, which is set to expire in December 2025, although there is no guarantee that an agreement will be reached.
Financial Performance and Ratios
Clipper Realty's financial performance has been robust, with the company reporting record quarterly revenues of $37.6 million in the third quarter of 2024, up from $35.1 million in the same period the previous year, representing a 7.1% increase. This strong revenue growth can be attributed to the company's successful leasing efforts across its residential portfolio, where occupancy rates reached an impressive 99% at the end of the quarter.
The company's net operating income (NOI) also reached a record high of $21.8 million in the third quarter of 2024, up from $20.0 million in the same period of 2023, reflecting a 9% year-over-year increase. This growth in NOI can be attributed to both increased revenues and effective cost management strategies implemented by the Clipper Realty team.
Clipper Realty's adjusted funds from operations (AFFO), a key metric for REITs, increased to $7.8 million in the third quarter of 2024, up from $6.3 million in the same period of the previous year, representing a 24% year-over-year increase. This strong AFFO performance demonstrates the company's ability to generate consistent and reliable cash flows, which is crucial for supporting its growth initiatives and maintaining its attractive dividend yield.
Despite the strong revenue growth, Clipper Realty reported a net loss of $412,000 for the third quarter of 2024, compared to a net income of $828,000 in the same period of the previous year. This decrease in net income was partially offset by increased property operating expenses, real estate taxes and insurance, and interest expense.
The company's operating cash flow (OCF) for the third quarter of 2024 was $6,293,000, representing a 9% increase from the previous year. Free cash flow (FCF) for the same period was $48,344,000, showing a significant 24% year-over-year increase. These improvements in cash flow metrics were primarily driven by the strong revenue growth experienced during the quarter.
From a financial ratio perspective, Clipper Realty's debt-to-equity ratio stands at -350.93, indicating a high level of leverage. The company's current ratio and quick ratio are both 1.12, suggesting adequate short-term liquidity.
Liquidity
The company's balance sheet remains healthy, with $18.6 million in unrestricted cash and $17.5 million in restricted cash as of September 30, 2024. Clipper Realty's debt is primarily non-recourse, with an average interest rate of 3.87% and an average duration of 4.9 years, providing the company with a stable and cost-effective capital structure.
Additionally, Clipper Realty has a $5 million corporate line of credit with Valley National Bank, which was undrawn as of September 30, 2024, providing further financial flexibility if needed.
Operational Highlights and Growth Strategies
Clipper Realty's operational excellence is evidenced by the strong performance of its residential portfolio. During the third quarter of 2024, the company reported that new leases at its properties exceeded prior rents by over 9.5%, with record-high rents of $82 per square foot at Tribeca House and $85 per square foot at Clover House.
The company's ground-up development projects have also been a source of growth, with the 1010 Pacific Street property in Brooklyn now fully stabilized and contributing to the company's cash flows. Additionally, the Dean Street development project in Brooklyn is progressing ahead of schedule, with the superstructure completed and construction expected to be finished in time for the 2025 leasing season.
Looking ahead, Clipper Realty's growth strategies include optimizing the performance of its Flatbush Gardens property through the implementation of the Article 11 transaction with the New York City Housing and Preservation Department, as well as actively pursuing opportunities to mitigate the impact of the impending lease termination at its 250 Livingston Street property in Brooklyn.
The company is also exploring the potential sale of select properties, such as its 10 West 65th Street asset, which could provide additional capital to fund future growth initiatives and improve overall returns.
Segment Performance
Clipper Realty operates through two reportable segments: Residential Rental Properties and Commercial Rental Properties. The Residential Rental Properties segment, which includes properties such as Flatbush Gardens, Clover House, 10 West 65th Street, 1010 Pacific Street, and portions of 250 Livingston Street, Tribeca House, and Aspen, generated $81.70 million in rental income for the nine months ended September 30, 2024. This segment accounted for 73.8% of the company's total revenues, underscoring its significance to Clipper Realty's overall performance.
The Commercial Rental Properties segment, which includes the 141 Livingston Street property and portions of 250 Livingston Street, Tribeca House, Dean Street, and Aspen properties, contributed $29.03 million in rental income for the same period, representing 26.2% of total revenues. While the residential segment remains the primary driver of the company's revenue, the commercial segment provides important diversification and stable income streams.
Risks and Challenges
Clipper Realty's operations are heavily concentrated in the New York metropolitan area, which exposes the company to regional economic fluctuations and changes in the local real estate market. The company's reliance on the City of New York as a major commercial tenant, particularly at its 141 Livingston Street and 250 Livingston Street properties, also presents a significant risk, as the potential loss or non-renewal of these leases could have a material impact on the company's financial performance.
Additionally, the company's development projects, while contributing to its growth, also carry inherent construction and execution risks that must be carefully managed.
Industry Trends and Market Position
The multi-family residential and commercial real estate market in New York City has seen strong demand and increasing rents, driven by limited supply and steady population growth. Clipper Realty's portfolio, focused on the high-demand New York metropolitan area, has benefited from these favorable industry trends. The company's properties in Manhattan and Brooklyn are well-positioned to capitalize on the continued strength of the New York real estate market.
Outlook and Conclusion
Clipper Realty's strong financial and operational performance, coupled with its strategic growth initiatives, position the company for continued success in the years ahead. The company's focus on high-quality assets, effective management, and disciplined capital allocation have enabled it to navigate the challenges of the New York real estate market and deliver consistent returns to its shareholders.
In terms of future performance, Clipper Realty has not provided specific numerical guidance for upcoming quarters or the full year 2024 and 2025. However, management has expressed confidence that current operating improvements will continue through 2024 to 2025. The company remains focused on efficiently operating its portfolio, optimizing the Flatbush Gardens property under the Article 11 transaction, completing the 953 Dean Street development, and managing the New York City leasing issues at the Livingston Street properties.
As Clipper Realty continues to optimize its portfolio, expand its development pipeline, and explore new opportunities, the company is well-positioned to capitalize on the robust demand for residential and commercial real estate in the New York metropolitan area. With a proven track record and a talented management team, Clipper Realty remains a compelling investment option for investors seeking exposure to the dynamic New York real estate market.