Clipper Realty Inc. (NYSE:CLPR), a self-administered and self-managed real estate investment trust (REIT) that owns and operates multifamily residential and commercial properties in the New York metropolitan area, reported record quarterly revenue and net operating income (NOI) for the first quarter of 2024, driven by strong residential leasing performance across its portfolio.

The company's total revenue for the first quarter of 2024 reached a record $35.8 million, up from $33.7 million in the same period last year. This increase was primarily attributable to a $2.1 million rise in residential rental income, which reached $26.1 million. Excluding the impact of the recently completed Pacific House property, residential rental income increased by $0.4 million. The company's NOI for the quarter also set a new record, reaching $20.2 million, up from $17.1 million in the first quarter of 2023, or $1.5 million excluding Pacific House.

Adjusted Funds from Operations (AFFO), a key metric for REITs, increased to $5.9 million in the first quarter of 2024, up from $4.5 million in the same period last year, or $0.9 million excluding Pacific House. The company's annual net income for 2023 was -$7,189,000, while its annual revenue was $138,205,000. Its annual operating cash flow was $26,185,000, and its annual free cash flow was -$15,172,000.

"I'm pleased to report that we are reporting record revenue and net operating income, continuing the positive trend from previous quarters for our residential properties," said David Bistricer, Co-Chairman of the Board and Chief Executive Officer. "Rental demand continues to be strong at all our properties, and overall rents are stabilizing as COVID-era rents are replaced with current rents."

Business Overview

Clipper Realty's portfolio consists of 9 properties located in Manhattan and Brooklyn, New York, totaling approximately 2.5 million square feet of residential and commercial space. The company's primary focus is on owning, managing, and operating its portfolio of multifamily residential and commercial properties, as well as acquiring and repositioning additional properties in the New York metropolitan area.

The company's properties include the Tribeca House in Manhattan, the Flatbush Gardens complex in Brooklyn, and several other residential and commercial properties in the boroughs of Manhattan and Brooklyn. The Tribeca House property comprises two buildings with a total of 483,000 square feet of residential rental space and 77,000 square feet of retail and parking space. The Flatbush Gardens complex in Brooklyn consists of 59 buildings with 2,494 rentable units and approximately 1.7 million square feet of residential rental space.

Residential Leasing Performance

The company's residential leasing performance has been a key driver of its strong financial results. At the end of the first quarter of 2024, the company's residential properties had an average occupancy rate of 98%, with new leases and renewals exceeding previous rents by over 6% across the portfolio.

At the Tribeca House property, the company has maintained a leased occupancy rate of over 97%, with average rents increasing to $78 per square foot, up from $63 near the end of the COVID-19 pandemic. Similarly, at the Clover House property, leased occupancy is over 97%, and average rents have increased to $83 per square foot.

The company's recently completed Pacific House property in Brooklyn is now 100% leased, with a blend of free market and rent-stabilized tenants. Rents at Pacific House are now fully stabilized, with free market rents above $78 per square foot and the property achieving the projected 7% capitalization rate in the original underwriting.

Flatbush Gardens Performance

The company's Flatbush Gardens property in Brooklyn has also been a strong performer, benefiting from the company's new Article 11 agreement with the New York City housing and preservation department. This agreement, which went into effect in July 2023, eliminated real estate taxes on the property and provides for enhanced rental recoveries for assisted tenants.

As a result of this agreement, the company has been able to profitably upgrade the property while meeting its commitments for property improvements, tenant assistance, and higher wages. Average rents at Flatbush Gardens have increased to $26.80 per square foot at the end of the first quarter of 2024, up from $26.17 at the end of the first quarter of 2023.

Upcoming Developments

The company is also making progress on its development projects, including the 953 Dean Street property in Brooklyn. Construction on this 9-story, 160,000 square foot residential building with 240 units (70% free market, 30% affordable) and an 8,500 square foot commercial center is proceeding ahead of schedule, with the superstructure completed. The company expects to complete construction in time for the 2025 leasing season, utilizing a $12.3 million construction loan secured in the third quarter of 2023.

Risks and Challenges

One of the key risks facing Clipper Realty is the potential impact of the City of New York's decision to terminate its lease at the company's 250 Livingston Street property, effective August 2025. The City of New York currently leases 342,496 square feet of office space at this property, representing approximately 22% of the company's total revenue. The company is actively seeking solutions and pursuing opportunities to mitigate the impact of this lease termination, but it could have a significant effect on the company's financial performance if it is unable to replace the City of New York as a tenant or find new tenants at comparable rental rates.

Additionally, the company's properties are located in the New York metropolitan area, which exposes it to economic and regulatory risks specific to that region. Changes in rent stabilization regulations or claims by tenants in rent-stabilized units could also impact the company's operations and financial results.

Liquidity

As of March 31, 2024, Clipper Realty had $21.9 million in unrestricted cash and $18.3 million in restricted cash. The company's total debt, net of unamortized loan costs, was $1.23 billion, with an average interest rate of 3.87% and an average duration of 5.2 years.

The company's debt is primarily non-recourse, with financing on an asset-by-asset basis, and is not cross-collateralized. This structure, combined with the relatively long duration of the debt, helps to insulate the company from the impact of rising interest rates.

Outlook

Clipper Realty remains focused on efficiently operating its portfolio, optimizing the Flatbush Gardens property under the new Article 11 agreement, and completing the 953 Dean Street development project. The company is also actively exploring other growth opportunities that may arise, while managing the potential impact of the City of New York's lease termination at the 250 Livingston Street property.

"We remain focused on efficiently operating our portfolio. We look for your current operating improvements to continue through 2024 and '25," said David Bistricer. "We look forward to optimizing Flatbush Gardens Article 11 transaction, 953 Dean Street developments and other growth opportunities, managing the New York leasing issues at Livingston Street properties and capitalizing on other opportunities that may present itself."

Overall, Clipper Realty's strong residential leasing performance, strategic initiatives, and prudent capital management position the company well to navigate the current market environment and continue delivering value to its shareholders.