Description
Thesis:
I recommend the purchase of shares of Clipper Realty, which is selling at 40 cents on the dollar. This is a NYC focused multi-family REIT, that is about to see a 20-50% increase in cash flow after debt service. Once the two new buildings are fully leased up, I expect the company to raise mortgage debt at each property and take out cash of between $100-150MM or roughly $2.35-$3.55 per share vs today’s stock price = $6.40. I think some of that cash will be distributed to shareholders, and meanwhile we are collecting a 6% dividend yield.
Description of the business
There have been three prior write-ups of Clipper on VIC, so I will keep this very brief. The company owns several apartment buildings in NYC, including the Tribeca House in Manhattan, 1010 Pacific Street and 953 Dean Street in Prospect Heights (Brooklyn) and Clover House in Brooklyn Heights. The company finished construction on the 1010 Pacific Street and has leased a number of apartments in the building. 953 Dean is under construction and should be finished in the next twelve to eighteen months.
Long term prospects
I am optimistic on rent growth in NYC. It is a market with high barriers to construction and very high construction costs. I think the demand for rentals in the market will continue to increase ahead of supply, and this will lead to rental increases ahead of inflation.
In addition, resumption of immigration, millions of people leaving China, India, Russia, Ukraine and Latin America are coming to the US, and a substantial portion will go to NY.
Management
The management is o’k, not great and not terrible. On the good side, the company took advantage of low interest rates to refinance most of the debt, with an average maturity eight years out. The insiders also did not take advantage of the 2020 crisis to steal the company from minorities. The bad news is that the company is controlled by insiders, and that SG&A is too bloated at $12-13MM per annum, too high for a company this size. Also some of the real estate purchases do not look that great, particularly in retrospect.
Financials
The company gives an excellent break-down in quarterly reports, and the supplemental reports give revenues, expenses and NOI for each building for the trailing 12 quarters.
Once construction is finished and the two new buildings in Brooklyn are fully leased up and stabilized, I expect 2025 NOI – corporate SG&A = $95MM, interest = $42MM (if no new debt on two new buildings), cap ex = $10MM, so free cash flow to equity = $43MM or $1 per share on a $6.40 share price.
I actually expect the company to refinance the two new buildings and take out $100-150MM in cash. So pro-forma for refinancing:
NOI – Corp SG&A = $95MM
Interest = $52MM
Cap ex = $10MM
FCF to equity = $33MM or $0.77 per share.
The company will also have between $2.35 and $3.55 per share in cash post refinancing, and I expect some of that cash to be paid out to shareholders.
Capital structure
Cash = $35MM on 09/30/2022
Debt at balance sheet = $1.16bn on 09/30/2022 (and $1.07bn at market value)
Market cap = $271MM on 12/31/2022 ($6.40* 42.8MM assuming all LP units are converted)
Pro-forma for refinancing in 2024
Cash = 150MM
Debt = $1.3bn
Market cap = $271MM, based on $6.40 stock price and 42.8MM fully diluted shares outstanding
Valuation
Assets
$95MM in NOI after corporate overhead at 5% cap rate = $1.9bn
Debt = $1.3bn (12/31/2024 pro-forma for refinancing)
Cash = $150MM (12/31/2024 pro-forma for refinancing)
Net to equity = $750MM or $17.5 per share on 12/31/2024 + $0.8 in dividends paid over the next two years = $18.3.
Capital allocation
Acceptable. The company will probably continue to buy buildings and pay an attractive dividend and I expect it to both increase it substantially in the future and distribute part of the refinancing proceeds to shareholders.
Conclusion
An opportunity to buy a collection of primarily Class B & A multi family assets in NYC, at 50-60% of replacement cost and 40% of NAV, with a 12% free cash flow yield to the equity.
Catalyst
Substantial increase in dividends in 2024.
Large one-time dividend as part of the refinancing proceeds from two new buildings are returned to shareholders in 2024.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Substantial increase in dividends in 2024.
Large one-time dividend as part of the refinancing proceeds from two new buildings are returned to shareholders in 2024.