UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
CLIPPER REALTY INC.
(Exact name of Registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ |
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| Non-accelerated filer ☐ |
| Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
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As of August 10, 2020, there were
TABLE OF CONTENTS
| Page |
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| PART I – FINANCIAL INFORMATION |
|
| CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS |
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| ITEM 1. CONDENSED FINANCIAL STATEMENTS |
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| CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2020 (UNAUDITED) AND DECEMBER 31, 2019 |
3 |
| CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED) |
4 |
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED) |
5 |
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED) |
6 |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
7 |
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
22 |
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
31 |
| ITEM 4. CONTROLS AND PROCEDURES |
31 |
| PART II – OTHER INFORMATION |
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| ITEM 1. LEGAL PROCEEDINGS |
32 |
| ITEM 1A. RISK FACTORS |
33 |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
33 |
| ITEM 4. MINE SAFETY DISCLOSURE |
33 |
| ITEM 6. EXHIBITS |
34 |
| SIGNATURES |
35 |
PART I – FINANCIAL INFORMATION
Cautionary Note Concerning Forward-Looking Statements
All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q for Clipper Realty Inc. (the “Company”), including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding the Company’s financial position, business strategy and the plans, objectives, expectations, or assumptions of management for future operations, are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “continue,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes are intended to identify forward-looking statements, which are generally not historical in nature. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. These risks, contingencies and uncertainties include, but are not limited to, the following:
| ● |
the effect of the ongoing novel strain of coronavirus (“COVID-19”) pandemic, and measures intended to curb its spread, including its effect on our tenants’ ability or willingness to pay rents and on demand for housing in the New York metropolitan area; |
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the severe economic, market and other disruptions worldwide caused, and likely to continue to be caused, by the COVID-19 pandemic; |
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market and economic conditions affecting occupancy levels, rental rates, the overall market value of our properties, our access to capital and the cost of capital and our ability to refinance indebtedness; |
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economic or regulatory developments in New York City; |
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the single government tenant in our commercial buildings may suffer financial difficulty; |
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changes in rent stabilization regulations or claims by tenants in rent-stabilized units that their rents exceed specified maximum amounts under current regulations; |
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our ability to control operating costs to the degree anticipated; |
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the risk of damage to our properties, including from severe weather, natural disasters, climate change and terrorist attacks; |
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risks related to financing, cost overruns and fluctuations in occupancy rates and rents resulting from development or redevelopment activities and the risk that we may not be able to pursue or complete development or redevelopment activities or that such development or redevelopment activities may not be profitable; |
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concessions or significant capital expenditures that may be required to attract and retain tenants; |
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the relative illiquidity of real estate investments; |
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competition affecting our ability to engage in investment and development opportunities or attract or retain tenants; |
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unknown or contingent liabilities in properties acquired in formative and future transactions; |
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the possible effects of departure of key personnel in our management team on our investment opportunities and relationships with lenders and prospective business partners; |
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conflicts of interest faced by members of management relating to the acquisition of assets and the development of properties, which may not be resolved in our favor; |
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a transfer of a controlling interest in any of our properties may obligate us to pay transfer tax based on the fair market value of the real property transferred; and |
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other risks and risk factors or uncertainties identified from time to time in our filings with the Securities and Exchange Commission (“SEC”). |
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Reference is made to a more complete discussion of forward-looking statements and applicable risks contained under the captions “Cautionary Note Concerning Forward-Looking Statements” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 12, 2020, the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 11, 2020, and other reports filed from time to time with the SEC. Clipper Realty Inc. undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Clipper Realty Inc.
Consolidated Balance Sheets
(In thousands, except for share and per share data)
| June 30, | December 31, | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Investment in real estate | ||||||||
| Land and improvements | $ | $ | ||||||
| Building and improvements | ||||||||
| Tenant improvements | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Real estate under development | ||||||||
| Total investment in real estate | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Investment in real estate, net | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Tenant and other receivables, net of allowance for doubtful accounts of $ and $, respectively | ||||||||
| Deferred rent | ||||||||
| Deferred costs and intangible assets, net | ||||||||
| Prepaid expenses and other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities: | ||||||||
| Notes payable, net of unamortized loan costs of $ and $, respectively | $ | $ | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Security deposits | ||||||||
| Below-market leases, net | ||||||||
| Other liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Equity: | ||||||||
| Preferred stock, $ par value; shares authorized (including shares of % Series A cumulative non-voting preferred stock), | ||||||||
| Common stock, $ par value; shares authorized, shares issued and outstanding | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Non-controlling interests | ||||||||
| TOTAL EQUITY | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
See accompanying notes to these consolidated financial statements.
Clipper Realty Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2020 |
2019 |
2020 |
2019 |
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| REVENUES |
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| Residential rental income |
$ | $ | $ | $ | ||||||||||||
| Commercial rental income |
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| TOTAL REVENUES |
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| OPERATING EXPENSES |
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| Property operating expenses |
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| Real estate taxes and insurance |
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| General and administrative |
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| Depreciation and amortization |
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| TOTAL OPERATING EXPENSES |
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| INCOME FROM OPERATIONS |
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| Interest expense, net |
( |
) | ( |
) | ( |
) | ( |
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| Loss on modification/extinguishment of debt |
( |
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| Gain on involuntary conversion |
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| Net loss |
( |
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) | ( |
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| Net loss attributable to non-controlling interests |
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| Net loss attributable to common stockholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Basic and diluted net loss per share |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
See accompanying notes to these consolidated financial statements.
Clipper Realty Inc.
Consolidated Statements of Changes in Equity
Three and Six Months Ended June 30, 2020 and 2019
(In thousands, except for share data)
(Unaudited)
| Number of |
Common |
Additional |
Accumulated |
Total |
Non- |
Total |
||||||||||||||||||||||
| Balance December 31, 2019 |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
| Amortization of LTIP grants |
— | — | — | — | ||||||||||||||||||||||||
| Dividends and distributions |
— | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Reallocation of noncontrolling interests |
— | ( |
) | |||||||||||||||||||||||||
| Balance March 31, 2020 |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
| Amortization of LTIP grants |
— | |||||||||||||||||||||||||||
| Dividends and distributions |
— | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
— | ( |
) | ( |
) | ( |
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| Reallocation of noncontrolling interests |
— | ( |
) | |||||||||||||||||||||||||
| Balance June 30, 2020 |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
| Number of |
Common |
Additional |
Accumulated |
Total |
Non- |
Total |
||||||||||||||||||||||
| Balance December 31, 2018 |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
| Amortization of LTIP grants |
— | — | — | — | ||||||||||||||||||||||||
| Dividends and distributions |
— | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
— | — | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Reallocation of noncontrolling interests |
— | ( |
) | |||||||||||||||||||||||||
| Balance March 31, 2019 |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
| Issuance of common stock |
||||||||||||||||||||||||||||
| Redemption of LTIP grants |
— | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||
| Amortization of LTIP grants |
— | |||||||||||||||||||||||||||
| Dividends and distributions |
— | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
— | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||
| Reallocation of noncontrolling interests |
— | ( |
) | |||||||||||||||||||||||||
| Balance June 30, 2019 |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
See accompanying notes to these consolidated financial statements.
Clipper Realty Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of deferred financing costs | ||||||||
| Amortization of deferred costs and intangible assets | ||||||||
| Amortization of above- and below-market leases | ( | ) | ( | ) | ||||
| Loss on modification/extinguishment of debt | ||||||||
| Gain on involuntary conversion | ( | ) | ||||||
| Deferred rent | ||||||||
| Stock-based compensation | ||||||||
| Bad debt expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Tenant and other receivables | ( | ) | ||||||
| Prepaid expenses, other assets and deferred costs | ||||||||
| Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
| Security deposits | ||||||||
| Other liabilities | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Additions to land, buildings, and improvements | ( | ) | ( | ) | ||||
| Insurance proceeds from involuntary conversion | ||||||||
| Purchase of interest rate cap | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payments of mortgage notes | ( | ) | ( | ) | ||||
| Proceeds from mortgage notes | ||||||||
| Dividends and distributions | ( | ) | ( | ) | ||||
| Loan issuance and extinguishment costs | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents and restricted cash | ||||||||
| Cash and cash equivalents and restricted cash - beginning of period | ||||||||
| Cash and cash equivalents and restricted cash - end of period | $ | $ | ||||||
| Cash and cash equivalents and restricted cash – beginning of period: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and cash equivalents and restricted cash – beginning of period | $ | $ | ||||||
| Cash and cash equivalents and restricted cash – end of period: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and cash equivalents and restricted cash – end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest, net of capitalized interest of $ and $ in 2020 and 2019, respectively | $ | $ | ||||||
| Non-cash interest capitalized to real estate under development | ||||||||
| Additions to investment in real estate included in accounts payable and accrued liabilities | ||||||||
See accompanying notes to these consolidated financial statements.
Clipper Realty Inc.
Notes to Condensed Consolidated Financial Statements
(In thousands, except for share and per share data and as noted)
(Unaudited)
INTRODUCTION TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of Clipper Realty Inc. (the “Company” or “we”) and subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 12, 2020.
The financial information presented reflects all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations, cash flows and financial position for the interim periods presented. Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation. These reclassifications did not have an impact on net income previously reported. These results are not necessarily indicative of a full year’s results of operations.
1. Organization
The Company was organized in the state of Maryland on July 7, 2015. On August 3, 2015, we completed certain formation transactions and the sale of shares of common stock in a private offering. We contributed the net proceeds of the private offering to Clipper Realty L.P., our operating partnership subsidiary (the “Operating Partnership”), in exchange for units in the Operating Partnership. The Operating Partnership in turn contributed such net proceeds to the limited liability companies (“LLCs”) that comprised the predecessor of the Company (the “Predecessor”) in exchange for Class A LLC units in such LLCs and became the managing member of such LLCs. The owners of the LLCs exchanged their interests for Class B LLC units and an equal number of special, non-economic, voting stock in the Company. The Class B LLC units, together with the special voting shares, are convertible into common shares of the Company on a -for-one basis and are entitled to distributions.
On June 27, 2016, the Operating Partnership acquired the Aspen property at 1955 First Avenue in Manhattan, New York.
On February 9, 2017, the Company priced an initial public offering of
On May 9, 2017, the Company completed the purchase of 107 Columbia Heights (subsequently renovated and rebranded “Clover House”), a
On October 27, 2017, the Company completed the acquisition of an
On November 8, 2019, the Company completed the acquisition of 1010 Pacific Street located in the Prospect Heights neighborhood of Brooklyn, New York; the Company plans to redevelop the property as a
As of June 30, 2020, the properties owned by the Company consist of the following (collectively, the “Properties”):
| • |
Tribeca House in Manhattan, comprising buildings, one with |
| • |
Flatbush Gardens in Brooklyn, a |
| • |
141 Livingston Street in Brooklyn, a |
| • |
250 Livingston Street in Brooklyn, a |
| • |
Aspen in Manhattan, a |
| • |
Clover House in Brooklyn, a |
| • |
10 West 65th Street in Manhattan, a |
| • |
1010 Pacific Street in Brooklyn, which the Company plans to redevelop as a |
During 2019, we entered into a joint venture in which we own a
The operations of Clipper Realty Inc. and its consolidated subsidiaries are carried on primarily through the Operating Partnership. The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code (the “Code”). The Company is the sole general partner of the Operating Partnership and the Operating Partnership is the sole managing member of the LLCs that comprised the Predecessor.
At June 30, 2020, the Company’s interest, through the Operating Partnership, in the LLCs that own the properties generally entitles it to
The Company determined that the Operating Partnership and the LLCs are variable interest entities (“VIEs”) and that the Company was the primary beneficiary. The assets and liabilities of these VIEs represented substantially all of the Company’s assets and liabilities.
2. Issuance of Common Stock
On April 9, 2019, the Company issued
3. Significant Accounting Policies
Segments
At June 30, 2020, the Company had reportable operating segments, Residential Rental Properties and Commercial Rental Properties. The Company’s chief operating decision maker may review operational and financial data on a property basis.
Basis of Consolidation
The accompanying consolidated financial statements of the Company are prepared in accordance with GAAP. The effect of all intercompany balances has been eliminated. The consolidated financial statements include the accounts of all entities in which the Company has a controlling interest. The ownership interests of other investors in these entities are recorded as non-controlling interest.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from these estimates.
Investment in Real Estate
Real estate assets held for investment are carried at historical cost and consist of land, buildings and improvements, furniture, fixtures and equipment. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as betterment or the life of the related asset will be substantially extended beyond the original life expectancy.
In accordance with ASU 2017-01, "Business Combinations – Clarifying the Definition of a Business,” the Company evaluates each acquisition of real estate or in-substance real estate to determine if the integrated set of assets and activities acquired meets the definition of a business and needs to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:
| • | Substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets; or |
| • | The integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., revenue generated before and after the transaction). |
An acquired process is considered substantive if:
| • | The process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce) that is skilled, knowledgeable and experienced in performing the process; |
| • | The process cannot be replaced without significant cost, effort or delay; or |
| • | The process is considered unique or scarce. |
Generally, the Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.
Upon acquisition of real estate, the Company assesses the fair values of acquired tangible and intangible assets including land, buildings, tenant improvements, above-market and below-market leases, in-place leases and any other identified intangible assets and assumed liabilities. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their relative fair values. In estimating fair value of tangible and intangible assets acquired, the Company assesses and considers fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates, estimates of replacement costs, net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
The Company records acquired above-market and below-market lease values initially based on the present value, using a discount rate which reflects the risks associated with the leases acquired based on the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed renewal options for the below-market leases. Other intangible assets acquired include amounts for in-place lease values and tenant relationship values (if any) that are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A property’s value is impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, a write-down is recorded and measured by the amount of the difference between the carrying value of the asset and the fair value of the asset. In the event that the Company obtains proceeds through an insurance policy due to impairment, the proceeds are offset against the write-down in calculating gain/loss on disposal of assets. Management of the Company does not believe that any of its properties within the portfolio are impaired as of June 30, 2020.
For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the assets less estimated cost to sell is less than the carrying value of the assets. Properties classified as real estate held-for-sale generally represent properties that are actively marketed or contracted for sale with closing expected to occur within the next twelve months. Real estate held-for-sale is carried at the lower of cost, net of accumulated depreciation, or fair value less cost to sell, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held-for-sale properties are charged to expense as incurred. Expenditures for improvements, renovations and replacements related to held-for-sale properties are capitalized at cost. Depreciation is not recorded on real estate held-for-sale.
If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balances of the related intangibles are written off. The tenant improvements and origination costs are amortized to expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).
Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
| Years | ||||
| Building and improvements | – | |||
| Tenant improvements | Shorter of useful life or lease term | |||
| Furniture, fixtures and equipment | – | |||
The capitalized above-market lease values are amortized as a reduction to base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. The value of in-place leases is amortized to expense over the remaining initial terms of the respective leases.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and in banks, plus all short-term investments with a maturity of three months or less when purchased. The Company maintains some of its cash in bank deposit accounts, which, at times, may exceed the federally insured limit. No losses have been experienced related to such accounts.
Restricted Cash
Restricted cash generally consists of escrows for future real estate taxes and insurance expenditures, repairs and capital improvements and security deposits.
Tenant and Other Receivables and Allowance for Doubtful Accounts
Tenant and other receivables are comprised of amounts due for monthly rents and other charges. The Company periodically performs a detailed review of amounts due from tenants to determine if accounts receivable balances are impaired based on factors affecting the collectability of those balances. If a tenant fails to make contractual payments beyond any allowance, the Company may recognize additional bad debt expense in future periods.
Deferred Costs
Deferred lease costs consist of fees incurred to initiate and renew operating leases. Lease costs are being amortized using the straight-line method over the terms of the respective leases.
Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are amortized over the term of the financing and are recorded in interest expense in the consolidated statements of operations. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions which do not close are expensed in the period the financing transaction is terminated.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net loss adjusted for changes in unrealized gains and losses, reported in equity, for financial instruments required to be reported at fair value under GAAP. For the three and six months ended June 30, 2020 and 2019, the Company did not own any financial instruments for which the change in value was not reported in net loss accordingly and its comprehensive loss was its net loss as presented in the consolidated statements of operations.
Revenue Recognition
Rental revenue for commercial leases is recognized on a straight-line basis over the terms of the respective leases. Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Rental income attributable to residential leases and parking is recognized as earned, which is not materially different from the straight-line basis. Leases entered into by residents for apartment units are generally for one-year terms, renewable upon consent of both parties on an annual or monthly basis.
Reimbursements for operating expenses due from tenants pursuant to their lease agreements are recognized as revenue in the period the applicable expenses are incurred. These costs generally include real estate taxes, utilities, insurance, common area maintenance costs and other recoverable costs and are recorded as part of commercial rental income in the condensed consolidated statements of operations.
Stock-based Compensation
The Company accounts for stock-based compensation pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, “Compensation — Stock Compensation.” As such, all equity-based awards are reflected as compensation expense in the Company’s consolidated statements of operations over their vesting period based on the fair value at the date of grant.
In April 2020, the Company granted
In June 2020, the Company granted
At June 30, 2020 and December 31, 2019, there were
Income Taxes
The Company elected to be taxed and to operate in a manner that will allow it to qualify as a REIT under the Code. To qualify as a REIT, the Company is required to distribute dividends equal to at least
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act was enacted to provide economic relief to companies and individuals in response to the COVID-19 pandemic. Included in the CARES Act are tax provisions which increase allowable interest expense deductions for 2019 and 2020 and increase the ability for taxpayers to use net operating losses. While we do not expect these provisions to have a material impact on the Company’s taxable income or tax liabilities, we continue to analyze the provisions of the CARES Act and related guidance as it is published.
In accordance with FASB ASC Topic 740, the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that, if successfully challenged, could result in a material impact on its or the Predecessor’s financial position or results of operations. The prior three years’ income tax returns are subject to review by the Internal Revenue Service.
Fair Value Measurements
Refer to Note 9, “Fair Value of Financial Instruments”.
Derivative Financial Instruments
FASB derivative and hedging guidance establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by FASB guidance, the Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation.
Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecast transactions, are considered cash flow hedges. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss) (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in the fair value or cash flows of the derivative hedging instrument with the changes in the fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value would be recognized in earnings. As of June 30, 2020, the Company has no derivatives for which it applies hedge accounting.
Loss Per Share
Basic and diluted loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding. As of June 30, 2020 and 2019, the Company had unvested LTIP units which provide for non-forfeitable rights to dividend-equivalent payments. Accordingly, these unvested LTIP units are considered participating securities and are included in the computation of basic and diluted loss per share pursuant to the two-class method. The Company did have dilutive securities as of June 30, 2020 or 2019.
The effect of the conversion of the
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (unaudited):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands, except per share amounts) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Numerator | ||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less: income attributable to participating securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Subtotal | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator | ||||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic and diluted net loss per share attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Recently Issued Pronouncements
In April 2020, FASB issued a Staff Q & A to provide interpretive guidance for lease concessions related to the effects of the COVID-19 pandemic. The Company did not provide any such concessions to its tenants as a result of COVID-19 during the three months ended June 30, 2020; therefore, this guidance did not have a material effect on its consolidated financial statements. The Company continues to evaluate the effect that this guidance may have on its consolidated financial statements.
In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (Topic 848). ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying current GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 is effective beginning on March 12, 2020, and may be applied prospectively to such transactions through December 31, 2022. We will apply ASU 2020-04 prospectively as and when we enter into transactions to which this guidance applies.
In March 2019, FASB issued ASU 2019-01, “Leases (Topic 842), Codification Improvements.” There are three codification updates to Topic 842 covered by this ASU: Issue 1 provides guidance on how to compute fair value of leased items for lessors who are non-dealers or manufacturers; Issue 2 relates to cash flow presentation for lessors of sales-type and direct financing leases; and Issue 3 clarifies that certain transition disclosures will only be required in annual disclosures.
In December 2018, FASB issued ASU 2018-20, “Leases (Topic 842), Narrow-Scope Improvements for Lessors.” This ASU modifies ASU 2016-02 to permit lessors, as an accounting policy election, not to evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Consequently, a lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures (includes sales, use, value-added, and some excise taxes and excludes real estate taxes). The Company has elected not to evaluate whether the aforementioned costs are lessor or lessee costs. This ASU also provides that certain lessor costs require lessors to exclude from variable payments, and therefore revenue, specifically lessor costs paid by lessees directly to third parties. The amendments also require lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue.
In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which prescribes a single, common revenue standard that supersedes nearly all existing revenue recognition guidance under U.S. GAAP, including most industry-specific requirements. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 outlines a five-step model to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. The Company’s revenues are primarily derived from rental income, which is scoped out from this standard and is currently accounted for in accordance with ASC Topic 840, Leases. The Company adopted this standard effective January 1, 2019, using the modified retrospective approach, applying the provisions to open contracts as of the date of adoption. The adoption of this standard did not have a material impact on the timing or amounts of the Company’s revenues.
In February 2016, FASB issued ASU 2016-02, “Leases.” ASU 2016-02 supersedes the current accounting for leases and while retaining two distinct types of leases, finance and operating, requires lessees to recognize most leases on their balance sheets and makes targeted changes to lessor accounting. In July 2018, FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which provides minor clarifications and corrections to ASU 2016-02, “Leases (Topic 842).” Further, in July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements.” This amendment provides a new practical expedient that allows lessors, by class of underlying asset, to avoid separating lease and associated non-lease components within a contract if certain criteria are met: (i) the timing and pattern of transfer for the non-lease component and the associated lease component are the same and (ii) the stand-alone lease component would be classified as an operating lease if accounted for separately. These pronouncements are effective for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company will adopt this standard effective January 1, 2022 and is currently evaluating the impact of adoption on its consolidated financial statements. As lessor, the Company expects that the adoption of ASU 2016-02 (as amended by subsequent ASUs) will not change the timing of revenue recognition of the Company’s rental revenues. As lessee, the Company is party to certain office equipment leases with future payment obligations for which the Company expects to record right-of-use assets and lease liabilities at the present value of the remaining minimum rental payments upon adoption of this standard.
In August 2018, FASB issued ASU 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,” which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. This guidance is effective in fiscal years beginning after December 15, 2019 with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s financial statement reporting.
In June 2018, FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments provide specific guidance for transactions for acquiring goods and services from nonemployees and specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (i) financing to the issuer or (ii) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, “Revenue from Contracts with Customers.” The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements as it has not historically issued share-based payments in exchange for goods or services to be consumed within its operations.
In February 2017, FASB issued ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20),” to add guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. ASU 2017-05 reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. ASU 2017-05 is effective for the Company for its annual reporting beginning after December 15, 2018, including interim reporting periods beginning after December 15, 2019. The Company adopted this standard effective January 1, 2019. The adoption of this standard did not have a material impact on our consolidated financial statements.
4. Acquisitions
On November 8, 2019, the Company acquired the 1010 Pacific Street property, a parcel of land, for $
5. Deferred Costs and Intangible Assets
Deferred costs and intangible assets consist of the following:
| June 30, |
December 31, |
|||||||
| (unaudited) |
||||||||
| Deferred costs |
$ | $ | ||||||
| Above-market leases |
||||||||
| Lease origination costs |
||||||||
| In-place leases |
||||||||
| Real estate tax abatements |
||||||||
| Total deferred costs and intangible assets |
||||||||
| Less accumulated amortization |
( |
) | ( |
) | ||||
| Total deferred costs and intangible assets, net |
$ | $ | ||||||
Amortization of deferred costs, lease origination costs and in-place lease intangible assets was $
Deferred costs and intangible assets as of June 30, 2020, amortize in future years as follows:
| 2020 (Remainder) |
$ | |||
| 2021 |
||||
| 2022 |
||||
| 2023 |
||||
| 2024 |
||||
| Thereafter |
||||
| Total |
$ |
6. Below-Market Leases, Net
The Company’s below-market lease intangibles liabilities are as follows:
| June 30, |
December 31, |
|||||||
| (unaudited) |
||||||||
| Below-market leases |
$ | $ | ||||||
| Less accumulated amortization |
( |
) | ( |
) | ||||
| Below-market leases, net |
$ | $ | ||||||
Rental income included amortization of below-market leases of $
Below-market leases as of June 30, 2020, amortize in future years as follows:
| 2020 (Remainder) |
$ | |||
| 2021 |
||||
| 2022 |
||||
| 2023 |
||||
| Total |
$ |
7. Notes Payable
The mortgages, loans and mezzanine notes payable collateralized by the properties, or the Company’s interest in the entities that own the properties and assignment of leases, are as follows:
| Property |
Maturity |
Interest Rate |
June 30, |
December 31, |
|||||||||
| Flatbush Gardens, Brooklyn, NY (a) |
6/1/2032 |
$ | $ | ||||||||||
| Flatbush Gardens, Brooklyn, NY (a) |
3/1/2028 |
||||||||||||
| 250 Livingston Street, Brooklyn, NY (b) |
6/6/2029 |
||||||||||||
| 141 Livingston Street, Brooklyn, NY (c) |
6/1/2028 |
||||||||||||
| Tribeca House, Manhattan, NY (d) |
3/6/2028 |
||||||||||||
| Aspen, Manhattan, NY (e) |
7/1/2028 |
||||||||||||
| Clover House, Brooklyn, NY (f) |
12/1/2029 |
||||||||||||
| 10 West 65th Street, Manhattan, NY (g) |
11/1/2027 |
||||||||||||
| 1010 Pacific Street, Brooklyn, NY (h) |
12/24/2020 |
LIBOR + 3.60% |
|||||||||||
| Total debt |
$ | $ | |||||||||||
| Unamortized debt issuance costs |
( |
) | ( |
) | |||||||||
| Total debt, net of unamortized debt issuance costs |
$ | $ | |||||||||||
(a) On May 8, 2020, the Company refinanced the $
(b) The $
(c) The $
(d) The $
(e) The $
(f) The $
(g) On October 27, 2017, the Company entered into a $
(h) On December 24, 2019, the Company entered into a $
The following table summarizes principal payment requirements under the terms of the mortgage notes as of June 30, 2020:
| 2020 (Remainder) |
$ | |||
| 2021 |
||||
| 2022 |
||||
| 2023 |
||||
| 2024 |
||||
| Thereafter |
||||
| Total |
$ |
8. Rental Income under Operating Leases
The Company’s commercial properties are leased to commercial tenants under operating leases with fixed terms of varying lengths. As of June 30, 2020, the minimum future cash rents receivable (excluding tenant reimbursements for operating expenses) under non-cancelable operating leases for the commercial tenants in each of the next five years and thereafter are as follows:
| 2020 (Remainder) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total | $ |
The Company has commercial leases with the City of New York that comprised approximately
9. Fair Value of Financial Instruments
GAAP requires the measurement of certain financial instruments at fair value on a recurring basis. In addition, GAAP requires the measure of other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
| • |
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
| • |
Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
| • |
Level 3: prices or valuation techniques where little or no market data is available that require inputs that are both significant to the fair value measurement and unobservable. |
When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by assigning weights to the various valuation sources.
Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
The financial assets and liabilities in the consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, interest rate caps, accounts payable and accrued liabilities, security deposits and notes payable. The carrying amount of cash and cash equivalents, restricted cash, receivables, accounts payable and accrued liabilities, and security deposits reported in the consolidated balance sheets approximates fair value due to the short-term nature of these instruments. The fair value of notes payable, which are classified as Level 2, is estimated by discounting the contractual cash flows of each debt instrument to their present value using adjusted market interest rates.
The carrying amount and estimated fair value of the notes payable are as follows:
| June 30, |
December 31, |
|||||||
| (unaudited) |
||||||||
| Carrying amount (excluding unamortized debt issuance costs) |
$ | $ | ||||||
| Estimated fair value |
$ | $ | ||||||
The Company purchased interest rate caps in connection with the 250 Livingston Street loan obtained on December 6, 2018, and the 1010 Pacific Street loan obtained on December 24, 2019. The fair value of the interest rate caps, which are classified as Level 2, is estimated using market inputs and credit valuation inputs.
The estimated fair values of the interest rate caps are as follows:
| Notional Amount |
Related |
Maturity Date |
Strike Rate |
Estimated Fair Value at June 30, 2020 |
Estimated Fair Value at December 31, 2019 |
|||||||||||
| (unaudited) |
||||||||||||||||
| $ |
250 Livingston Street |
December 15, 2020 |
% | $ | $ | |||||||||||
| $ |
1010 Pacific Street |
December 24, 2020 |
% | |||||||||||||
| Total fair value of derivative instruments included in prepaid expenses and other assets |
$ | $ | ||||||||||||||
These interest rate caps were not designated as hedges. Accordingly, changes in fair value of the 250 Livingston Street instrument are recognized in earnings. Changes in fair value of the Clover House instrument which matured and was written off in May 2020, were recognized in real estate under development during construction and are recognized in earnings following completion of development. Changes in fair value of the 1010 Pacific Street instrument are recognized in real estate under development. Fair value of the 250 Livingston Street instrument did not change during each of the three and six months ended June 30, 2020 and 2019. Fair value of the Clover House instrument did not change during each of the three and six months ended June 30, 2020; decrease in fair value of the Clover House instrument of $
The above disclosures regarding fair value of financial instruments are based on pertinent information available as of June 30, 2020, and December 31, 2019, respectively. Although the Company is not aware of any factors that would significantly affect the reasonableness of the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented herein.
10. Commitments and Contingencies
Legal
On July 3, 2017, the Supreme Court of the State of New York (the “Court”) ruled in favor of 41 present or former tenants of apartment units at the Company’s buildings located at 50 Murray Street and 53 Park Place in Manhattan, New York, who brought an action (the “Kuzmich” case) against the Company alleging that they were subject to applicable rent stabilization laws with the result that rental payments charged by the Company exceeded amounts permitted under these laws because the buildings were receiving certain tax abatements under Real Property Tax Law (“RPTL”) 421-g. The Court also awarded the plaintiffs-tenants their attorney’s fees and costs. The Court declared that the plaintiffs-tenants were subject to rent stabilization requirements and referred the matter to a special referee to determine the amount of rent over-charges, if any. On July 18, 2017, the Court, pursuant to the parties’ agreement, stayed the Court’s ruling; the Company subsequently appealed the decision to the Appellate Division, First Department. On January 18, 2018, the Appellate Division unanimously reversed the Court’s ruling and ruled in favor of the Company, holding that the Company acted properly in de-regulating the apartments. The plaintiffs-tenants thereafter moved for leave to appeal to the Court of Appeals, which motion was granted on April 24, 2018. On June 25, 2019, the New York Court of Appeals reversed the Appellate Division’s order and ruled in favor of the plaintiffs-tenants, holding that apartments in buildings receiving RPTL 421-g tax benefits are not subject to luxury deregulation. The Court of Appeals also remitted the matter for further proceedings consistent with its opinion. As a result of the Court of Appeals’ order, Company management believes that payments may be required to be made to the 41 present or former tenants comprising the plaintiff group, that other tenants may attempt to make similar claims, and that the special referee process referred to above will be used to determine the timing and the amount of any claims that must be paid. On July 25, 2019, the Company filed a motion for reargument with the New York Court of Appeals, which was denied on September 12, 2019. On August 13, 2019, the Court, in effect, reinstated its prior order and referred the calculation of rent overcharges and attorneys’ fees for a hearing before a special referee. The special referee’s hearing was scheduled for October 23, 2019. On October 17, 2019, the Company made a motion in the Appellate Division for a stay of the special referee’s hearing pending the Company’s appeal from the August 13 order. On such date, the Appellate Division granted an interim stay of the special referee’s hearing, pending the determination of the underlying motion. On January 7, 2020, the Appellate Division granted the Company’s motion for a full stay of the special referee’s hearing pending appeal. The appeal had been scheduled to be argued during the May 2020 term, but on March 16, 2020, the parties filed a stipulation adjourning the appeal to the September 2020 term. On or about July 13, 2020, the parties filed another stipulation adjourning the appeal to the October 2020 term. On October 24, 2019, the Company filed a Petition for a Writ of Certiorari with the United States Supreme Court, seeking permission to have that Court hear the Company’s appeal on Constitutional grounds from the Court of Appeals’ order. On January 13, 2020, the United States Supreme Court denied the Company’s Petition for a Writ of Certiorari, meaning that the Court of Appeals’ order is final. On November 18, 2019, the same law firm which filed the Kuzmich case above filed a second action involving a separate group of 26 tenants (captioned Crowe et al v 50 Murray Street Acquisition LLC, Supreme Court, New York County, Index No. 161227/19), which action advances the same exact claims as in Kuzmich. The Company’s deadline to answer or otherwise respond to the complaint in Crowe had been extended to June 30, 2020; on such date, the Company filed its answer to the complaint. Pursuant to the court’s rules, on July 16, 2020, the plaintiffs filed an amended complaint; the sole difference as compared to the initial complaint is that seven new plaintiffs-tenants were added to the caption; there were no substantive changes to the complaint’s allegations. On August 5, 2020, the Company filed its answer to the amended complaint. The Company cannot predict what the timing or ultimate resolution of these matters will be, and accordingly, at this time, the Company has not recorded any liability for the potential settlement of these matters.
In addition to the above, the Company is subject to certain legal proceedings and claims arising in connection with its business, including a claim under the Americans with Disabilities Act of 1990 at the 141 Livingston Street property. Management believes, based in part upon consultation with legal counsel, that the ultimate resolution of all such claims will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.
Commitments
The Company is obligated to provide parking availability through August 2025 under a lease with a tenant at the 250 Livingston Street property; the current cost to the Company is approximately $
Contingencies
The COVID-19 pandemic has adversely impacted global economic activity and contributed to significant volatility in financial markets. The COVID-19 pandemic and associated government actions intended to curb its spread are creating disruptions in, and adversely impacting, many industries and have negatively impacted, and could continue to negatively impact, the Company’s business in a number of ways, including affecting its tenants’ ability or willingness to pay rents and reducing demand for housing in the New York metropolitan area. Certain of the Company’s commercial tenants have announced temporary closures of their locations and have requested rent deferrals during the COVID-19 pandemic. In some cases, the Company may restructure rent and other obligations under its leases with its tenants on terms that are less favorable to it than those currently in place. Additionally, the outbreak could have a continued material adverse impact on economic and market conditions and prolong the current period of global economic slowdown which may ultimately decrease occupancy levels and pricing across the Company’s portfolio as residents reduce their spending. The rapid development and fluidity with which the situation continues to develop precludes any prediction as to the ultimate material adverse impact of the COVID-19 pandemic. Nevertheless, COVID-19 presents uncertainty and risk with respect to the Company’s tenants, which could adversely affect the Company’s financial performance.
The Company’s properties have remained open and operational throughout the pandemic. The Company is taking the necessary steps to keep employees and tenants safe in compliance with state and local orders, and continues to provide typical services to its residents. The Company’s rent collection rate during the second quarter of 2020 was equal to
Concentrations
The Company’s properties are located in the Boroughs of Manhattan and Brooklyn in New York City, which exposes the Company to greater economic risks than if it owned a more geographically dispersed portfolio.
The breakdown between commercial and residential revenue is as follows (unaudited):
| Commercial | Residential | Total | ||||||||||
| Three months ended June 30, 2020 | % | % | % | |||||||||
| Three months ended June 30, 2019 | % | % | % | |||||||||
| Six months ended June 30, 2020 | % | % | % | |||||||||
| Six months ended June 30, 2019 | % | % | % | |||||||||
11. Related-Party Transactions
The Company recorded office and overhead expenses pertaining to a related company in general and administrative expense of $
The Company paid legal and advisory fees to firms in which two of our directors were principals or partners of $
12. Segment Reporting
The Company has classified its reporting segments into commercial and residential rental properties. The commercial reporting segment includes the 141 Livingston Street property and portions of the 250 Livingston Street, Tribeca House and Aspen properties. The residential reporting segment includes the Flatbush Gardens property, the Clover House property, the 10 West 65th Street property, the 1010 Pacific Street property and portions of the 250 Livingston Street, Tribeca House and Aspen properties.
The Company’s income from operations by segment for the three and six months ended June 30, 2020 and 2019, is as follows (unaudited):
| Three months ended June 30, 2020 |
Commercial |
Residential |
Total |
|||||||||
| Rental income |
$ | $ | $ | |||||||||
| Total revenues |
||||||||||||
| Property operating expenses |
||||||||||||
| Real estate taxes and insurance |
||||||||||||
| General and administrative |
||||||||||||
| Depreciation and amortization |
||||||||||||
| Total operating expenses |
||||||||||||
| Income from operations |
$ | $ | $ | |||||||||
| Three months ended June 30, 2019 |
Commercial |
Residential |
Total |
|||||||||
| Rental income |
$ | $ | $ | |||||||||
| Total revenues |
||||||||||||
| Property operating expenses |
||||||||||||
| Real estate taxes and insurance |
||||||||||||
| General and administrative |
||||||||||||
| Depreciation and amortization |
||||||||||||
| Total operating expenses |
||||||||||||
| Income from operations |
$ | $ | $ | |||||||||
|
Six months ended June 30, 2020 | Commercial | Residential | Total | |||||||||
| Rental income | $ | $ | $ | |||||||||
| Total revenues | ||||||||||||
| Property operating expenses | ||||||||||||
| Real estate taxes and insurance | ||||||||||||
| General and administrative | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Total operating expenses | ||||||||||||
| Income from operations | $ | $ | $ | |||||||||
| Six months ended June 30, 2019 |
Commercial |
Residential |
Total |
|||||||||
| Rental income |
$ | $ | $ | |||||||||
| Total revenues |
||||||||||||
| Property operating expenses |
||||||||||||
| Real estate taxes and insurance |
||||||||||||
| General and administrative |
||||||||||||
| Depreciation and amortization |
||||||||||||
| Total operating expenses |
||||||||||||
| Income from operations |
$ | $ | $ | |||||||||
The Company’s total assets by segment are as follows, as of:
| Commercial | Residential | Total | ||||||||||
| June 30, 2020 (unaudited) | $ | $ | $ | |||||||||
| December 31, 2019 | ||||||||||||
The Company’s interest expense by segment for the three and six months ended June 30, 2020 and 2019, is as follows (unaudited):
| Commercial |
Residential |
Total |
||||||||||
| Three months ended June 30, |
||||||||||||
| 2020 |
$ | $ | $ | |||||||||
| 2019 |
||||||||||||
| Six months ended June 30, | ||||||||||||
| 2020 | $ | $ | $ | |||||||||
| 2019 |
The Company’s capital expenditures by segment for the three and six months ended June 30, 2020 and 2019, are as follows (unaudited):
| Commercial | Residential | Total | ||||||||||
| Three months ended June 30, | ||||||||||||
| 2020 | $ | $ | $ | |||||||||
| 2019 | ||||||||||||
| Six months ended June 30, | ||||||||||||
| 2020 | $ | $ | $ | |||||||||
| 2019 | ||||||||||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the more detailed information set forth under the caption, “Cautionary Note Concerning Forward-Looking Statements,” and in our financial statements and the related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
Overview of Our Company
Clipper Realty Inc. (the “Company” or “we”) is a self-administered and self-managed real estate company that acquires, owns, manages, operates and repositions multifamily residential and commercial properties in the New York metropolitan area, with a current portfolio in Manhattan and Brooklyn. Our primary focus is to own, manage and operate our portfolio and to acquire and reposition additional multifamily residential and commercial properties in the New York metropolitan area. The Company has been organized and operates in conformity with the requirements for qualification and taxation as a real estate investment trust (“REIT”) under the U.S. federal income tax law and elected to be treated as a REIT commencing with the taxable year ended December 31, 2015.
The Company was incorporated on July 7, 2015. On August 3, 2015, we closed a private offering of shares of our common stock, in which we raised net proceeds of approximately $130.2 million. In connection with the private offering, we consummated a series of investment and other formation transactions that were designed, among other things, to enable us to qualify as a REIT for U.S. federal income tax purposes.
In February 2017, the Company sold 6,390,149 primary shares of common stock (including the exercise of the over-allotment option, which closed on March 10, 2017) to investors in an initial public offering (“IPO”) at $13.50 per share. The proceeds, net of offering costs, were approximately $78.7 million. The Company contributed the IPO proceeds to the Operating Partnership in exchange for units in the Operating Partnership.
On May 9, 2017, the Company completed the purchase of 107 Columbia Heights (since rebranded as “Clover House”), a 158-unit apartment community located in Brooklyn Heights, New York, for $87.5 million.
On October 27, 2017, the Company completed the acquisition of an 82-unit residential property at 10 West 65th Street in Manhattan, New York, for $79.0 million.
On November 8, 2019, the Company completed the acquisition of property located at 1010 Pacific Street in Prospect Heights, New York, for $31.0 million.
As of June 30, 2020, the Company owns:
| • |
two neighboring residential/retail rental properties at 50 Murray Street and 53 Park Place in the Tribeca neighborhood of Manhattan; |
| • |
one residential property complex in the East Flatbush neighborhood of Brooklyn consisting of 59 buildings; |
| • |
two primarily commercial properties in downtown Brooklyn (one of which includes 36 residential apartment units); |
| • |
one residential/retail rental property at 1955 1st Avenue in Manhattan; |
| • |
one residential rental property at 107 Columbia Heights in the Brooklyn Heights neighborhood of Brooklyn; |
| • |
one residential rental property at 10 West 65th Street in the Upper West Side neighborhood of Manhattan; and |
| • |
one property at 1010 Pacific Street in the Prospect Heights neighborhood of Brooklyn, to be redeveloped as a residential rental building. |
These properties are located in the most densely populated major city in the United States, each with immediate access to mass transportation.
On May 8, 2020, the Company refinanced the existing Flatbush Gardens loan with a $329 million, twelve-year secured first mortgage note with New York Community Bank. The note matures on June 1, 2032, and bears interest at 3.125% through May 2027 and thereafter at the prime rate plus 2.75%, subject to an option to fix the rate. The note requires interest-only payments through May 2027, and monthly principal and interest payments thereafter based on a 30-year amortization schedule. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note prior to the maturity date, subject to certain prepayment premiums, as defined.
The Company’s ownership interest in its initial portfolio of properties, which includes the Tribeca House, Flatbush Gardens and the two Livingston Street properties, was acquired in the formation transactions in connection with the private offering. These properties are owned by the LLC subsidiaries, which are managed by the Company through the Operating Partnership. The Operating Partnership’s interests in the LLC subsidiaries generally entitle the Operating Partnership to all cash distributions from, and the profits and losses of, the LLC subsidiaries other than the preferred distributions to the continuing investors who hold Class B LLC units in these LLC subsidiaries. The continuing investors own an aggregate amount of 26,317,396 Class B LLC units, representing 59.6% of the Company’s common stock on a fully diluted basis. Accordingly, the Operating Partnership’s interests in the LLC subsidiaries entitle the Operating Partnership to receive 40.4% of the aggregate distributions from the LLC subsidiaries. The Company, through the Operating Partnership, owns all of the ownership interests in the Aspen property, the Clover House property, the 10 West 65th Street property and the 1010 Pacific Street property.
COVID-19 Pandemic
The COVID-19 pandemic has adversely impacted global economic activity and contributed to significant volatility in financial markets. The COVID-19 pandemic and associated government actions intended to curb its spread are creating disruption in, and adversely impacting, many industries and have negatively impacted, and could continue to negatively impact, our business in a number of ways, including affecting our tenants’ ability or willingness to pay rents and reducing demand for housing in the New York metropolitan area. Certain of our commercial tenants have announced temporary closures of their locations and have requested rent deferrals during the COVID-19 pandemic. In some cases, we may restructure rent and other obligations under our leases with tenants on terms that are less favorable to us than those currently in place. Additionally, the outbreak could have a continued material adverse impact on economic and market conditions and prolong the current period of global economic slowdown which may ultimately decrease occupancy levels and pricing across our portfolio as residents reduce their spending. The rapid development and fluidity with which the situation continues to develop precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic on our business. Nevertheless, COVID-19 presents uncertainty and risk with respect to the our tenants, which could adversely affect the Company’s business, financial condition, liquidity and results of operations.
Despite these continuing very challenging circumstances, our business has remained durable. Our properties have remained open and operational throughout the pandemic. We are taking the necessary steps to keep our employees and tenants safe in compliance with state and local orders, and we continue to provide typical services to our residents. Our rent collection rate during the second quarter of 2020 was equal to 94% of our first quarter 2020 rent collection rate. At June 30, 2020, our properties were 96% leased. We expect our properties and the New York City market to remain desirable to a broad range of tenants and our operations to return to a more normal state over time.
Results of Operations
Our focus throughout 2019 and year-to-date 2020 has been to manage our properties to optimize revenues and control costs, while continuing to renovate and reposition certain properties. The discussion below highlights the specific properties contributing to the changes in the results of operations, and focuses on the properties that the Company owned and operated for the full period in each comparison (Clover House was under renovation during the first six months of 2019).
Income Statement for the Three Months Ended June 30, 2020 and 2019 (in thousands)
| 2020 |
Less: Clover House |
2020 excluding Clover House |
2019 |
Increase (decrease) |
% |
|||||||||||||||||||
| Revenues |
||||||||||||||||||||||||
| Residential rental income |
$ | 23,679 | $ | 1,848 | $ | 21,831 | $ | 21,146 | $ | 685 | 3.2 | % | ||||||||||||
| Commercial rental income |
7,050 | 4 | 7,046 | 7,300 | (254 | ) | (3.5 | )% | ||||||||||||||||
| Total revenues |
30,729 | 1,852 | 28,877 | 28,446 | 431 | 1.5 | % | |||||||||||||||||
| Operating Expenses |
||||||||||||||||||||||||
| Property operating expenses |
6,868 | 231 | 6,637 | 6,747 | (110 | ) | (1.6 | )% | ||||||||||||||||
| Real estate taxes and insurance |
6,778 | 368 | 6,410 | 5,707 | 703 | 12.3 | % | |||||||||||||||||
| General and administrative |
2,594 | 184 | 2,410 | 2,579 | (169 | ) | (6.6 | )% | ||||||||||||||||
| Depreciation and amortization |
5,872 | 583 | 5,289 | 4,590 | 699 | 15.2 | % | |||||||||||||||||
| Total operating expenses |
22,112 | 1,366 | 20,746 | 19,623 | 1,123 | 5.7 | % | |||||||||||||||||
| Income from operations |
8,617 | 486 | 8,131 | 8,823 | (692 | ) | (7.8 | )% | ||||||||||||||||
| Interest expense, net |
(9,979 | ) | (755 | ) | (9,224 | ) | (8,210 | ) | 1,014 | 12.4 | % | |||||||||||||
| Loss on modification/extinguishment of debt |
(4,228 | ) | — | (4,228 | ) | (1,771 | ) | 2,457 | 138.7 | % | ||||||||||||||
| Gain on involuntary conversion |
85 | — | 85 | — | 85 | NM | ||||||||||||||||||
| Net loss |
$ | (5,505 | ) | $ | (269 | ) | $ | (5,236 | ) | $ | (1,158 | ) | $ | (4,078 | ) | 352.2 | % | |||||||
The dollar amounts in the narrative disclosure below are in thousands, other than the base rent per square foot figures.
Revenue. Residential rental income, excluding Clover House, increased from $21,146 for the three months ended June 30, 2019, to $21,831 for the three months ended June 30, 2020, primarily due to increases in rental rates at the Flatbush Gardens and Tribeca House properties as well as the completion of renovations and leaseup of apartments at the 10 West 65th Street property during 2019. Base rent per square foot increased at the Flatbush Gardens property from $24.30 at June 30, 2019, to $25.05 at June 30, 2020. Base rent per square foot increased at the Tribeca House property from $68.77 at June 30, 2019, to $70.43 at June 30, 2020.
Commercial rental income, excluding Clover House, decreased from $7,300 for the three months ended June 30, 2019, to $7,046 for the three months ended June 30, 2020, primarily due to the termination of a commercial lease at the Tribeca House property, partially offset by increases in tenant reimbursements across the portfolio.
Property operating expenses. Property operating expenses include property-level costs such as compensation costs for property-level personnel, repairs and maintenance, supplies, utilities and landscaping. Property operating expenses, excluding Clover House, decreased from $6,747 for the three months ended June 30, 2019, to $6,637 for the three months ended June 30, 2020, primarily due to lower legal expenses, lower commission expenses and lower expenses related to renovation projects, partially offset by an increase in the provision for bad debt across the portfolio due to the impact of COVID-19.
Real estate taxes and insurance. Real estate taxes and insurance expenses, excluding Clover House, increased from $5,707 for the three months ended June 30, 2019, to $6,410 for the three months ended June 30, 2020, due to increased real estate taxes and property insurance across the portfolio.
General and administrative. General and administrative expenses, excluding Clover House, decreased from $2,579 for the three months ended June 30, 2019, to $2,410 for the three months ended June 30, 2020, primarily due to a decrease in executive bonuses.
Depreciation and amortization. Depreciation and amortization expense, excluding Clover House, increased from $4,590 for the three months ended June 30, 2019, to $5,289 for the three months ended June 30, 2020, due to additions to real estate across the portfolio.
Interest expense, net. Interest expense, net, excluding Clover House, increased from $8,210 for the three months ended June 30, 2019, to $9,224 for the three months ended June 30, 2020. The increase primarily resulted from the refinancing of the 250 Livingston Street property in May 2019, the refinancing of the Flatbush Gardens property in May 2020 and lower interest income related to the construction at Clover House. Interest expense, excluding Clover House, included amortization of loan costs and changes in fair value of interest rate caps of $271 and $424 for the three months ended June 30, 2020 and 2019, respectively.
Loss on modification/extinguishment of debt. Loss on modification/extinguishment of debt related to the refinancing of the Flatbush Gardens loan in May 2020 and the refinancing of the 250 Livingston Street loan in May 2019. The amount included charges for early modification and extinguishment of debt and the write-off of unamortized debt costs.
Gain on involuntary conversion. Gain on involuntary conversion represented insurance proceeds in excess of the carrying value of assets disposed of related to fire damage suffered by two units at the Flatbush Gardens property.
Net loss. As a result of the foregoing, net loss, excluding Clover House, increased from $1,158 for the three months ended June 30, 2019, to $5,236 for the three months ended June 30, 2020.
Income Statement for the Six Months Ended June 30, 2020 and 2019 (in thousands)
| 2020 |
Less: Clover House |
2020 excluding Clover House |
2019 |
Increase (decrease) |
% |
|||||||||||||||||||
| Revenues |
||||||||||||||||||||||||
| Residential rental income |
$ | 47,397 | $ | 3,570 | $ | 43,827 | $ | 41,918 | $ | 1,909 | 4.6 | % | ||||||||||||
| Commercial rental income |
14,218 | 9 | 14,209 | 14,180 | 29 | 0.2 | % | |||||||||||||||||
| Total revenues |
61,615 | 3,579 | 58,036 | 56,098 | 1,938 | 3.5 | % | |||||||||||||||||
| Operating Expenses |
||||||||||||||||||||||||
| Property operating expenses |
14,027 | 470 | 13,557 | 14,310 | (753 | ) | (5.3 | )% | ||||||||||||||||
| Real estate taxes and insurance |
13,642 | 737 | 12,905 | 11,438 | 1,467 | 12.8 | % | |||||||||||||||||
| General and administrative |
4,917 | 329 | 4,588 | 4,247 | 341 | 8.0 | % | |||||||||||||||||
| Depreciation and amortization |
11,430 | 1,165 | 10,265 | 9,139 | 1,126 | 12.3 | % | |||||||||||||||||
| Total operating expenses |
44,016 | 2,701 | 41,315 | 39,134 | 2,181 | 5.6 | % | |||||||||||||||||
| Income from operations |
17,599 | 878 | 16,721 | 16,964 | (243 | ) | (1.4 | )% | ||||||||||||||||
| Interest expense, net |
(19,767 | ) | (1,510 | ) | (18,257 | ) | (16,484 | ) | 1,773 | 10.8 | % | |||||||||||||
| Loss on modification/extinguishment of debt |
(4,228 | ) | — | (4,228 | ) | (1,771 | ) | 2,457 | 138.7 | |||||||||||||||
| Gain on involuntary conversion |
85 | — | 85 | — | 85 | NM | ||||||||||||||||||
| Net loss |
$ | (6,311 | ) | $ | (632 | ) | $ | (5,679 | ) | $ | (1,291 | ) | $ | (4,388 | ) | 339.9 | % | |||||||
The dollar amounts in the narrative disclosure below are in thousands, other than the base rent per square foot figures.
Revenue. Residential rental income, excluding Clover House, increased from $41,918 for the six months ended June 30, 2019, to $43,827 for the six months ended June 30, 2020, primarily due to increases in rental rates at the Flatbush Gardens and Tribeca House properties as well as the completion of renovations and leaseup of apartments at the 10 West 65th Street property during 2019. Base rent per square foot increased at the Flatbush Gardens property from $24.30 at June 30, 2019, to $25.05 at June 30, 2020. Base rent per square foot increased at the Tribeca House property from $68.77 at June 30, 2019, to $70.43 at June 30, 2020.
Commercial rental income, excluding Clover House, was essentially flat for the six months ended June 30, 2020, compared to the six months ended June 30, 2019.
Property operating expenses. Property operating expenses include property-level costs such as compensation costs for property-level personnel, repairs and maintenance, supplies, utilities and landscaping. Property operating expenses, excluding Clover House, decreased from $14,310 for the six months ended June 30, 2019, to $13,557 for the six months ended June 30, 2020, primarily due to lower legal expenses, lower commission expenses, lower expenses related to renovation projects and lower utility expenses across the portfolio, partially offset by an increase in the provision for bad debt across the portfolio due to the impact of COVID-19.
Real estate taxes and insurance. Real estate taxes and insurance expenses, excluding Clover House, increased from $11,438 for the six months ended June 30, 2019, to $12,905 for the six months ended June 30, 2020, due to increased real estate taxes and property insurance across the portfolio.
General and administrative. General and administrative expenses, excluding Clover House, increased from $4,247 for the six months ended June 30, 2019, to $4,588 for the six months ended June 30, 2020, primarily due to increases in legal expenses (including non-recurring litigation-related expenses).
Depreciation and amortization. Depreciation and amortization expense, excluding Clover House, increased from $9,139 for the six months ended June 30, 2019, to $10,265 for the six months ended June 30, 2020, due to additions to real estate across the portfolio.
Interest expense, net. Interest expense, net, excluding Clover House, increased from $16,484 for the six months ended June 30, 2019, to $18,257 for the six months ended June 30, 2020. The increase primarily resulted from the refinancing of the 250 Livingston Street property in May 2019, the refinancing of the Flatbush Gardens property in May 2020 and lower interest income related to the construction at Clover House. Interest expense, excluding Clover House, included amortization of loan costs and changes in fair value of interest rate caps of $543 and $928 for the six months ended June 30, 2020 and 2019, respectively.
Loss on modification/extinguishment of debt. Loss on modification/extinguishment of debt related to the refinancing of the Flatbush Gardens loan in May 2020 and the refinancing of the 250 Livingston Street loan in May 2019. The amount included charges for early modification and extinguishment of debt and the write-off of unamortized debt costs.
Gain on involuntary conversion. Gain on involuntary conversion represented insurance proceeds in excess of the carrying value of assets disposed of related to fire damage suffered by two units at the Flatbush Gardens property.
Net loss. As a result of the foregoing, net loss, excluding Clover House, increased from $1,291 for the six months ended June 30, 2019, to $5,679 for the six months ended June 30, 2020.
Liquidity and Capital Resources
As of June 30, 2020, we had $1,079.7 million of indebtedness (net of unamortized issuance costs) secured by our properties, $88.3 million of cash and cash equivalents, and $28.0 million of restricted cash. See Note 7 of the accompanying “Notes to Consolidated Financial Statements” for a discussion of the Company’s property-level debt.
As a REIT, we are required to distribute at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and excluding net capital gains, to stockholders on an annual basis. We expect that these needs will be met from cash generated from operations and other sources, including proceeds from secured mortgages and unsecured indebtedness, proceeds from additional equity issuances and cash generated from the sale of property.
Short-Term and Long-Term Liquidity Needs
Our short-term liquidity needs will primarily be to fund operating expenses, recurring capital expenditures, property taxes and insurance, interest and scheduled debt principal payments, general and administrative expenses and distributions to stockholders and unit holders. We generally expect to meet our short-term liquidity requirements through net cash provided by operations and cash on hand, and we believe we will have sufficient resources to meet our short-term liquidity requirements.
Our principal long-term liquidity needs will primarily be to fund additional property acquisitions, major renovation and upgrading projects, and debt payments and retirements at maturity. We do not expect that net cash provided by operations will be sufficient to meet all of these long-term liquidity needs. We anticipate meeting our long-term liquidity requirements by using cash as an interim measure and funds from public and private equity offerings and long-term secured and unsecured debt offerings.
We believe that as a publicly traded REIT, we will have access to multiple sources of capital to fund our long-term liquidity requirements. These sources include the incurrence of additional debt and the issuance of additional equity. However, we cannot provide assurance that this will be the case. Our ability to secure additional debt will depend on a number of factors, including our cash flow from operations, our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed. Our ability to access the equity capital markets will depend on a number of factors as well, including general market conditions for REITs and market perceptions about our company.
We believe that our current cash flows from operations and cash on hand, coupled with additional mortgage debt, will be sufficient to allow us to continue operations, satisfy our contractual obligations and make distributions to our stockholders and the members of our LLC subsidiaries for at least the next twelve months. However, no assurance can be given that we will be able to refinance any of our outstanding indebtedness in the future on favorable terms or at all.
Distributions
In order to qualify as a REIT for Federal income tax purposes, we must currently distribute at least 90% of our taxable income to our shareholders. During the three months ended June 30, 2020 and 2019, we paid dividends and distributions on our common shares, Class B LLC units and LTIP units totaling $4.3 million and $4.3 million, respectively, and during the six months ended June 30, 2020 and 2019, we paid dividends and distributions on our common shares, Class B LLC units and LTIP units totaling $8.6 million and $8.5 million, respectively.
Cash Flows for the Six Months Ended June 30, 2020 and 2019 (in thousands)
| Six Months Ended |
||||||||
| 2020 |
2019 |
|||||||
| Operating activities |
$ | 5,082 | $ | 10,443 | ||||
| Investing activities |
(13,525 | ) | (21,383 | ) | ||||
| Financing activities |
67,811 | 37,880 | ||||||
Cash flows provided by (used in) operating activities, investing activities and financing activities for the six months ended June 30, 2020 and 2019, were as follows:
Net cash flow provided by operating activities was $5,082 for the six months ended June 30, 2020, compared to $10,443 for the six months ended June 30, 2019. The net decrease during the 2020 period reflected an increase of $235 of cash flow from operating results, and a decrease of $5,596 of cash generated by operating assets and liabilities.
Net cash used in investing activities was $13,525 for the six months ended June 30, 2020, compared to $21,383 for the six months ended June 30, 2019. We spent $13,622 and $21,383 on capital projects for the six months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020, we received $111 of insurance proceeds from the disposal of assets damaged in a fire at a property and spent $14 on the purchase of an interest rate cap.
Net cash provided by financing activities was $67,811 for the six months ended June 30, 2020, compared to $37,880 for the six months ended June 30, 2019. Cash was primarily provided in the six months ended June 30, 2020, by proceeds from the refinancing of the Flatbush Gardens property ($329,000), offset by repayment of the existing loan on the property ($246,000), loan issuance and extinguishment costs ($5,220) and scheduled debt amortization ($1,798); and in the six months ended June 30, 2019, by proceeds from the refinancing of the 250 Livingston Street property ($125,000), offset by repayment of the existing loan on the property ($75,000), loan issuance and extinguishment costs ($2,166) and scheduled debt amortization ($1,416). The Company paid distributions of $8,595 and $8,538 in the six months ended June 30, 2020 and 2019, respectively.
Income Taxes
No provision has been made for income taxes since all of the Company’s operations are held in pass-through entities and accordingly the income or loss of the Company is included in the individual income tax returns of the partners or members.
We elected to be treated as a REIT for U.S. federal income tax purposes, beginning with our first taxable three months ended March 31, 2015. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate tax rates. We believe that we are organized and operate in a manner that will enable us to qualify and be taxed as a REIT and we intend to continue to operate so as to satisfy the requirements for qualification as a REIT for federal income tax purposes.
Inflation
Inflation in the United States has been relatively low in recent years and did not have a significant impact on the results of operations for the Company’s business for the periods reported in the consolidated financial statements. We do not believe that inflation currently poses a material risk to the Company. The leases at our residential rental properties, which comprise approximately 77% of our revenue, are short-term in nature. Our longer-term commercial and retail leases would generally allow us to recover some increased costs in the event of significant inflation.
Although the impact of inflation has been relatively insignificant in recent years, it does remain a factor in the United States economy and could increase the cost of acquiring or replacing properties in the future.
Off-Balance Sheet Arrangements
As of June 30, 2020, we do not have any off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures.
Non-GAAP Financial Measures
In this Quarterly Report on Form 10-Q, we disclose and discuss funds from operations (“FFO”), adjusted funds from operations (“AFFO”), adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”) and net operating income (“NOI”), all of which meet the definition of “non-GAAP financial measure” set forth in Item 10(e) of Regulation S-K promulgated by the SEC.
While management and the investment community in general believe that presentation of these measures provides useful information to investors, neither FFO, AFFO, Adjusted EBITDA, nor NOI should be considered as an alternative to net income (loss) or income from operations as an indication of our performance. We believe that to understand our performance further, FFO, AFFO, Adjusted EBITDA, and NOI should be compared with our reported net income or income from operations and considered in addition to cash flows computed in accordance with GAAP, as presented in our consolidated financial statements.
Funds From Operations and Adjusted Funds From Operations
FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property and impairment adjustments, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT.
AFFO is defined by us as FFO excluding amortization of identifiable intangibles incurred in property acquisitions, straight-line rent adjustments to revenue from long-term leases, amortization costs incurred in originating debt, interest rate cap mark-to-market adjustments, amortization of non-cash equity compensation, acquisition and other costs, loss on modification/extinguishment of debt, gain on involuntary conversion and non-recurring litigation-related expenses, less recurring capital spending.
Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values have historically risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO useful in evaluating potential property acquisitions and measuring operating performance. We further consider AFFO useful in determining funds available for payment of distributions. Neither FFO nor AFFO represent net income or cash flows from operations computed in accordance with GAAP. You should not consider FFO and AFFO to be alternatives to net income (loss) as reliable measures of our operating performance; nor should you consider FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (computed in accordance with GAAP) as measures of liquidity.
Neither FFO nor AFFO measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO and AFFO do not represent cash flows from operating, investing or financing activities computed in accordance with GAAP. Further, FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO and AFFO.
The following table sets forth a reconciliation of FFO and AFFO for the periods presented to net loss, computed in accordance with GAAP (amounts in thousands):
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| FFO |
||||||||||||||||
| Net loss |
$ | (5,505 | ) | $ | (1,158 | ) | $ | (6,311 | ) | $ | (1,291 | ) | ||||
| Real estate depreciation and amortization |
5,872 | 4,590 | 11,430 | 9,139 | ||||||||||||
| FFO |
$ | 367 | $ | 3,432 | $ | 5,119 | $ | 7,848 | ||||||||
| AFFO |
||||||||||||||||
| FFO |
$ | 367 | $ | 3,432 | $ | 5,119 | $ | 7,848 | ||||||||
| Amortization of real estate tax intangible |
121 | 120 | 240 | 239 | ||||||||||||
| Amortization of above- and below-market leases |
(129 | ) | (406 | ) | (228 | ) | (830 | ) | ||||||||
| Straight-line rent adjustments |
192 | 182 | 393 | 816 | ||||||||||||
| Amortization of debt origination costs |
304 | 424 | 608 | 928 | ||||||||||||
| Amortization of LTIP awards |
536 | 704 | 693 | 860 | ||||||||||||
| Loss on modification/extinguishment of debt |
4,228 | 1,771 | 4,228 | 1,771 | ||||||||||||
| Gain on involuntary conversion |
(85 | ) | — | (85 | ) | — | ||||||||||
| Non-recurring litigation-related expenses |
160 | — | 424 | — | ||||||||||||
| Recurring capital spending |
(238 | ) | (127 | ) | (383 | ) | (280 | ) | ||||||||
| AFFO |
$ | 5,456 | $ | 6,100 | $ | 11,009 | $ | 11,352 | ||||||||
Adjusted Earnings Before Interest, Income Taxes, Depreciation and Amortization
We believe that Adjusted EBITDA is a useful measure of our operating performance. We define Adjusted EBITDA as net income (loss) before allocation to non-controlling interests, plus real estate depreciation and amortization, amortization of identifiable intangibles, straight-line rent adjustments to revenue from long-term leases, amortization of non-cash equity compensation, interest expense (net), acquisition and other costs, loss on modification/extinguishment of debt and non-recurring litigation-related expenses, less gain on involuntary conversion.
We believe that this measure provides an operating perspective not immediately apparent from GAAP income from operations or net income (loss). We consider Adjusted EBITDA to be a meaningful financial measure of our core operating performance.
However, Adjusted EBITDA should only be used as an alternative measure of our financial performance. Further, other REITs may use different methodologies for calculating Adjusted EBITDA, and accordingly, our Adjusted EBITDA may not be comparable to that of other REITs.
The following table sets forth a reconciliation of Adjusted EBITDA for the periods presented to net loss, computed in accordance with GAAP (amounts in thousands):
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Adjusted EBITDA |
||||||||||||||||
| Net loss |
$ | (5,505 | ) | $ | (1,158 | ) | $ | (6,311 | ) | $ | (1,291 | ) | ||||
| Real estate depreciation and amortization |
5,872 | 4,590 | 11,430 | 9,139 | ||||||||||||
| Amortization of real estate tax intangible |
121 | 120 | 240 | 239 | ||||||||||||
| Amortization of above- and below-market leases |
(129 | ) | (406 | ) | (228 | ) | (830 | ) | ||||||||
| Straight-line rent adjustments |
192 | 182 | 393 | 816 | ||||||||||||
| Amortization of LTIP awards |
536 | 704 | 693 | 860 | ||||||||||||
| Interest expense, net |
9,979 | 8,210 | 19,767 | 16,484 | ||||||||||||
| Loss on modification/extinguishment of debt |
4,228 | 1,771 | 4,228 | 1,771 | ||||||||||||
| Gain on involuntary conversion |
(85 | ) | — | (85 | ) | — | ||||||||||
| Non-recurring litigation-related expenses |
160 | — | 424 | — | ||||||||||||
| Adjusted EBITDA |
$ | 15,369 | $ | 14,013 | $ | 30,551 | $ | 27,188 | ||||||||
Net Operating Income
We believe that NOI is a useful measure of our operating performance. We define NOI as income from operations plus real estate depreciation and amortization, general and administrative expenses, acquisition and other costs, amortization of identifiable intangibles and straight-line rent adjustments to revenue from long-term leases. We believe that this measure is widely recognized and provides an operating perspective not immediately apparent from GAAP income from operations or net income (loss). We use NOI to evaluate our performance because NOI allows us to evaluate the operating performance of our company by measuring the core operations of property performance and capturing trends in rental housing and property operating expenses. NOI is also a widely used metric in valuation of properties.
However, NOI should only be used as an alternative measure of our financial performance. Further, other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to that of other REITs.
The following table sets forth a reconciliation of NOI for the periods presented to income from operations, computed in accordance with GAAP (amounts in thousands):
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| NOI |
||||||||||||||||
| Income from operations |
$ | 8,617 | $ | 8,823 | $ | 17,599 | $ | 16,964 | ||||||||
| Real estate depreciation and amortization |
5,872 | 4,590 | 11,430 | 9,139 | ||||||||||||
| General and administrative expenses |
2,594 | 2,579 | 4,917 | 4,247 | ||||||||||||
| Amortization of real estate tax intangible |
121 | 120 | 240 | 239 | ||||||||||||
| Amortization of above- and below-market leases |
(129 | ) | (406 | ) | (228 | ) | (830 | ) | ||||||||
| Straight-line rent adjustments |
192 | 182 | 393 | 816 | ||||||||||||
| NOI |
$ | 17,267 | $ | 15,888 | $ | 34,351 | $ | 30,575 | ||||||||
Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K for the year ended December 31, 2019.
Recent Accounting Pronouncements
See Note 3, “Significant Accounting Policies” of our consolidated financial statements for a discussion of recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future income, cash flows and fair value relevant to our financial instruments depends upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, the principal market risk to which we are exposed is the risk related to interest rate fluctuations. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control, contribute to interest rate risk. To manage this risk, we purchased interest rate caps on the $64.7 million of Clover House debt outstanding (prior to the Clover House debt refinancing on November 8, 2019), the $75.0 million of 250 Livingston Street debt outstanding (prior to the 250 Livingston Street debt refinancing on May 31, 2019) and the $19.9 million of 1010 Pacific Street debt outstanding as of June 30, 2020, that would provide interest rate protection if one-month LIBOR exceeds 3.0% for the Clover House loans, 4.0% for the 250 Livingston Street loan and 3.6% for the 1010 Pacific Street loans.
A one percent change in interest rates on our $19.9 million of variable rate debt as of June 30, 2020, would impact annual net income by approximately $0.2 million.
The fair value of the Company’s notes payable was approximately $1,219.5 million and $1,058.1 million as of June 30, 2020, and December 31, 2019, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of June 30, 2020, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDIngs
On July 3, 2017, the Supreme Court of the State of New York (the “Court”) ruled in favor of 41 present or former tenants of apartment units at the Company’s buildings located at 50 Murray Street and 53 Park Place in Manhattan, New York, who brought an action (the “Kuzmich” case) against the Company alleging that they were subject to applicable rent stabilization laws with the result that rental payments charged by the Company exceeded amounts permitted under these laws because the buildings were receiving certain tax abatements under Real Property Tax Law (“RPTL”) 421-g. The Court also awarded the plaintiffs-tenants their attorney’s fees and costs. The Court declared that the plaintiffs-tenants were subject to rent stabilization requirements and referred the matter to a special referee to determine the amount of rent over-charges, if any. On July 18, 2017, the Court, pursuant to the parties’ agreement, stayed the Court’s ruling; the Company subsequently appealed the decision to the Appellate Division, First Department. On January 18, 2018, the Appellate Division unanimously reversed the Court’s ruling and ruled in favor of the Company, holding that the Company acted properly in de-regulating the apartments. The plaintiffs-tenants thereafter moved for leave to appeal to the Court of Appeals, which motion was granted on April 24, 2018. On June 25, 2019, the New York Court of Appeals reversed the Appellate Division’s order and ruled in favor of the plaintiffs-tenants, holding that apartments in buildings receiving RPTL 421-g tax benefits are not subject to luxury deregulation. The Court of Appeals also remitted the matter for further proceedings consistent with its opinion. As a result of the Court of Appeals’ order, Company management believes that payments may be required to be made to the 41 present or former tenants comprising the plaintiff group, that other tenants may attempt to make similar claims, and that the special referee process referred to above will be used to determine the timing and the amount of any claims that must be paid. On July 25, 2019, the Company filed a motion for reargument with the New York Court of Appeals, which was denied on September 12, 2019. On August 13, 2019, the Court, in effect, reinstated its prior order and referred the calculation of rent overcharges and attorneys’ fees for a hearing before a special referee. The special referee’s hearing was scheduled for October 23, 2019. On October 17, 2019, the Company made a motion in the Appellate Division for a stay of the special referee’s hearing pending the Company’s appeal from the August 13 order. On such date, the Appellate Division granted an interim stay of the special referee’s hearing, pending the determination of the underlying motion. On January 7, 2020, the Appellate Division granted the Company’s motion for a full stay of the special referee’s hearing pending appeal. The appeal had been scheduled to be argued during the May 2020 term, but on March 16, 2020, the parties filed a stipulation adjourning the appeal to the September 2020 term. On or about July 13, 2020, the parties filed another stipulation adjourning the appeal to the October 2020 term. On October 24, 2019, the Company filed a Petition for a Writ of Certiorari with the United States Supreme Court, seeking permission to have that Court hear the Company’s appeal on Constitutional grounds from the Court of Appeals’ order. On January 13, 2020, the United States Supreme Court denied the Company’s Petition for a Writ of Certiorari, meaning that the Court of Appeals’ order is final. On November 18, 2019, the same law firm which filed the Kuzmich case above filed a second action involving a separate group of 26 tenants (captioned Crowe et al v 50 Murray Street Acquisition LLC, Supreme Court, New York County, Index No. 161227/19), which action advances the same exact claims as in Kuzmich. The Company’s deadline to answer or otherwise respond to the complaint in Crowe had been extended to June 30, 2020; on such date, the Company filed its answer to the complaint. Pursuant to the court’s rules, on July 16, 2020, the plaintiffs filed an amended complaint; the sole difference as compared to the initial complaint is that seven new plaintiffs-tenants were added to the caption; there were no substantive changes to the complaint’s allegations. On August 5, 2020, the Company filed its answer to the amended complaint. The Company cannot predict what the timing or ultimate resolution of these matters will be, and accordingly, at this time, the Company has not recorded any liability for the potential settlement of these matters.
In addition to the above, the Company is subject to certain legal proceedings and claims arising in connection with its business, including a claim under the Americans with Disabilities Act of 1990 at the 141 Livingston Street property. Management believes, based in part upon consultation with legal counsel, that the ultimate resolution of all such claims will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.
item 1a. RISK FACTORS
The risk factors disclosed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, set forth information relating to various risks and uncertainties that could materially adversely affect our business, financial condition, liquidity and operating results. Such risk factors continue to be relevant to an understanding of our business, financial condition, liquidity and operating results. Moreover, many of the risks described in the risk factors set forth in our Annual Report on Form 10-K may be more likely to impact us as a result of the COVID-19 pandemic.
The risk factor set forth below supplements, and should be read together with, the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
The ongoing COVID-19 pandemic, and measures intended to curb its spread, could have a material adverse impact on our business, financial condition, liquidity and results of operations.
The COVID-19 pandemic, which was declared a pandemic by the World Health Organization in March 2020, has had an ongoing significant adverse impact on local, national, and global economic activity and has contributed to volatility in global financial markets. The pandemic led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to control the spread of the virus, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. Beginning in early May 2020, the United States began to lift certain lockdown restrictions and allow for the reopening of businesses, however, there can be no assurance that these lockdown restrictions will not be re-imposed or that new restrictions will not be put in place.
The impact of the COVID-19 pandemic and measures enacted by governmental authorities to curb its spread have negatively impacted, and may continue to negatively impact, our business in a number of ways, including affecting our tenants’ ability or willingness to pay rents and reducing demand for housing in the New York metropolitan area; for example, the percentage of our tenants’ rent that we collected in the second quarter of 2020 was lower than the collection rate in the first quarter of 2020, prior to the impact of COVID-19, and certain of our commercial tenants have announced temporary closures of their locations and requested rent deferrals during the pandemic. In some cases, we may restructure rent and other obligations under our leases with our tenants on terms that are less favorable to us than those currently in place. In the event of resident nonpayment, default or bankruptcy, we may incur costs in protecting our investment and re-leasing our property. Additionally, local and national authorities may enact, expand or extend certain measures, including moratoriums on or suspensions of eviction proceedings, imposing restrictions on our ability to enforce tenants’ contractual rental obligations. In addition, if governmental restrictions restricting our employees’ and other brokers’ ability to meet with existing and potential residents are re-imposed, such restrictions may disrupt our ability to lease apartments which could adversely impact our rental rate and occupancy levels.
The COVID-19 pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions worldwide. We cannot assure you conditions will not continue to deteriorate as a result of the COVID-19 pandemic. For example, due to the recent increase in the number of COVID-19 cases following the reopening of some portions of the United States, state and local governments may reinstitute lockdowns to control the further spread of the virus. In addition, the continued deterioration of global economic conditions as a result of the COVID-19 pandemic may ultimately decrease occupancy levels and pricing across our portfolio as residents and commercial tenants reduce their spending.
The full extent of the COVID-19 pandemic’s effect on our business, financial condition, liquidity and results of operations will depend on future developments, including the duration, spread and intensity of the outbreak and the measures intended to curb its spread, all of which are uncertain and difficult to predict. As a result of the rapid development and fluidity with which the situation continues to develop, we are unable to estimate the effect of these factors on our business, but if such events lead to a continued significant or prolonged impact on capital or credit markets or economic growth, then our business, financial condition, liquidity and results of operations could be adversely affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 6. EXHIBITS
| Exhibit Number |
Description |
| *31.1 |
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer |
| *31.2 |
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer |
| *32.1 |
|
| *32.2 |
|
| **101.INS | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| **101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
| **101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| **101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
| **101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| **101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
| **104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Filed herewith
**Submitted electronically with the report
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned.
|
|
Clipper realty inc. |
|
|
|
|
|
| August 10, 2020 |
By: |
/s/ David Bistricer |
|
|
|
David Bistricer |
| Co-Chairman and Chief Executive Officer | ||
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David Bistricer, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Clipper Realty Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
|
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: |
August 10, 2020 |
By: |
/s/ David Bistricer |
|
David Bistricer |
|||
|
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Michael C. Frenz, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Clipper Realty Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
|
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: |
August 10, 2020 |
By: |
/s/ Michael C. Frenz |
|
Michael C. Frenz |
|||
|
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of Clipper Realty Inc. (the "Company") for the period ended June 30, 2020, as filed with the Securities and Exchange Commission (the "Report"), the undersigned, as the Chief Executive Officer of the Company, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: |
August 10, 2020 |
Signed: |
/s/ David Bistricer |
|
David Bistricer |
|||
|
Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of Clipper Realty Inc. (the "Company") for the period ended June 30, 2020, as filed with the Securities and Exchange Commission (the "Report"), the undersigned, as the Chief Financial Officer of the Company, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: |
August 10, 2020 |
Signed: |
/s/ Michael C. Frenz |
|
Michael C. Frenz |
|||
|
Chief Financial Officer |
Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended |
|---|---|---|
Jun. 30, 2020 |
Dec. 31, 2019 |
|
| Allowance for doubtful accounts | $ 4,309 | $ 3,361 |
| Unamortized loan costs | $ 11,380 | $ 11,528 |
| Preferred stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
| Preferred stock, shares issued (in shares) | 0 | 0 |
| Preferred stock, shares outstanding (in shares) | 0 | 0 |
| Preferred stock, shares authorized (in shares) | 100,000 | 100,000 |
| Common stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
| Common stock, shares authorized (in shares) | 500,000,000 | 500,000,000 |
| Common stock, share outstanding (in shares) | 17,814,672 | 17,814,672 |
| Series A Cumulative Non-Voting Preferred Stock [Member] | ||
| Preferred stock, shares authorized (in shares) | 140 | 140 |
| Preferred stock, dividend rate, percentage | 12.50% | 12.50% |
Consolidated Statements of Operations (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2019 |
Jun. 30, 2020 |
Jun. 30, 2019 |
|
| REVENUES | ||||
| TOTAL REVENUES | $ 30,729 | $ 28,446 | $ 61,615 | $ 56,098 |
| OPERATING EXPENSES | ||||
| Property operating expenses | 6,868 | 6,747 | 14,027 | 14,310 |
| Real estate taxes and insurance | 6,778 | 5,707 | 13,642 | 11,438 |
| General and administrative | 2,594 | 2,579 | 4,917 | 4,247 |
| Depreciation and amortization | 5,872 | 4,590 | 11,430 | 9,139 |
| TOTAL OPERATING EXPENSES | 22,112 | 19,623 | 44,016 | 39,134 |
| INCOME FROM OPERATIONS | 8,617 | 8,823 | 17,599 | 16,964 |
| Interest expense, net | (9,979) | (8,210) | (19,767) | (16,484) |
| Loss on modification/extinguishment of debt | (4,228) | (1,771) | (4,228) | (1,771) |
| Gain on involuntary conversion | 85 | 0 | 85 | 0 |
| Net loss | (5,505) | (1,158) | (6,311) | (1,291) |
| Net loss attributable to non-controlling interests | 3,283 | 691 | 3,763 | 770 |
| Net loss attributable to common stockholders | $ (2,222) | $ (467) | $ (2,548) | $ (521) |
| Basic and diluted net loss per share (in dollars per share) | $ (0.13) | $ (0.03) | $ (0.15) | $ (0.04) |
| Residential Rental [Member] | ||||
| REVENUES | ||||
| TOTAL REVENUES | $ 23,679 | $ 21,146 | $ 47,397 | $ 41,918 |
| Commercial Real Estate [Member] | ||||
| REVENUES | ||||
| TOTAL REVENUES | $ 7,050 | $ 7,300 | $ 14,218 | $ 14,180 |
Consolidated Statements of Equity (Unaudited) - USD ($) $ in Thousands |
Common Stock [Member] |
Additional Paid-in Capital [Member] |
Retained Earnings [Member] |
Parent [Member] |
Noncontrolling Interest [Member] |
Total |
|---|---|---|---|---|---|---|
| Balance (in shares) at Dec. 31, 2018 | 17,812,755 | |||||
| Balance at Dec. 31, 2018 | $ 178 | $ 92,945 | $ (27,941) | $ 65,182 | $ 96,303 | $ 161,485 |
| Amortization of LTIP grants | 0 | 156 | 156 | |||
| Dividends and distributions | 0 | 0 | (1,692) | (1,692) | (4,261) | |
| Dividends and distributions | (2,569) | |||||
| Net loss | 0 | (54) | (54) | (79) | (133) | |
| Reallocation of noncontrolling interests | 0 | 35 | 0 | 35 | (35) | 0 |
| Amortization of LTIP grants | $ 0 | 156 | 156 | |||
| Balance (in shares) at Mar. 31, 2019 | 17,812,755 | |||||
| Balance at Mar. 31, 2019 | $ 178 | 92,980 | (29,687) | 63,471 | 93,776 | 157,247 |
| Balance (in shares) at Dec. 31, 2018 | 17,812,755 | |||||
| Balance at Dec. 31, 2018 | $ 178 | 92,945 | (27,941) | 65,182 | 96,303 | 161,485 |
| Net loss | (1,291) | |||||
| Balance (in shares) at Jun. 30, 2019 | 17,814,672 | |||||
| Balance at Jun. 30, 2019 | $ 178 | 93,235 | (31,847) | 61,566 | 90,950 | 152,516 |
| Balance (in shares) at Mar. 31, 2019 | 17,812,755 | |||||
| Balance at Mar. 31, 2019 | $ 178 | 92,980 | (29,687) | 63,471 | 93,776 | 157,247 |
| Amortization of LTIP grants | 0 | 0 | 0 | 0 | 704 | 704 |
| Dividends and distributions | 0 | 0 | (1,693) | (1,693) | (4,277) | |
| Dividends and distributions | (2,584) | |||||
| Net loss | 0 | 0 | (467) | (467) | (691) | (1,158) |
| Reallocation of noncontrolling interests | $ 0 | 255 | 0 | 255 | (255) | 0 |
| Issuance of common stock (in shares) | 1,917 | |||||
| Issuance of common stock | $ 0 | 25 | 0 | 25 | 0 | 25 |
| Redemption of LTIP grants | 0 | (25) | 0 | (25) | 0 | (25) |
| Amortization of LTIP grants | $ 0 | 0 | 0 | 0 | 704 | 704 |
| Balance (in shares) at Jun. 30, 2019 | 17,814,672 | |||||
| Balance at Jun. 30, 2019 | $ 178 | 93,235 | (31,847) | 61,566 | 90,950 | 152,516 |
| Balance (in shares) at Dec. 31, 2019 | 17,814,672 | |||||
| Balance at Dec. 31, 2019 | $ 178 | 93,431 | (36,375) | 57,234 | 84,549 | 141,783 |
| Amortization of LTIP grants | 0 | 158 | 158 | |||
| Dividends and distributions | 0 | 0 | (1,692) | (1,692) | (4,276) | |
| Dividends and distributions | (2,584) | |||||
| Net loss | 0 | (326) | (326) | (480) | (806) | |
| Reallocation of noncontrolling interests | 0 | 30 | 0 | 30 | (30) | 0 |
| Amortization of LTIP grants | $ 0 | 158 | 158 | |||
| Balance (in shares) at Mar. 31, 2020 | 17,814,672 | |||||
| Balance at Mar. 31, 2020 | $ 178 | 93,461 | (38,393) | 55,246 | 81,613 | 136,859 |
| Balance (in shares) at Dec. 31, 2019 | 17,814,672 | |||||
| Balance at Dec. 31, 2019 | $ 178 | 93,431 | (36,375) | 57,234 | 84,549 | 141,783 |
| Net loss | (6,311) | |||||
| Balance (in shares) at Jun. 30, 2020 | 17,814,672 | |||||
| Balance at Jun. 30, 2020 | $ 178 | 93,626 | (42,307) | 51,497 | 76,073 | 127,570 |
| Balance (in shares) at Mar. 31, 2020 | 17,814,672 | |||||
| Balance at Mar. 31, 2020 | $ 178 | 93,461 | (38,393) | 55,246 | 81,613 | 136,859 |
| Amortization of LTIP grants | 0 | 0 | 0 | 0 | 535 | 535 |
| Dividends and distributions | 0 | 0 | (1,692) | (1,692) | (4,319) | |
| Dividends and distributions | (2,627) | |||||
| Net loss | 0 | 0 | (2,222) | (2,222) | (3,283) | (5,505) |
| Reallocation of noncontrolling interests | 0 | 165 | 0 | 165 | (165) | 0 |
| Amortization of LTIP grants | $ 0 | 0 | 0 | 0 | 535 | 535 |
| Balance (in shares) at Jun. 30, 2020 | 17,814,672 | |||||
| Balance at Jun. 30, 2020 | $ 178 | $ 93,626 | $ (42,307) | $ 51,497 | $ 76,073 | $ 127,570 |
Consolidated Statements of Cash Flows (Unaudited) (Parentheticals) - USD ($) $ in Thousands |
6 Months Ended | |
|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2019 |
|
| Capitalized interest | $ 679 | $ 3,761 |
Note 1 - Organization |
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| Notes to Financial Statements | |||||||||||||||||||||||||
| Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block] |
1. Organization
The Company was organized in the state of Maryland on July 7, 2015. On August 3, 2015, we completed certain formation transactions and the sale of shares of common stock in a private offering. We contributed the net proceeds of the private offering to Clipper Realty L.P., our operating partnership subsidiary (the “Operating Partnership”), in exchange for units in the Operating Partnership. The Operating Partnership in turn contributed such net proceeds to the limited liability companies (“LLCs”) that comprised the predecessor of the Company (the “Predecessor”) in exchange for Class A LLC units in such LLCs and became the managing member of such LLCs. The owners of the LLCs exchanged their interests for Class B LLC units and an equal number of special, non-economic, voting stock in the Company. The Class B LLC units, together with the special voting shares, are convertible into common shares of the Company on a -for-one basis and are entitled to distributions.
On June 27, 2016, the Operating Partnership acquired the Aspen property at 1955 First Avenue in Manhattan, New York.
On February 9, 2017, the Company priced an initial public offering of 6,390,149 primary shares of its common stock (including the exercise of the over-allotment option, which closed on March 10, 2017) at a price of $13.50 per share (the “IPO”). The net proceeds of the IPO were approximately $78.7 million. We contributed the proceeds of the IPO to the Operating Partnership, in exchange for units in the Operating Partnership.
On May 9, 2017, the Company completed the purchase of 107 Columbia Heights (subsequently renovated and rebranded “Clover House”), a 158-unit apartment community located in Brooklyn Heights, New York.
On October 27, 2017, the Company completed the acquisition of an 82-unit residential property at 10 West 65th Street in the Upper West Side neighborhood of Manhattan, New York.
On November 8, 2019, the Company completed the acquisition of 1010 Pacific Street located in the Prospect Heights neighborhood of Brooklyn, New York; the Company plans to redevelop the property as a 175-unit residential building.
As of June 30, 2020, the properties owned by the Company consist of the following (collectively, the “Properties”):
During 2019, we entered into a joint venture in which we own a 50% interest through which we are paying certain legal and advisory expenses in connection with various rent laws and ordinances which govern certain of our properties. During the three and six months ended June 30, 2020, the Company incurred $0.1 million and $0.3 million, respectively, of such expenses, which are recorded as part of general and administrative in the Condensed Consolidated Statements of Operations, and the Company has fulfilled its commitment to the joint venture.
The operations of Clipper Realty Inc. and its consolidated subsidiaries are carried on primarily through the Operating Partnership. The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code (the “Code”). The Company is the sole general partner of the Operating Partnership and the Operating Partnership is the sole managing member of the LLCs that comprised the Predecessor.
At June 30, 2020, the Company’s interest, through the Operating Partnership, in the LLCs that own the properties generally entitles it to 40.4% of the aggregate cash distributions from, and the profits and losses of, the LLCs.
The Company determined that the Operating Partnership and the LLCs are variable interest entities (“VIEs”) and that the Company was the primary beneficiary. The assets and liabilities of these VIEs represented substantially all of the Company’s assets and liabilities. |
Note 2 - Issuance of Common Stock |
6 Months Ended |
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Jun. 30, 2020 | |
| Notes to Financial Statements | |
| Sale of Common Stock and Formation Transactions [Text Block] |
2. Issuance of Common Stock
On April 9, 2019, the Company issued 1,917 primary shares of its common stock to one of our directors, in connection with the conversion of vested long-term incentive plan (“LTIP”) units on a one-for-one basis. The Company did receive any proceeds from the issuance. |
Note 3 - Significant Accounting Policies |
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| Significant Accounting Policies [Text Block] |
3. Significant Accounting Policies
Segments
At June 30, 2020, the Company had reportable operating segments, Residential Rental Properties and Commercial Rental Properties. The Company’s chief operating decision maker may review operational and financial data on a property basis.
Basis of Consolidation
The accompanying consolidated financial statements of the Company are prepared in accordance with GAAP. The effect of all intercompany balances has been eliminated. The consolidated financial statements include the accounts of all entities in which the Company has a controlling interest. The ownership interests of other investors in these entities are recorded as non-controlling interest.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from these estimates.
Investment in Real Estate
Real estate assets held for investment are carried at historical cost and consist of land, buildings and improvements, furniture, fixtures and equipment. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as betterment or the life of the related asset will be substantially extended beyond the original life expectancy.
In accordance with ASU 2017-01, "Business Combinations – Clarifying the Definition of a Business,” the Company evaluates each acquisition of real estate or in-substance real estate to determine if the integrated set of assets and activities acquired meets the definition of a business and needs to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:
An acquired process is considered substantive if:
Generally, the Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.
Upon acquisition of real estate, the Company assesses the fair values of acquired tangible and intangible assets including land, buildings, tenant improvements, above-market and below-market leases, in-place leases and any other identified intangible assets and assumed liabilities. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their relative fair values. In estimating fair value of tangible and intangible assets acquired, the Company assesses and considers fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates, estimates of replacement costs, net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
The Company records acquired above-market and below-market lease values initially based on the present value, using a discount rate which reflects the risks associated with the leases acquired based on the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed renewal options for the below-market leases. Other intangible assets acquired include amounts for in-place lease values and tenant relationship values (if any) that are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A property’s value is impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, a write-down is recorded and measured by the amount of the difference between the carrying value of the asset and the fair value of the asset. In the event that the Company obtains proceeds through an insurance policy due to impairment, the proceeds are offset against the write-down in calculating gain/loss on disposal of assets. Management of the Company does not believe that any of its properties within the portfolio are impaired as of June 30, 2020.
For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the assets less estimated cost to sell is less than the carrying value of the assets. Properties classified as real estate held-for-sale generally represent properties that are actively marketed or contracted for sale with closing expected to occur within the next twelve months. Real estate held-for-sale is carried at the lower of cost, net of accumulated depreciation, or fair value less cost to sell, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held-for-sale properties are charged to expense as incurred. Expenditures for improvements, renovations and replacements related to held-for-sale properties are capitalized at cost. Depreciation is not recorded on real estate held-for-sale.
If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balances of the related intangibles are written off. The tenant improvements and origination costs are amortized to expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).
Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
The capitalized above-market lease values are amortized as a reduction to base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. The value of in-place leases is amortized to expense over the remaining initial terms of the respective leases.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and in banks, plus all short-term investments with a maturity of three months or less when purchased. The Company maintains some of its cash in bank deposit accounts, which, at times, may exceed the federally insured limit. No losses have been experienced related to such accounts.
Restricted Cash
Restricted cash generally consists of escrows for future real estate taxes and insurance expenditures, repairs and capital improvements and security deposits.
Tenant and Other Receivables and Allowance for Doubtful Accounts
Tenant and other receivables are comprised of amounts due for monthly rents and other charges. The Company periodically performs a detailed review of amounts due from tenants to determine if accounts receivable balances are impaired based on factors affecting the collectability of those balances. If a tenant fails to make contractual payments beyond any allowance, the Company may recognize additional bad debt expense in future periods.
Deferred Costs
Deferred lease costs consist of fees incurred to initiate and renew operating leases. Lease costs are being amortized using the straight-line method over the terms of the respective leases.
Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are amortized over the term of the financing and are recorded in interest expense in the consolidated statements of operations. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions which do not close are expensed in the period the financing transaction is terminated.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net loss adjusted for changes in unrealized gains and losses, reported in equity, for financial instruments required to be reported at fair value under GAAP. For the three and six months ended June 30, 2020 and 2019, the Company did not own any financial instruments for which the change in value was not reported in net loss accordingly and its comprehensive loss was its net loss as presented in the consolidated statements of operations.
Revenue Recognition
Rental revenue for commercial leases is recognized on a straight-line basis over the terms of the respective leases. Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Rental income attributable to residential leases and parking is recognized as earned, which is not materially different from the straight-line basis. Leases entered into by residents for apartment units are generally for one-year terms, renewable upon consent of both parties on an annual or monthly basis.
Reimbursements for operating expenses due from tenants pursuant to their lease agreements are recognized as revenue in the period the applicable expenses are incurred. These costs generally include real estate taxes, utilities, insurance, common area maintenance costs and other recoverable costs and are recorded as part of commercial rental income in the condensed consolidated statements of operations.
Stock-based Compensation
The Company accounts for stock-based compensation pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, “Compensation — Stock Compensation.” As such, all equity-based awards are reflected as compensation expense in the Company’s consolidated statements of operations over their vesting period based on the fair value at the date of grant.
In April 2020, the Company granted 450,623 LTIP units with a weighted average grant date fair value of $4.75 per unit.
In June 2020, the Company granted 78,681 LTIP units with a weighted average grant date fair value of $8.10 per unit.
At June 30, 2020 and December 31, 2019, there were 1,410,371 and 881,067 LTIP units outstanding, respectively, with a weighted average grant date fair value of $9.90 and $12.70 per unit, respectively. As of June 30, 2020 and December 31, 2019, there was $3.5 million and $1.4 million, respectively, of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under share incentive plans. As of June 30, 2020, the weighted average period over which the unrecognized compensation expense will be recorded is approximately 1.1 years.
Income Taxes
The Company elected to be taxed and to operate in a manner that will allow it to qualify as a REIT under the Code. To qualify as a REIT, the Company is required to distribute dividends equal to at least 90% of the REIT taxable income (computed without regard to the dividends paid deduction and net capital gains) to its stockholders, and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided the Company qualifies for taxation as a REIT, it is generally not subject to U.S. federal corporate-level income tax on the earnings distributed currently to its stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and any applicable alternative minimum tax. In addition, the Company may not be able to re-elect as a REIT for the four subsequent taxable years. The entities comprising the Predecessor are limited liability companies and are treated as pass-through entities for income tax purposes. Accordingly, no provision has been made for federal, state or local income or franchise taxes in the accompanying consolidated financial statements.
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act was enacted to provide economic relief to companies and individuals in response to the COVID-19 pandemic. Included in the CARES Act are tax provisions which increase allowable interest expense deductions for 2019 and 2020 and increase the ability for taxpayers to use net operating losses. While we do not expect these provisions to have a material impact on the Company’s taxable income or tax liabilities, we continue to analyze the provisions of the CARES Act and related guidance as it is published.
In accordance with FASB ASC Topic 740, the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that, if successfully challenged, could result in a material impact on its or the Predecessor’s financial position or results of operations. The prior three years’ income tax returns are subject to review by the Internal Revenue Service.
Fair Value Measurements
Refer to Note 9, “Fair Value of Financial Instruments”.
Derivative Financial Instruments
FASB derivative and hedging guidance establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by FASB guidance, the Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation.
Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecast transactions, are considered cash flow hedges. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss) (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in the fair value or cash flows of the derivative hedging instrument with the changes in the fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value would be recognized in earnings. As of June 30, 2020, the Company has no derivatives for which it applies hedge accounting.
Loss Per Share
Basic and diluted loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding. As of June 30, 2020 and 2019, the Company had unvested LTIP units which provide for non-forfeitable rights to dividend-equivalent payments. Accordingly, these unvested LTIP units are considered participating securities and are included in the computation of basic and diluted loss per share pursuant to the two-class method. The Company did have dilutive securities as of June 30, 2020 or 2019.
The effect of the conversion of the 26,317 Class B LLC units outstanding is not reflected in the computation of basic and diluted loss per share, as the effect would be anti-dilutive. The net loss allocable to such units is reflected as non-controlling interests in the accompanying consolidated financial statements.
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (unaudited):
Recently Issued Pronouncements
In April 2020, FASB issued a Staff Q & A to provide interpretive guidance for lease concessions related to the effects of the COVID-19 pandemic. The Company did not provide any such concessions to its tenants as a result of COVID-19 during the three months ended June 30, 2020; therefore, this guidance did not have a material effect on its consolidated financial statements. The Company continues to evaluate the effect that this guidance may have on its consolidated financial statements.
In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (Topic 848). ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying current GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 is effective beginning on March 12, 2020, and may be applied prospectively to such transactions through December 31, 2022. We will apply ASU 2020-04 prospectively as and when we enter into transactions to which this guidance applies.
In March 2019, FASB issued ASU 2019-01, “Leases (Topic 842), Codification Improvements.” There are three codification updates to Topic 842 covered by this ASU: Issue 1 provides guidance on how to compute fair value of leased items for lessors who are non-dealers or manufacturers; Issue 2 relates to cash flow presentation for lessors of sales-type and direct financing leases; and Issue 3 clarifies that certain transition disclosures will only be required in annual disclosures.
In December 2018, FASB issued ASU 2018-20, “Leases (Topic 842), Narrow-Scope Improvements for Lessors.” This ASU modifies ASU 2016-02 to permit lessors, as an accounting policy election, not to evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Consequently, a lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures (includes sales, use, value-added, and some excise taxes and excludes real estate taxes). The Company has elected not to evaluate whether the aforementioned costs are lessor or lessee costs. This ASU also provides that certain lessor costs require lessors to exclude from variable payments, and therefore revenue, specifically lessor costs paid by lessees directly to third parties. The amendments also require lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue.
In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which prescribes a single, common revenue standard that supersedes nearly all existing revenue recognition guidance under U.S. GAAP, including most industry-specific requirements. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 outlines a five-step model to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. The Company’s revenues are primarily derived from rental income, which is scoped out from this standard and is currently accounted for in accordance with ASC Topic 840, Leases. The Company adopted this standard effective January 1, 2019, using the modified retrospective approach, applying the provisions to open contracts as of the date of adoption. The adoption of this standard did not have a material impact on the timing or amounts of the Company’s revenues.
In February 2016, FASB issued ASU 2016-02, “Leases.” ASU 2016-02 supersedes the current accounting for leases and while retaining two distinct types of leases, finance and operating, requires lessees to recognize most leases on their balance sheets and makes targeted changes to lessor accounting. In July 2018, FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which provides minor clarifications and corrections to ASU 2016-02, “Leases (Topic 842).” Further, in July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements.” This amendment provides a new practical expedient that allows lessors, by class of underlying asset, to avoid separating lease and associated non-lease components within a contract if certain criteria are met: (i) the timing and pattern of transfer for the non-lease component and the associated lease component are the same and (ii) the stand-alone lease component would be classified as an operating lease if accounted for separately. These pronouncements are effective for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company will adopt this standard effective January 1, 2022 and is currently evaluating the impact of adoption on its consolidated financial statements. As lessor, the Company expects that the adoption of ASU 2016-02 (as amended by subsequent ASUs) will not change the timing of revenue recognition of the Company’s rental revenues. As lessee, the Company is party to certain office equipment leases with future payment obligations for which the Company expects to record right-of-use assets and lease liabilities at the present value of the remaining minimum rental payments upon adoption of this standard.
In August 2018, FASB issued ASU 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,” which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. This guidance is effective in fiscal years beginning after December 15, 2019 with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s financial statement reporting.
In June 2018, FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments provide specific guidance for transactions for acquiring goods and services from nonemployees and specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (i) financing to the issuer or (ii) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, “Revenue from Contracts with Customers.” The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements as it has not historically issued share-based payments in exchange for goods or services to be consumed within its operations.
In February 2017, FASB issued ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20),” to add guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. ASU 2017-05 reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. ASU 2017-05 is effective for the Company for its annual reporting beginning after December 15, 2018, including interim reporting periods beginning after December 15, 2019. The Company adopted this standard effective January 1, 2019. The adoption of this standard did not have a material impact on our consolidated financial statements. |
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Note 4 - Acquisitions |
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4. Acquisitions
On November 8, 2019, the Company acquired the 1010 Pacific Street property, a parcel of land, for $31,129, including acquisition costs of $129.
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Note 5 - Deferred Costs and Intangible Assets |
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5. Deferred Costs and Intangible Assets
Deferred costs and intangible assets consist of the following:
Amortization of deferred costs, lease origination costs and in-place lease intangible assets was $279 and $196 for the three months ended June 30, 2020 and 2019, respectively, and $352 and $384 for the six months ended June 30, 2020 and 2019, respectively; $283 of fully amortized lease origination costs was written off during the six months ended June 30, 2020. Amortization of real estate tax abatements of $121 and $120 for the three months ended June 30, 2020 and 2019, respectively, and $240 and $239 for the six months ended June 30, 2020 and 2019, respectively, is included in real estate taxes and insurance in the consolidated statements of operations. Amortization of above-market leases of $0 and $29 for the three months ended June 30, 2020 and 2019, respectively, and $30 and $59 for the six months ended June 30, 2020 and 2019, respectively, is included in commercial rental income in the consolidated statements of operations. $444 of fully amortized above-market leases was written off during the six months ended June 30, 2020.
Deferred costs and intangible assets as of June 30, 2020, amortize in future years as follows:
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Note 6 - Below-market Leases, Net |
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| Below Market Lease Intangibles Disclosure [Text Block] |
6. Below-Market Leases, Net
The Company’s below-market lease intangibles liabilities are as follows:
Rental income included amortization of below-market leases of $129 and $435 for the three months ended June 30, 2020 and 2019, respectively, and $258 and $889 for the six months ended June 30, 2020 and 2019, respectively.
Below-market leases as of June 30, 2020, amortize in future years as follows:
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Note 7 - Notes Payable |
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| Long-term Debt [Text Block] |
7. Notes Payable
The mortgages, loans and mezzanine notes payable collateralized by the properties, or the Company’s interest in the entities that own the properties and assignment of leases, are as follows:
(a) On May 8, 2020, the Company refinanced the $246,000 mortgage note at Flatbush Gardens with a $329 million, -year secured first mortgage note with NYCB. The note matures on June 1, 2032, and bears interest at 3.125% through May 2027 and thereafter at the prime rate plus 2.75%, subject to an option to fix the rate. The note requires interest-only payments through May 2027, and monthly principal and interest payments thereafter based on a 30-year amortization schedule. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note prior to the maturity date, subject to certain prepayment premiums, as defined.
(b) The $125,000 mortgage note agreement with Citi Real Estate Funding Inc., entered into on May 31, 2019, matures on June 6, 2029, bears interest at 3.63% and requires interest-only payments for the entire term. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note within months of maturity, without a prepayment premium.
(c) The $79,500 mortgage note agreement with NYCB matures on June 1, 2028, and bears interest at 3.875%. The note required interest-only payments through June 2017, and monthly principal and interest payments of $374 thereafter based on a 30-year amortization schedule.
(d) The $360,000 loan with Deutsche Bank, entered into on February 21, 2018, matures on March 6, 2028, bears interest at 4.506% and requires interest-only payments for the entire term. The Company has the option to prepay all (but not less than all) of the unpaid balance of the loan prior to the maturity date, subject to a prepayment premium if it occurs prior to December 6, 2027.
(e) The $70,000 mortgage note agreement with Capital One Multifamily Finance LLC matures on July 1, 2028, and bears interest at 3.68%. The note required interest-only payments through July 2017, and monthly principal and interest payments of $321 thereafter based on a 30-year amortization schedule. The Company has the option to prepay the note prior to the maturity date, subject to a prepayment premium.
(f) The $82,000 mortgage note agreement with MetLife Investment Management, entered into on November 8, 2019, matures on December 1, 2029, bears interest at 3.53% and requires interest-only payments for the entire term. The Company has the option, commencing on January 1, 2024, to prepay the note prior to the maturity date, subject to a prepayment premium if it occurs prior to September 2, 2029.
(g) On October 27, 2017, the Company entered into a $34,350 mortgage note agreement with NYCB, related to the 10 West 65th Street acquisition. The note matures on November 1, 2027, and bears interest at 3.375% through October 2022 and thereafter at the prime rate plus 2.75%, subject to an option to fix the rate. The note required interest-only payments through October 2019, and monthly principal and interest payments of $152 thereafter based on a 30-year amortization schedule. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note prior to the maturity date, subject to certain prepayment premiums, as defined.
(h) On December 24, 2019, the Company entered into a $18,600 mortgage note agreement with CIT Bank, N.A., related to the 1010 Pacific Street acquisition. The Company also entered into a pre-development bridge loan secured by the property with the same lender that will provide up to $2,987 for eligible pre-development and carrying costs, of which $1,280 was drawn as of June 30, 2020. The notes mature on December 24, 2020, are subject to a -year extension option, require interest-only payments and bear interest at one-month LIBOR (with a floor of 1.25%) plus 3.60% (4.85% as of June 30, 2020).
The following table summarizes principal payment requirements under the terms of the mortgage notes as of June 30, 2020:
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Note 8 - Rental Income Under Operating Leases |
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| Lessor, Operating Leases [Text Block] |
8. Rental Income under Operating Leases
The Company’s commercial properties are leased to commercial tenants under operating leases with fixed terms of varying lengths. As of June 30, 2020, the minimum future cash rents receivable (excluding tenant reimbursements for operating expenses) under non-cancelable operating leases for the commercial tenants in each of the next five years and thereafter are as follows:
The Company has commercial leases with the City of New York that comprised approximately 17% of total revenues for each of the three and six months ended June 30, 2020, and 19% of total revenues for each of the three and six months ended June 30, 2019. |
Note 9 - Fair Value of Financial Instruments |
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| Fair Value Disclosures [Text Block] |
9. Fair Value of Financial Instruments
GAAP requires the measurement of certain financial instruments at fair value on a recurring basis. In addition, GAAP requires the measure of other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by assigning weights to the various valuation sources.
Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
The financial assets and liabilities in the consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, interest rate caps, accounts payable and accrued liabilities, security deposits and notes payable. The carrying amount of cash and cash equivalents, restricted cash, receivables, accounts payable and accrued liabilities, and security deposits reported in the consolidated balance sheets approximates fair value due to the short-term nature of these instruments. The fair value of notes payable, which are classified as Level 2, is estimated by discounting the contractual cash flows of each debt instrument to their present value using adjusted market interest rates.
The carrying amount and estimated fair value of the notes payable are as follows:
The Company purchased interest rate caps in connection with the 250 Livingston Street loan obtained on December 6, 2018, and the 1010 Pacific Street loan obtained on December 24, 2019. The fair value of the interest rate caps, which are classified as Level 2, is estimated using market inputs and credit valuation inputs.
The estimated fair values of the interest rate caps are as follows:
These interest rate caps were not designated as hedges. Accordingly, changes in fair value of the 250 Livingston Street instrument are recognized in earnings. Changes in fair value of the Clover House instrument which matured and was written off in May 2020, were recognized in real estate under development during construction and are recognized in earnings following completion of development. Changes in fair value of the 1010 Pacific Street instrument are recognized in real estate under development. Fair value of the 250 Livingston Street instrument did not change during each of the three and six months ended June 30, 2020 and 2019. Fair value of the Clover House instrument did not change during each of the three and six months ended June 30, 2020; decrease in fair value of the Clover House instrument of $2 and $24 for the respective three and six months ended June 30, 2019, is capitalized to real estate under development. Decrease in fair value of the 1010 Pacific Street instrument of $0 and $14 for the respective three and six months ended June 30, 2020, is capitalized to real estate under development.
The above disclosures regarding fair value of financial instruments are based on pertinent information available as of June 30, 2020, and December 31, 2019, respectively. Although the Company is not aware of any factors that would significantly affect the reasonableness of the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented herein. |
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Note 10 - Commitments and Contingencies |
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| Commitments and Contingencies Disclosure [Text Block] |
10. Commitments and Contingencies
Legal
On July 3, 2017, the Supreme Court of the State of New York (the “Court”) ruled in favor of 41 present or former tenants of apartment units at the Company’s buildings located at 50 Murray Street and 53 Park Place in Manhattan, New York, who brought an action (the “Kuzmich” case) against the Company alleging that they were subject to applicable rent stabilization laws with the result that rental payments charged by the Company exceeded amounts permitted under these laws because the buildings were receiving certain tax abatements under Real Property Tax Law (“RPTL”) 421-g. The Court also awarded the plaintiffs-tenants their attorney’s fees and costs. The Court declared that the plaintiffs-tenants were subject to rent stabilization requirements and referred the matter to a special referee to determine the amount of rent over-charges, if any. On July 18, 2017, the Court, pursuant to the parties’ agreement, stayed the Court’s ruling; the Company subsequently appealed the decision to the Appellate Division, First Department. On January 18, 2018, the Appellate Division unanimously reversed the Court’s ruling and ruled in favor of the Company, holding that the Company acted properly in de-regulating the apartments. The plaintiffs-tenants thereafter moved for leave to appeal to the Court of Appeals, which motion was granted on April 24, 2018. On June 25, 2019, the New York Court of Appeals reversed the Appellate Division’s order and ruled in favor of the plaintiffs-tenants, holding that apartments in buildings receiving RPTL 421-g tax benefits are not subject to luxury deregulation. The Court of Appeals also remitted the matter for further proceedings consistent with its opinion. As a result of the Court of Appeals’ order, Company management believes that payments may be required to be made to the 41 present or former tenants comprising the plaintiff group, that other tenants may attempt to make similar claims, and that the special referee process referred to above will be used to determine the timing and the amount of any claims that must be paid. On July 25, 2019, the Company filed a motion for reargument with the New York Court of Appeals, which was denied on September 12, 2019. On August 13, 2019, the Court, in effect, reinstated its prior order and referred the calculation of rent overcharges and attorneys’ fees for a hearing before a special referee. The special referee’s hearing was scheduled for October 23, 2019. On October 17, 2019, the Company made a motion in the Appellate Division for a stay of the special referee’s hearing pending the Company’s appeal from the August 13 order. On such date, the Appellate Division granted an interim stay of the special referee’s hearing, pending the determination of the underlying motion. On January 7, 2020, the Appellate Division granted the Company’s motion for a full stay of the special referee’s hearing pending appeal. The appeal had been scheduled to be argued during the May 2020 term, but on March 16, 2020, the parties filed a stipulation adjourning the appeal to the September 2020 term. On or about July 13, 2020, the parties filed another stipulation adjourning the appeal to the October 2020 term. On October 24, 2019, the Company filed a Petition for a Writ of Certiorari with the United States Supreme Court, seeking permission to have that Court hear the Company’s appeal on Constitutional grounds from the Court of Appeals’ order. On January 13, 2020, the United States Supreme Court denied the Company’s Petition for a Writ of Certiorari, meaning that the Court of Appeals’ order is final. On November 18, 2019, the same law firm which filed the Kuzmich case above filed a second action involving a separate group of 26 tenants (captioned Crowe et al v 50 Murray Street Acquisition LLC, Supreme Court, New York County, Index No. 161227/19), which action advances the same exact claims as in Kuzmich. The Company’s deadline to answer or otherwise respond to the complaint in Crowe had been extended to June 30, 2020; on such date, the Company filed its answer to the complaint. Pursuant to the court’s rules, on July 16, 2020, the plaintiffs filed an amended complaint; the sole difference as compared to the initial complaint is that seven new plaintiffs-tenants were added to the caption; there were no substantive changes to the complaint’s allegations. On August 5, 2020, the Company filed its answer to the amended complaint. The Company cannot predict what the timing or ultimate resolution of these matters will be, and accordingly, at this time, the Company has not recorded any liability for the potential settlement of these matters.
In addition to the above, the Company is subject to certain legal proceedings and claims arising in connection with its business, including a claim under the Americans with Disabilities Act of 1990 at the 141 Livingston Street property. Management believes, based in part upon consultation with legal counsel, that the ultimate resolution of all such claims will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.
Commitments
The Company is obligated to provide parking availability through August 2025 under a lease with a tenant at the 250 Livingston Street property; the current cost to the Company is approximately $205 per year.
Contingencies
The COVID-19 pandemic has adversely impacted global economic activity and contributed to significant volatility in financial markets. The COVID-19 pandemic and associated government actions intended to curb its spread are creating disruptions in, and adversely impacting, many industries and have negatively impacted, and could continue to negatively impact, the Company’s business in a number of ways, including affecting its tenants’ ability or willingness to pay rents and reducing demand for housing in the New York metropolitan area. Certain of the Company’s commercial tenants have announced temporary closures of their locations and have requested rent deferrals during the COVID-19 pandemic. In some cases, the Company may restructure rent and other obligations under its leases with its tenants on terms that are less favorable to it than those currently in place. Additionally, the outbreak could have a continued material adverse impact on economic and market conditions and prolong the current period of global economic slowdown which may ultimately decrease occupancy levels and pricing across the Company’s portfolio as residents reduce their spending. The rapid development and fluidity with which the situation continues to develop precludes any prediction as to the ultimate material adverse impact of the COVID-19 pandemic. Nevertheless, COVID-19 presents uncertainty and risk with respect to the Company’s tenants, which could adversely affect the Company’s financial performance.
The Company’s properties have remained open and operational throughout the pandemic. The Company is taking the necessary steps to keep employees and tenants safe in compliance with state and local orders, and continues to provide typical services to its residents. The Company’s rent collection rate during the second quarter of 2020 was equal to 94% of its first quarter 2020 rent collection rate. At June 30, 2020, the Company’s properties were 96% leased.
Concentrations
The Company’s properties are located in the Boroughs of Manhattan and Brooklyn in New York City, which exposes the Company to greater economic risks than if it owned a more geographically dispersed portfolio.
The breakdown between commercial and residential revenue is as follows (unaudited):
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Note 11 - Related-party Transactions |
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Jun. 30, 2020 | |
| Notes to Financial Statements | |
| Related Party Transactions Disclosure [Text Block] |
11. Related-Party Transactions
The Company recorded office and overhead expenses pertaining to a related company in general and administrative expense of $45 and $84 for the three months ended June 30, 2020 and 2019, respectively, and $133 and $171 for the six months ended June 30, 2020 and 2019, respectively.
The Company paid legal and advisory fees to firms in which two of our directors were principals or partners of $0 and $313 for the three months ended June 30, 2020 and 2019, respectively, and $5 and $313 for the six months ended June 30, 2020 and 2019, respectively. |
Note 12 - Segment Reporting |
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| Notes to Financial Statements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting Disclosure [Text Block] |
12. Segment Reporting
The Company has classified its reporting segments into commercial and residential rental properties. The commercial reporting segment includes the 141 Livingston Street property and portions of the 250 Livingston Street, Tribeca House and Aspen properties. The residential reporting segment includes the Flatbush Gardens property, the Clover House property, the 10 West 65th Street property, the 1010 Pacific Street property and portions of the 250 Livingston Street, Tribeca House and Aspen properties.
The Company’s income from operations by segment for the three and six months ended June 30, 2020 and 2019, is as follows (unaudited):
The Company’s total assets by segment are as follows, as of:
The Company’s interest expense by segment for the three and six months ended June 30, 2020 and 2019, is as follows (unaudited):
The Company’s capital expenditures by segment for the three and six months ended June 30, 2020 and 2019, are as follows (unaudited):
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Significant Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting, Policy [Policy Text Block] | Segments
At June 30, 2020, the Company had reportable operating segments, Residential Rental Properties and Commercial Rental Properties. The Company’s chief operating decision maker may review operational and financial data on a property basis.
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| Consolidation, Policy [Policy Text Block] | Basis of Consolidation
The accompanying consolidated financial statements of the Company are prepared in accordance with GAAP. The effect of all intercompany balances has been eliminated. The consolidated financial statements include the accounts of all entities in which the Company has a controlling interest. The ownership interests of other investors in these entities are recorded as non-controlling interest.
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| Use of Estimates, Policy [Policy Text Block] | Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from these estimates.
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| Real Estate, Policy [Policy Text Block] | Investment in Real Estate
Real estate assets held for investment are carried at historical cost and consist of land, buildings and improvements, furniture, fixtures and equipment. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as betterment or the life of the related asset will be substantially extended beyond the original life expectancy.
In accordance with ASU 2017-01, "Business Combinations – Clarifying the Definition of a Business,” the Company evaluates each acquisition of real estate or in-substance real estate to determine if the integrated set of assets and activities acquired meets the definition of a business and needs to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:
An acquired process is considered substantive if:
Generally, the Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.
Upon acquisition of real estate, the Company assesses the fair values of acquired tangible and intangible assets including land, buildings, tenant improvements, above-market and below-market leases, in-place leases and any other identified intangible assets and assumed liabilities. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their relative fair values. In estimating fair value of tangible and intangible assets acquired, the Company assesses and considers fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates, estimates of replacement costs, net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
The Company records acquired above-market and below-market lease values initially based on the present value, using a discount rate which reflects the risks associated with the leases acquired based on the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed renewal options for the below-market leases. Other intangible assets acquired include amounts for in-place lease values and tenant relationship values (if any) that are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A property’s value is impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, a write-down is recorded and measured by the amount of the difference between the carrying value of the asset and the fair value of the asset. In the event that the Company obtains proceeds through an insurance policy due to impairment, the proceeds are offset against the write-down in calculating gain/loss on disposal of assets. Management of the Company does not believe that any of its properties within the portfolio are impaired as of June 30, 2020.
For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the assets less estimated cost to sell is less than the carrying value of the assets. Properties classified as real estate held-for-sale generally represent properties that are actively marketed or contracted for sale with closing expected to occur within the next twelve months. Real estate held-for-sale is carried at the lower of cost, net of accumulated depreciation, or fair value less cost to sell, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held-for-sale properties are charged to expense as incurred. Expenditures for improvements, renovations and replacements related to held-for-sale properties are capitalized at cost. Depreciation is not recorded on real estate held-for-sale.
If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balances of the related intangibles are written off. The tenant improvements and origination costs are amortized to expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).
Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
The capitalized above-market lease values are amortized as a reduction to base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. The value of in-place leases is amortized to expense over the remaining initial terms of the respective leases.
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| Cash and Cash Equivalents, Policy [Policy Text Block] | Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and in banks, plus all short-term investments with a maturity of three months or less when purchased. The Company maintains some of its cash in bank deposit accounts, which, at times, may exceed the federally insured limit. No losses have been experienced related to such accounts.
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| Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block] | Restricted Cash
Restricted cash generally consists of escrows for future real estate taxes and insurance expenditures, repairs and capital improvements and security deposits.
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| Receivables, Trade and Other Accounts Receivable, Allowance for Doubtful Accounts, Policy [Policy Text Block] | Tenant and Other Receivables and Allowance for Doubtful Accounts
Tenant and other receivables are comprised of amounts due for monthly rents and other charges. The Company periodically performs a detailed review of amounts due from tenants to determine if accounts receivable balances are impaired based on factors affecting the collectability of those balances. If a tenant fails to make contractual payments beyond any allowance, the Company may recognize additional bad debt expense in future periods.
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| Deferred Charges, Policy [Policy Text Block] | Deferred Costs
Deferred lease costs consist of fees incurred to initiate and renew operating leases. Lease costs are being amortized using the straight-line method over the terms of the respective leases.
Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are amortized over the term of the financing and are recorded in interest expense in the consolidated statements of operations. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions which do not close are expensed in the period the financing transaction is terminated.
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| Comprehensive Income, Policy [Policy Text Block] | Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net loss adjusted for changes in unrealized gains and losses, reported in equity, for financial instruments required to be reported at fair value under GAAP. For the three and six months ended June 30, 2020 and 2019, the Company did not own any financial instruments for which the change in value was not reported in net loss accordingly and its comprehensive loss was its net loss as presented in the consolidated statements of operations.
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| Revenue [Policy Text Block] | Revenue Recognition
Rental revenue for commercial leases is recognized on a straight-line basis over the terms of the respective leases. Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Rental income attributable to residential leases and parking is recognized as earned, which is not materially different from the straight-line basis. Leases entered into by residents for apartment units are generally for one-year terms, renewable upon consent of both parties on an annual or monthly basis.
Reimbursements for operating expenses due from tenants pursuant to their lease agreements are recognized as revenue in the period the applicable expenses are incurred. These costs generally include real estate taxes, utilities, insurance, common area maintenance costs and other recoverable costs and are recorded as part of commercial rental income in the condensed consolidated statements of operations.
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| Share-based Payment Arrangement [Policy Text Block] | Stock-based Compensation
The Company accounts for stock-based compensation pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, “Compensation — Stock Compensation.” As such, all equity-based awards are reflected as compensation expense in the Company’s consolidated statements of operations over their vesting period based on the fair value at the date of grant.
In April 2020, the Company granted 450,623 LTIP units with a weighted average grant date fair value of $4.75 per unit.
In June 2020, the Company granted 78,681 LTIP units with a weighted average grant date fair value of $8.10 per unit.
At June 30, 2020 and December 31, 2019, there were 1,410,371 and 881,067 LTIP units outstanding, respectively, with a weighted average grant date fair value of $9.90 and $12.70 per unit, respectively. As of June 30, 2020 and December 31, 2019, there was $3.5 million and $1.4 million, respectively, of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under share incentive plans. As of June 30, 2020, the weighted average period over which the unrecognized compensation expense will be recorded is approximately 1.1 years.
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| Income Tax, Policy [Policy Text Block] | Income Taxes
The Company elected to be taxed and to operate in a manner that will allow it to qualify as a REIT under the Code. To qualify as a REIT, the Company is required to distribute dividends equal to at least 90% of the REIT taxable income (computed without regard to the dividends paid deduction and net capital gains) to its stockholders, and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided the Company qualifies for taxation as a REIT, it is generally not subject to U.S. federal corporate-level income tax on the earnings distributed currently to its stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and any applicable alternative minimum tax. In addition, the Company may not be able to re-elect as a REIT for the four subsequent taxable years. The entities comprising the Predecessor are limited liability companies and are treated as pass-through entities for income tax purposes. Accordingly, no provision has been made for federal, state or local income or franchise taxes in the accompanying consolidated financial statements.
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act was enacted to provide economic relief to companies and individuals in response to the COVID-19 pandemic. Included in the CARES Act are tax provisions which increase allowable interest expense deductions for 2019 and 2020 and increase the ability for taxpayers to use net operating losses. While we do not expect these provisions to have a material impact on the Company’s taxable income or tax liabilities, we continue to analyze the provisions of the CARES Act and related guidance as it is published.
In accordance with FASB ASC Topic 740, the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that, if successfully challenged, could result in a material impact on its or the Predecessor’s financial position or results of operations. The prior three years’ income tax returns are subject to review by the Internal Revenue Service.
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| Fair Value of Financial Instruments, Policy [Policy Text Block] | Fair Value Measurements
Refer to Note 9, “Fair Value of Financial Instruments”.
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| Derivatives, Policy [Policy Text Block] | Derivative Financial Instruments
FASB derivative and hedging guidance establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by FASB guidance, the Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation.
Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecast transactions, are considered cash flow hedges. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss) (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in the fair value or cash flows of the derivative hedging instrument with the changes in the fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value would be recognized in earnings. As of June 30, 2020, the Company has no derivatives for which it applies hedge accounting.
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| Earnings Per Share, Policy [Policy Text Block] | Loss Per Share
Basic and diluted loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding. As of June 30, 2020 and 2019, the Company had unvested LTIP units which provide for non-forfeitable rights to dividend-equivalent payments. Accordingly, these unvested LTIP units are considered participating securities and are included in the computation of basic and diluted loss per share pursuant to the two-class method. The Company did have dilutive securities as of June 30, 2020 or 2019.
The effect of the conversion of the 26,317 Class B LLC units outstanding is not reflected in the computation of basic and diluted loss per share, as the effect would be anti-dilutive. The net loss allocable to such units is reflected as non-controlling interests in the accompanying consolidated financial statements.
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (unaudited):
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| New Accounting Pronouncements, Policy [Policy Text Block] | Recently Issued Pronouncements
In April 2020, FASB issued a Staff Q & A to provide interpretive guidance for lease concessions related to the effects of the COVID-19 pandemic. The Company did not provide any such concessions to its tenants as a result of COVID-19 during the three months ended June 30, 2020; therefore, this guidance did not have a material effect on its consolidated financial statements. The Company continues to evaluate the effect that this guidance may have on its consolidated financial statements.
In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (Topic 848). ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying current GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 is effective beginning on March 12, 2020, and may be applied prospectively to such transactions through December 31, 2022. We will apply ASU 2020-04 prospectively as and when we enter into transactions to which this guidance applies.
In March 2019, FASB issued ASU 2019-01, “Leases (Topic 842), Codification Improvements.” There are three codification updates to Topic 842 covered by this ASU: Issue 1 provides guidance on how to compute fair value of leased items for lessors who are non-dealers or manufacturers; Issue 2 relates to cash flow presentation for lessors of sales-type and direct financing leases; and Issue 3 clarifies that certain transition disclosures will only be required in annual disclosures.
In December 2018, FASB issued ASU 2018-20, “Leases (Topic 842), Narrow-Scope Improvements for Lessors.” This ASU modifies ASU 2016-02 to permit lessors, as an accounting policy election, not to evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Consequently, a lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures (includes sales, use, value-added, and some excise taxes and excludes real estate taxes). The Company has elected not to evaluate whether the aforementioned costs are lessor or lessee costs. This ASU also provides that certain lessor costs require lessors to exclude from variable payments, and therefore revenue, specifically lessor costs paid by lessees directly to third parties. The amendments also require lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue.
In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which prescribes a single, common revenue standard that supersedes nearly all existing revenue recognition guidance under U.S. GAAP, including most industry-specific requirements. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 outlines a five-step model to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. The Company’s revenues are primarily derived from rental income, which is scoped out from this standard and is currently accounted for in accordance with ASC Topic 840, Leases. The Company adopted this standard effective January 1, 2019, using the modified retrospective approach, applying the provisions to open contracts as of the date of adoption. The adoption of this standard did not have a material impact on the timing or amounts of the Company’s revenues.
In February 2016, FASB issued ASU 2016-02, “Leases.” ASU 2016-02 supersedes the current accounting for leases and while retaining two distinct types of leases, finance and operating, requires lessees to recognize most leases on their balance sheets and makes targeted changes to lessor accounting. In July 2018, FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which provides minor clarifications and corrections to ASU 2016-02, “Leases (Topic 842).” Further, in July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements.” This amendment provides a new practical expedient that allows lessors, by class of underlying asset, to avoid separating lease and associated non-lease components within a contract if certain criteria are met: (i) the timing and pattern of transfer for the non-lease component and the associated lease component are the same and (ii) the stand-alone lease component would be classified as an operating lease if accounted for separately. These pronouncements are effective for fiscal years beginning after December 15, 2021, and early adoption is permitted. The Company will adopt this standard effective January 1, 2022 and is currently evaluating the impact of adoption on its consolidated financial statements. As lessor, the Company expects that the adoption of ASU 2016-02 (as amended by subsequent ASUs) will not change the timing of revenue recognition of the Company’s rental revenues. As lessee, the Company is party to certain office equipment leases with future payment obligations for which the Company expects to record right-of-use assets and lease liabilities at the present value of the remaining minimum rental payments upon adoption of this standard.
In August 2018, FASB issued ASU 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,” which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. This guidance is effective in fiscal years beginning after December 15, 2019 with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s financial statement reporting.
In June 2018, FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments provide specific guidance for transactions for acquiring goods and services from nonemployees and specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (i) financing to the issuer or (ii) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, “Revenue from Contracts with Customers.” The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements as it has not historically issued share-based payments in exchange for goods or services to be consumed within its operations.
In February 2017, FASB issued ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20),” to add guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. ASU 2017-05 reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. ASU 2017-05 is effective for the Company for its annual reporting beginning after December 15, 2018, including interim reporting periods beginning after December 15, 2019. The Company adopted this standard effective January 1, 2019. The adoption of this standard did not have a material impact on our consolidated financial statements. |
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Note 3 - Significant Accounting Policies (Tables) |
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Note 5 - Deferred Costs and Intangible Assets (Tables) |
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Note 6 - Below-market Leases, Net (Tables) |
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Note 7 - Notes Payable (Tables) |
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Note 8 - Rental Income Under Operating Leases (Tables) |
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| Lessor, Operating Lease, Payment to be Received, Fiscal Year Maturity [Table Text Block] |
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Note 9 - Fair Value of Financial Instruments (Tables) |
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| Schedule of Derivative Instruments [Table Text Block] |
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Note 10 - Commitments and Contingencies (Tables) |
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Note 12 - Segment Reporting (Tables) |
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| Schedule of Segment Reporting Information, by Segment [Table Text Block] |
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Note 2 - Issuance of Common Stock (Details Textual) - Director [Member] $ in Thousands |
Apr. 09, 2019
USD ($)
shares
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| Shares Issued, Shares, Share-based Payment Arrangement, after Forfeiture, Total (in shares) | shares | 1,917 |
| Proceeds from Issuance of Common Stock | $ | $ 0 |
Note 3 - Significant Accounting Policies - Estimated Useful Lives of Assets (Details) |
6 Months Ended |
|---|---|
Jun. 30, 2020 | |
| Building and Building Improvements [Member] | Minimum [Member] | |
| Estimated useful life (Year) | 10 years |
| Building and Building Improvements [Member] | Maximum [Member] | |
| Estimated useful life (Year) | 44 years |
| Furniture, Fixtures and Equipment [Member] | Minimum [Member] | |
| Estimated useful life (Year) | 3 years |
| Furniture, Fixtures and Equipment [Member] | Maximum [Member] | |
| Estimated useful life (Year) | 15 years |
Note 3 - Significant Accounting Policies - Basic and Diluted Earnings (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2019 |
Jun. 30, 2020 |
Jun. 30, 2019 |
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| Net loss attributable to common stockholders | $ (2,222) | $ (467) | $ (2,548) | $ (521) |
| Less: income attributable to participating securities | (126) | (83) | (210) | (152) |
| Subtotal | $ (2,348) | $ (550) | $ (2,758) | $ (673) |
| Weighted average common shares outstanding (in shares) | 17,815 | 17,815 | 17,815 | 17,814 |
| Basic and diluted net loss per share (in dollars per share) | $ (0.13) | $ (0.03) | $ (0.15) | $ (0.04) |
Note 4 - Acquisitions (Details Textual) - Residential Property in Brooklyn, NY [Member] $ in Thousands |
Nov. 08, 2019
USD ($)
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| Business Combination, Consideration Transferred, Total | $ 31,129 |
| Business Combination, Acquisition Related Costs | $ 129 |
Note 5 - Deferred Costs and Intangible Assets (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2019 |
Jun. 30, 2020 |
Jun. 30, 2019 |
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| Amortization of Lease Origination Costs and In-place Lease Intangible Assets | $ 279 | $ 196 | $ 352 | $ 384 |
| Write off of Fully Amortized Lease Origination Costs and In-place Leases | 283 | |||
| Amortization of Real Estate Abatements | 121 | 120 | 240 | 239 |
| Amortization of Intangible Assets, Total | $ 0 | $ 29 | 30 | $ 59 |
| Impairment of Intangible Assets, Finite-lived | $ 444 | |||
Note 5 - Deferred Costs and Intangible Assets - Deferred Costs and Intangible Assets (Details) - USD ($) $ in Thousands |
Jun. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Deferred costs | $ 348 | $ 348 |
| Above-market leases | 0 | 444 |
| Lease origination costs | 1,141 | 1,385 |
| In-place leases | 859 | 859 |
| Real estate tax abatements | 9,142 | 9,142 |
| Total deferred costs and intangible assets | 11,490 | 12,178 |
| Less accumulated amortization | (3,291) | (3,396) |
| Total | $ 8,199 | $ 8,782 |
Note 5 - Deferred Costs and Intangible Assets - Future Amortization Expense (Details) - USD ($) $ in Thousands |
Jun. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|
| 2020 (Remainder) | $ 387 | |
| 2021 | 760 | |
| 2022 | 729 | |
| 2023 | 583 | |
| 2024 | 537 | |
| Thereafter | 5,203 | |
| Total | $ 8,199 | $ 8,782 |
Note 6 - Below-market Leases, Net (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2019 |
Jun. 30, 2020 |
Jun. 30, 2019 |
|
| Amortization of Below Market Lease | $ 129 | $ 435 | $ 258 | $ 889 |
Note 6 - Below-market Leases, Net - Below-market Lease Intangibles Liabilities (Details) - USD ($) $ in Thousands |
Jun. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Below-market leases | $ 4,087 | $ 4,087 |
| Less accumulated amortization | (2,720) | (2,462) |
| Total | $ 1,367 | $ 1,625 |
Note 6 - Below-market Leases, Net - Future Amortization Income (Details) - USD ($) $ in Thousands |
Jun. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|
| 2020 (Remainder) | $ 259 | |
| 2021 | 493 | |
| 2022 | 423 | |
| 2023 | 192 | |
| Total | $ 1,367 | $ 1,625 |
Note 7 - Notes Payable - Mortgages and Mezzanine Note Payable (Details) - USD ($) $ in Thousands |
6 Months Ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2020 |
Dec. 31, 2019 |
|||||||||||||||||
| Debt, gross | $ 1,091,057 | $ 1,009,431 | ||||||||||||||||
| Unamortized debt issuance costs | (11,380) | (11,528) | ||||||||||||||||
| Total debt, net of unamortized debt issuance costs | $ 1,079,677 | 997,903 | ||||||||||||||||
| Mortgages and Mezzanine Notes 1[Member] | Flatbush Gardens, Brooklyn, NY [Member] | ||||||||||||||||||
| Interest rate | [1] | 3.125% | ||||||||||||||||
| Debt, gross | [1] | $ 329,000 | 0 | |||||||||||||||
| Interest rate | [1] | 3.125% | ||||||||||||||||
| Mortgages and Mezzanine Notes 1[Member] | 250 Livingston Street in Brooklyn [Member] | ||||||||||||||||||
| Debt, gross | [2] | $ 125,000 | 125,000 | |||||||||||||||
| Mortgages and Mezzanine Notes 1[Member] | 250 Livingston Street in Brooklyn [Member] | London Interbank Offered Rate (LIBOR) [Member] | ||||||||||||||||||
| Interest rate | [2] | 3.63% | ||||||||||||||||
| Mortgages and Mezzanine Notes 1[Member] | Tribeca House Properties [Member] | ||||||||||||||||||
| Interest rate | [3] | 4.506% | ||||||||||||||||
| Debt, gross | [3] | $ 360,000 | 360,000 | |||||||||||||||
| Interest rate | [3] | 4.506% | ||||||||||||||||
| Mortgages and Mezzanine Notes 1[Member] | Aspen [Member] | ||||||||||||||||||
| Interest rate | [4] | 3.68% | ||||||||||||||||
| Debt, gross | [4] | $ 66,180 | 66,862 | |||||||||||||||
| Interest rate | [4] | 3.68% | ||||||||||||||||
| Mortgages and Mezzanine Notes 1[Member] | Clover House [Member] | ||||||||||||||||||
| Debt, gross | [5] | $ 82,000 | 82,000 | |||||||||||||||
| Mortgages and Mezzanine Notes 1[Member] | Clover House [Member] | London Interbank Offered Rate (LIBOR) [Member] | ||||||||||||||||||
| Interest rate | [5] | 3.53% | ||||||||||||||||
| Interest rate | [5] | 3.53% | ||||||||||||||||
| Mortgages and Mezzanine Notes 1[Member] | Property at 10 W 65th St. Manhattan, NY [Member] | ||||||||||||||||||
| Interest rate | [6] | 3.375% | ||||||||||||||||
| Debt, gross | [6] | $ 33,960 | 34,295 | |||||||||||||||
| Interest rate | [6] | 3.375% | ||||||||||||||||
| Mortgages and Mezzanine Notes 1[Member] | Residential Property At 1010 Pacific Street [Member] | ||||||||||||||||||
| Debt, gross | [7] | $ 19,880 | 19,457 | |||||||||||||||
| Mortgages and Mezzanine Notes 2 [Member] | Flatbush Gardens, Brooklyn, NY [Member] | ||||||||||||||||||
| Interest rate | [1] | 3.50% | ||||||||||||||||
| Debt, gross | [1] | $ 0 | 246,000 | |||||||||||||||
| Interest rate | [1] | 3.50% | ||||||||||||||||
| Mortgages and Mezzanine Notes 2 [Member] | 250 Livingston Street in Brooklyn [Member] | ||||||||||||||||||
| Interest rate | [8] | 3.875% | ||||||||||||||||
| Debt, gross | [8] | $ 75,037 | 75,817 | |||||||||||||||
| Interest rate | [8] | 3.875% | ||||||||||||||||
| Mortgages and Mezzanine Notes [Member] | ||||||||||||||||||
| Unamortized debt issuance costs | $ (11,380) | $ (11,528) | ||||||||||||||||
| ||||||||||||||||||
Note 7 - Notes Payable - Summary of Principal Payment Requirements (Details) - USD ($) $ in Thousands |
Jun. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|
| 2020 (Remainder) | $ 21,769 | |
| 2021 | 3,777 | |
| 2022 | 3,920 | |
| 2023 | 4,068 | |
| 2024 | 4,216 | |
| Thereafter | 1,053,307 | |
| Total | $ 1,091,057 | $ 1,009,431 |
Note 8 - Rental Income Under Operating Leases (Details Textual) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2019 |
Jun. 30, 2020 |
Jun. 30, 2019 |
|
| Total Revenue [Member] | Customer Concentration Risk [Member] | City of New York [Member] | ||||
| Concentration Risk, Percentage | 17.00% | 19.00% | 17.00% | 19.00% |
Note 8 - Rental Income Under Operating Leases - Minimum Future Cash Rents Receivable (Details) $ in Thousands |
Jun. 30, 2020
USD ($)
|
|---|---|
| 2020 (Remainder) | $ 13,211 |
| 2021 | 29,977 |
| 2022 | 29,746 |
| 2023 | 27,693 |
| 2024 | 26,960 |
| Thereafter | 24,846 |
| Total | $ 152,433 |
Note 9 - Fair Value of Financial Instruments (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2019 |
Jun. 30, 2020 |
Jun. 30, 2019 |
|
| Not Designated as Hedging Instrument [Member] | Interest Rate Cap 1 [Member] | ||||
| Derivative, Gain (Loss) on Derivative, Net, Total | $ 0 | $ 2 | $ 14 | $ 24 |
Note 9 - Fair Value of Financial Instruments - Carrying Amount and Fair Value of Mortgage Notes Payable (Details) - Mortgages [Member] - USD ($) $ in Thousands |
Jun. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Reported Value Measurement [Member] | ||
| Mortgage notes payable | $ 1,091,057 | $ 1,009,431 |
| Estimate of Fair Value Measurement [Member] | ||
| Mortgage notes payable | $ 1,219,543 | $ 1,058,083 |
Note 9 - Fair Value of Financial Instruments - Interest Rate Caps in Connection With Mortgage Loans (Details) - USD ($) $ in Thousands |
Jun. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Estimated fair market value | $ 0 | $ 0 |
| Interest Rate Cap 1 [Member] | ||
| Notional amount | $ 75,000 | |
| Strike rate | 4.00% | |
| Estimated fair market value | $ 0 | 0 |
| Interest Rate Cap 2 [Member] | ||
| Notional amount | $ 21,587 | |
| Strike rate | 3.60% | |
| Estimated fair market value | $ 0 | $ 0 |
Note 10 - Commitments and Contingencies (Details Textual) $ in Thousands |
3 Months Ended |
|---|---|
|
Jun. 30, 2020
USD ($)
| |
| Percentage of Rent Collection Rate to Last Quarter | 94.00% |
| Percentage of Properties Leased | 96.00% |
| Obligated to Provide Parking [Member] | |
| Other Commitment, Total | $ 205 |
Note 10 - Commitments and Contingencies - Summary of Concentration Risk by Segment (Details) - Total Revenue [Member] - Geographic Concentration Risk [Member] - New York City [Member] |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2019 |
Jun. 30, 2020 |
Jun. 30, 2019 |
|
| Percentage | 100.00% | 100.00% | 100.00% | 100.00% |
| Commercial Segment [Member] | ||||
| Percentage | 23.00% | 26.00% | 23.00% | 25.00% |
| Residential Segment [Member] | ||||
| Percentage | 77.00% | 74.00% | 77.00% | 75.00% |
Note 11 - Related-party Transactions (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2019 |
Jun. 30, 2020 |
Jun. 30, 2019 |
|
| Overhead Charged Related to Office Expenses [Member] | General and Administrative Expense [Member] | ||||
| Related Party Transaction, Amounts of Transaction | $ 45 | $ 84 | $ 133 | $ 171 |
| Firms in Which Two Directors Were Principals or Partners [Member] | ||||
| Related Party Transaction, Amounts of Transaction | $ 0 | $ 313 | $ 5 | $ 313 |
Note 12 - Segment Reporting - Segment Information (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | |||
|---|---|---|---|---|---|
Jun. 30, 2020 |
Jun. 30, 2019 |
Jun. 30, 2020 |
Jun. 30, 2019 |
Dec. 31, 2019 |
|
| Total revenues | $ 30,729 | $ 28,446 | $ 61,615 | $ 56,098 | |
| Property operating expenses | 6,868 | 6,747 | 14,027 | 14,310 | |
| Real estate taxes and insurance | 6,778 | 5,707 | 13,642 | 11,438 | |
| General and administrative | 2,594 | 2,579 | 4,917 | 4,247 | |
| Depreciation and amortization | 5,872 | 4,590 | 11,430 | 9,139 | |
| Total operating expenses | 22,112 | 19,623 | 44,016 | 39,134 | |
| Income from operations | 8,617 | 8,823 | 17,599 | 16,964 | |
| Assets | 1,230,449 | 1,230,449 | $ 1,166,207 | ||
| Interest expense | 9,979 | 8,210 | 19,767 | 16,484 | |
| Capital expenditures | 8,251 | 12,788 | 14,322 | 24,003 | |
| Rental Income [Member] | |||||
| Total revenues | 30,729 | 28,446 | 61,615 | 56,098 | |
| Commercial Segment [Member] | |||||
| Total revenues | 7,050 | 7,300 | 14,218 | 14,180 | |
| Property operating expenses | 898 | 1,036 | 2,035 | 2,177 | |
| Real estate taxes and insurance | 1,444 | 1,236 | 2,936 | 2,472 | |
| General and administrative | 402 | 409 | 739 | 688 | |
| Depreciation and amortization | 1,092 | 970 | 2,111 | 1,916 | |
| Total operating expenses | 3,836 | 3,651 | 7,821 | 7,253 | |
| Income from operations | 3,214 | 3,649 | 6,397 | 6,927 | |
| Assets | 281,891 | 281,891 | 285,103 | ||
| Interest expense | 2,025 | 1,721 | 4,012 | 3,455 | |
| Capital expenditures | 2,611 | 1,239 | 4,394 | 2,147 | |
| Commercial Segment [Member] | Rental Income [Member] | |||||
| Total revenues | 7,050 | 7,300 | 14,218 | 14,180 | |
| Residential Segment [Member] | |||||
| Total revenues | 23,679 | 21,146 | 47,397 | 41,918 | |
| Property operating expenses | 5,970 | 5,711 | 11,992 | 12,133 | |
| Real estate taxes and insurance | 5,334 | 4,471 | 10,706 | 8,966 | |
| General and administrative | 2,192 | 2,170 | 4,178 | 3,559 | |
| Depreciation and amortization | 4,780 | 3,620 | 9,319 | 7,223 | |
| Total operating expenses | 18,276 | 15,972 | 36,195 | 31,881 | |
| Income from operations | 5,403 | 5,174 | 11,202 | 10,037 | |
| Assets | 948,558 | 948,558 | $ 881,104 | ||
| Interest expense | 7,954 | 6,489 | 15,755 | 13,029 | |
| Capital expenditures | 5,640 | 11,549 | 9,928 | 21,856 | |
| Residential Segment [Member] | Rental Income [Member] | |||||
| Total revenues | $ 23,679 | $ 21,146 | $ 47,397 | $ 41,918 | |
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