Clipper Realty (New York Stock Exchange: CLPR) adjusted for unproductive assets trades at a cap rate of 5.5% or higher. This is cheap considering the quality of the property Clippers owns. The private market cap rate is 4.5%.
CLPR’s rental income is currently depressed by cheap leases signed during the pandemic. Over the next 12-16 months, these should be rolled off and replaced by more profitable leases.
Clipper also has two development projects, one of which is expected to be completed in Q4 2022. Liabilities from these development projects are now booked against Clipper. Once development is complete, rent from these projects should be added to your income.
Owning real estate is a big long-term bet in NYC. If you think NYC real estate prices will continue to rise in the future, the CLPR’s low entry point and great leverage offer an excellent opportunity to benefit from long-term gains.
Betting on New York City Real Estate
CLPR bets on long-term capital and rent growth in New York City. This has been a good bet for the last 20 years. From 1997 to 2019, the price per square of his Manhattan condo was CAGR 7.6%This compares to a CAGR of 3.4% for S&P 500 prices. If you don’t think New York real estate will continue to rise over the next 20 years, this is not an investment.
Over the past two decades, demand for NYC real estate has grown along with the prosperity of NYC and the United States. This, coupled with the limited supply of new buildings, has led to this massive valuation.
A lot has been done since the pandemic began with the death of “superstar” cities and the shift to remote work. But quiet facts, at least in New York, don’t seem to support this narrative.Rents and real estate prices have exploded since the vaccine became widely available.
Over the past 12 months, NYC rent has been strongly repulsedMedian rents for new leases in June were up 24.7% year-over-year in Manhattan and 22% in Brooklyn.
The company has already started to benefit from this price increase.
“Base rent per square foot for Tribeca House increased from $62.43 (96.5% rent occupancy) on March 31, 2021 to $64.76 (98.8% rent occupancy) on March 31, 2022. ).”-Q1 2022
That’s just a 4% rent increase per square foot, but keep in mind that more leases were signed during 2021. From 2022 to 2023, he expects prices per square foot to continue to rise in CLPR’s Market Price Apartments.
New York City recently 3.25% rent increase About stable rent apartments. This is his biggest steady rent increase in a decade. About 40% of CLPR’s rent now comes from rent-stable apartments.
The company has two development projects. Located on Dean and Pacific Streets. Currently, these two properties are listed in the company’s net debt, but have yet to accrue rent.
The company said the Pacific Street project should be completed and begin leasing in the fourth quarter of 2022. This building is expected to add him $5.2 million in NOI.
The Dean Street project is expected to take about two years to complete, so we don’t expect it to be completed until early 2024. Approximately $7.1 million in NOI is expected. Interest payments, the non-operating costs of these buildings, have already been paid for by the company, so most of the NOI should be reflected in the revenue.
clover house redevelopment
The company follows a pattern of buying properties, improving them, refinancing the mortgages and withdrawing some of the equity.
To get an idea of what this looks like, let’s take a look at Clover’s House. CLPR purchased Clover House in May 2017 for $87.6 million. Between May 2017 and November 2019, he spent $58 million on refurbishing the facility. They then refinanced their debt and withdrew some of their stock. This left him with $82 million in debt and his $63.6 million in equity.
The property has approx. 1.3 million operating expenses and interest expense of 2.9 million. Annual rent for December 2021 was $6.2 million for him. This means the building generates $2 million in cash flow annually. That’s only a 3% return on the stock still in the building. Given the amount of leverage used, this is not exciting at all.
This calculation highlights that an investment in CLPR is betting on long-term increases in New York real estate and rents. This kind of investment doesn’t make sense if your rent payments don’t keep increasing over time.
I also think it highlights the significant operating leverage inherent in the CLPRs portfolio. If rents rise by 20% during 2022, other expenses should remain largely unchanged. The building represents $3.2 million in annual cash flow.
Building on Livingston Street
To highlight the compounding potential of NYC real estate, examine CLPR’s Livingston St property. These two properties were acquired by CLPR’s predecessor in 2002 for $53.3 million. $33.9 million in improvements since the acquisition. These two buildings currently have a mortgage of $225 million. Meaning they have -$137.8 million in stocks invested.
The Livingston office building generated $27.1 million in annualized rental income in December 2021. I don’t have an exact estimate in the company’s operating expenses filings, but let’s just say it’s 50% of the rent, or $13.5 million. Property debt requires $7.75MM in annual rent. These two buildings generate $5.9 million in free cash flow.
These buildings were purchased over 20 years ago, so the return on investment here is very long-term. These buildings highlight the complex nature of owning New York City real estate. There aren’t many investments that I believe will compound in value within 20 years.New York City real estate would be on the list.
Risk – liability burden
The company is heavily indebted, about $1.1 billion.debt is held as a mortgage for different properties in the portfolio. Even if one building ends up being extremely unprofitable, the rest of the company won’t collapse. Nothing will mature through 2027, except for construction financing debt on the company’s assets under development. Give the firm enough time to wait for the credit market to freeze.
Even with longer maturities, the long-term downward trend in rents in the New York rental market could mean the company loses a lot of properties. A downward trend like this would need to last for years and would have a severe impact on rent prices.
I think it’s positive that the company has proven it can weather COVID. I had enough confidence in
Risk – Rent Regulation
New York City has a long history of rent regulation. Approximately 40% of CLPR revenue is rent stabilized. CLPR can only increase rents by amounts approved by NYC. Rental guideline boardI assume that the company can only increase the rent of rent-stabilized apartments by 1% per year.
Current legislation on rent-stabilized apartments is tenant-friendly. Landlords have limited options to raise rents. The biggest risk in this area is if New York City adds rent controls to apartments that don’t have rent stabilization. I think this is an unlikely result. But it would be devastating and would significantly reduce the value of CLPR’s portfolio.
Risk – Insider Conflict of Interest
company CEO David Bistriser A longtime New York City real estate mogul. This has benefits such as long-standing relationships and a great sense of New York real estate. It also involves conflict. From the company 2021 10-K:
“Our charter contains provisions expressly authorizing our officers to compete with us. Our officers have outside business interests and may compete with us for our investments in. There can be no assurance that any conflicts of interest arising from such competition will be resolved in our favour.”
The risk is that David and other executives at the company may not get CLPR the best deal.
This is a real risk, but there are two things you can rest assured about.of Directors own 49.4% Overall interest in the business and 20% or more of common stock outstanding. Finding a good deal for CLPR is still their primary concern, even if they may compete with the company on some deals. The communication they have had with shareholders since going public seemed honest to me. The deal they brought to his CLPR delivered as promised and benefited shareholders in my view.
CLPR future rents and AFFO over the next five years were estimated based on historical rent growth and forecasts regarding when the announced buildings will start collecting rents. I used 20 times the price of the AFFO multiple as my terminal value. As always, this kind of forecast makes a lot of assumptions and is meant to give you an idea of how I’m evaluating the business. I tried to use assumptions.
Another way to look at valuations is cap rates. CLPR generated 65 million NOIs in TTM. After deducting the more than $100 million that the company has invested in Dean & Pacific Street and is currently not making a profit, the rest of the portfolio has a cap rate of about 5.5%. My rough estimate is that the CLPR property will approach the 4.5% cap rate. open marketA cap rate of 4.5% implies a stock valuation of 15.01 per share.
I think CLPR is an attractive price point as an entry point into the New York real estate market. Management has a proven playbook to expand their in-game portfolio and key skins. We will open a position on Monday.
Also, I would like to give credit to where I first heard of this idea. Bill Chen presented an excellent stock pitch Yet another worthwhile podcast.