Description

Clipper Realty Trust has three imminent catalysts that should re-rate the stock at least 20-30% higher in the next couple months. Long term, the stock could trade materially higher. This write up will focus on the event driven dynamics of Clipper. For background information on the company, my 10/21/2021 write up has a lot of information on the company. 

1) Clipper issued a press release on July 5th that stated the company has reached a 40-yr tax abatement agreement on its 2,500 unit Flatbush Garden property with the New York City Department of Housing Preservation and Development ("HPD"). The press release did not mention anything about the amount of the tax savings or any additional reimbursements they may receive. But it did mention that Clipper will invest another $27mm of capital improvements into the properties. See link to press release below. https://e6b8t8fdqod.exactdn.com/wp-content/uploads/2023/07/2-CLPR-2Q23-Conference-Call-Announcement.pdf

But the company also issued an 8-K that included lots of details on the terms so that shareholders can figure out how much of a HUGE WIN this deal is for Clipper. 

The key items are, Clipper will stop paying $7.4mm in properties taxes AND be eligible to receive an additional $8mm in reimbursements per year. The additional expenses will be $750 thousand plus some other miscellanous which will add up to about $1.5mm. Net net, Clipper will increase its NOI by about $14mm a year on a property that generated NOI of $15.8mm in the trailing 12 months. Why did Clipper not make more noise about this big event? My understanding is that the company did not want to piss off NYC's government with a splashying $14mm abatement/reimbursement deal announcement. The press release instead focused on their $27mm capital project. Per my conversation with management, this is their intention. They wanted the government officials to feel like they got a win, hence the presse release. But the company also want shareholders to know how big of a deal. It's a delicate balance, but I very much approve of the method that they went about disseminating information. Flatbush has gone from a write off in my mind to an asset that will do $30mm of NOI in no time. Also they took away a huge expense line item that was growing.    

2) 1010 Pacific St has been an absolute homerun of a development project. It is now expected to generated an unlevered yield of 7%. Clipper is actually converting some of the larger one bedroom into two bedrooms due to rents of $85 per sqft for their market rate units. At an $85mm of cost, 1010 Pacific will add $6mm of NOI to be consolidated in Q2 or Q3 of 2023. 

3) Rent continues to reach new heights in New York City. Veris Residentail reported same store 21.8% increases in NOI. Veris owns multifamily assets in Jersey City and is a good proxy for rent growth in Manhattan and Brooklyn. We anticipates very meaningful rent growth for Clipper's market rate apartments. This is harder to gauage, but it will likely be meaningful. There is typically a lag between when new leases are signed and rent growth shows up as NOI growth in the following quarters as older cheaper leases roll off. So we expect good things in Q2. 

This is the NOI bridge for Clipper 

$68mm NOI (17.0mm NOI annualized) + 14mm in Flatbush Garden + $6mm from 1010 Pacific St + Unknown from rent growth = $88mm + rent growth in market rate 

Clipper's stock has moved about 10% since on the news. But the inflection in NOI is actually 30%. More importantly, Clipper is more levered, but the 30% movement in NOI is at the asset level. So the movement in the equity could be magnified by 5x due to the leverage ratio. I am not suggesting that the stock should move 150%, but 10% is too little and frankly, I was part of the buyer who likely added 2-3% to the stock price gains. The stock gains should be somewhere between 10% and 150%. 

Bigger picture, I think these inflection in NOI will make Clipper appear to be less problematic (which the stock price implies today due to the leverage which are all non-recourse and fixed rate at the property level). It takes away a lot of the going concern risk. I think the market is also coming around to favoring coastal supply constrained markets again. For a period, people loved Sunbelt multifamily with its relentless rent growth and little government interference. Now the marekt only wants to own Coastal with minimal supply additions like AvalonBay, Clipper, Veris etc. These results will also screen very well shortly. All a sudden, the company's NOI will seemingly grow 30% out of no where.

Catalyst

The market figures out that Clipper's Net Operating Income (NOI) is about to inflect 30%, earnings call this Thursday August 3rd