5-Minute Value #2: Clipper Realty ($CLPR)
NYC Multifamily REIT Equity Stub Trading for ~40 cents on the Dollar
In my ‘5-Minute Value’ series, I plan on posting short-form value investing ideas/thoughts (<10 minute reads) for any company of interest.
Check out my 1st post on special situation liquidation opportunity, Dream Residential ($DRR.TO). Please also follow my Twitter account for more.
Today, I will cover another undervalued multifamily REIT at a greater discount to NAV, in a stronger market, undergoing some temporary headwinds.
5-Minute Value #2: Clipper Realty ($CLPR)
Clipper Realty, went public in 2017, offering 6.4 million shares at $13.50 (current fully diluted market cap of $170M, inclusive of OP units).
Since IPO, shares are down -70%. Net of the consistent $0.38/share annual dividend, this translates to a total return of -54%.
Over the same time, the company has grown run-rate NOI +52% and FFO +118% with substantially the same portfolio (with the addition of some recent smaller ground-up developments). Before discussing valuation, let’s explore the assets.
NYC-Concentrated Real Estate Portfolio
22% of Clipper’s multifamily units are located in Manhattan (Tribeca, Harlem, Upper West Side) with the remaining 78% located in Brooklyn (Flatbush, downtown Brooklyn). The company owns a total of 3,925 multifamily units (after the completion of Dean St.) and 2 office assets in downtown Brooklyn (141 and 250 Livingstone).
Flatbush Gardens (2,494 units, NAV: $3.52/share)
Flatbush Gardens is a 59-building housing complex in Brooklyn. In June 2023, the company announced a 40-year Article 11 tax abatement deal with the NYC Department of Housing Preservation and Development.
Clipper got a full abatement on real estate taxes (~$3.9M annually) and became eligible to receive Section 610 reimbursements (est. ~$5-8M annually).
In exchange, they must complete ~$27M in capital improvements at the property in 3 years, re-house 250 homeless in vacant units as they turn, maintain rent-regulated units (subject to stabilized rent increases) and higher wages for on-site management.
Overall, the deal is very favorable for Clipper with the tax abatement alone (inclusive of the $27M in Year 1-3 capital improvements), on an NPV8 basis, worth ~$30M.
Applying a very conservative 6.0% cap rate on the tax-abated T3/T3 NOI, (which captures only $4.6M of the $8.0M in management-guided Section 610 reimbursements), I estimate a minimum gross asset value of $478M ($192K/unit), translating to $149M in NAV ($3.52/share).
Tribeca House (506 units, NAV: $2.20/share)
Tribeca House is a fully-renovated, 506-unit luxury property with street-level retail and a parking garage, well-located in Lower Manhattan. Clipper acquired the fee simple interest (formerly ground leased) in subsequent transactions totaling $231M ($451K/unit) in 2014. It is currently 98% leased.
With higher retail exposure (10%-15% of NOI), I applied a 5.25% cap rate, wider than the market for the independent residential portion (<5.0%). This results in $453M of GAV or $93M of NAV (24% of total or $2.20/share). I confidently believe Flatbush Gardens and Tribeca House, combined, are worth more than the implied public market NAV today.
But there’s more…
953 Dean St. (Under Development, 252 units, NAV: $1.92/share) and 1010 Pacific St. (175 units, NAV: $0.55/share)
1010 Pacific St. is a 175-unit, 2023-built asset, with Class A amenities and interiors, developed by Clipper that is 97% leased in desirable Prospect Heights, Brooklyn. Using a 5.0% cap rate on T3/T12 NOI translates to $103M of GAV or $23.5M of NAV (6.1% of total or $0.55/share)
953 Dean St (252 units) is a 3-minute walk from 1010 Pacific St. and is nearing completion, expected to be delivered this summer. Clipper is already pre-leasing the top-of-the-line units at $4K/mo for 1-beds and $5.5K/mo for 2-beds. Management has guided to a 7.0% yield on cost for the project. Conservatively using a 6.5% yield on cost gets you to a $9.5M NOI, valued at a 5.0% cap rate translates to a $190M of GAV or $82M of NAV (21% of total or $1.92/share).
Livingston St. Office Assets (586K Sq Ft. GLA, NAV: -$0.82/share)
The Livingston St. office assets, located in downtown Brooklyn, are where the uncertainty lies within Clipper. Importantly, the debt on both assets is non-recourse and not cross-collateralized - Clipper has the optionality to fund debt service or walk away at any time.
141 Livingston (216K sq ft of GLA):
Currently 100% leased to NYC Civil Court with their lease expiring in December 2025. Management claims that are ‘finalizing discussions’ for renewal, however it was previously reported that the tenant is planning on re-locating.
There have also been negative headlines surrounding the loan on this asset. The lender (Citi) has claimed that Clipper has failed to replenish vacancy reserves and violated other covenants, which Clipper is disputing with the servicer. This could be an effort to buy time (on Clipper’s part) with a lender who is probably just trying to find a way out of its 3.2% interest-only, 2031 maturity paper.
Either way, in our conservative scenario (10% cap rate on current rents or $97.7M GAV), we will assume the building is not worth more than the debt.
250 Livingston St.
250 Livingston (370K sq ft of GLA)
Effective August 2025, the only tenant (also NYC government) will vacate. Clipper remains current on the loan and is “seeking solutions and pursuing opportunities supported by cash flows from our other properties.”
The asset has similarly attractive debt terms (3.6% interest only debt, maturing in 2029).
In our conservative scenario, assuming the liquidation value of the asset is only $250PSF, the asset is likely worth ~$93M or underwater $32M. Again, this debt is non-recourse so Clipper could hand the keys and walk away, shedding the $125M debt load.
Remaining Assets (472 units, NAV: $0.91/share)
Clipper has 3 more assets:
Aspen - 232-unit asset in Harlem, currently 99.5% occupied on residential portion. We will assume a 5.5% T3/T12 cap rate ($68.9M GAV) given the Harlem discount.
10 W 65th Street - 82-unit asset in Upper West Side, neighboring Central Park. The property also includes 53K sq. feet of air rights, which I valued conservatively at $200PSF, translating to a total $52M GAV, assuming a 5.0% cap rate on the residential T3/T12 NOI.
Note that Clipper is currently marketing this asset for sale at a ‘discount to book value ($78M).’ Clipper probably overpaid for the asset in 2017 for $79M and a sale would likely result in $20M to $30M in net proceeds. This asset makes sense to sell, given the higher (7%) mortgage rate, unmonetized air rights and smaller scale.
Clover House - 158-unit asset in downtown Brooklyn, currently 97.4% occupied. I valued this at a 5.0% T3/T12 cap rate, which translates to $90.6M GAV.
Combined these assets are worth $38.7M of NAV ($0.91 per share) or 10.0% of the total.
Total Portfolio
On a sum of parts, I reached a private market NAV of $8.29/share (inclusive of the Livingston office assets) to $9.11/share (excluding those assets), implying that shares are trading anywhere between a 56% to 59% discount to NAV, a comfortable margin of safety.
With some multifamily properties in NYC trading in 4-range cap rates today, this case is conservative. The implied cap rate on the portfolio based on today’s share price is ~6.5%.
The $9.11/share NAV valuation assumes Clipper fails to favorably re-structure the Livingston debt or re-tenant either asset. An upside scenario is possible, given the quickly recovering NYC office leasing market and relatively loose real estate credit markets.
So why the large disconnect to private-market NAV?
The Perception of Overleverage
There’s a few reasons why the gap to NAV has widened recently:
Negative headlines concerning the vacancy and delinquency on the Livingston St. assets (24% of NOI).
Forced selling from the largest fund holder, KBW’s Yield Equity REIT Index ($KBWY) owning 9.2% of the float, dropping Clipper in its March re-balancing.
A perception of overleverage and high sensitivity to rates, which the market is now accepting to be ‘higher for longer’.
We’ve already established that the Livingston St. debt is non-recourse and assuming those assets are 0’s, Clipper is actually worth more on a NAV basis (free optionality). And Clipper’s drop from the KBW ETF is non-fundamental.
While there are some smaller individual assets in Clipper’s portfolio that are probably temporarily over-levered (such as Aspen and Clover House), the overall portfolio is moderately leveraged (est. ~73% LTV, excluding Livingston). The debt is also 91% fixed rate with a weighted average maturity in 2029, so there is plenty of runway for NOI growth before refinance so any impairment beyond the office assets in highly unlikely.
The most expensive debt is the Dean Street construction financing. Management has guided the asset to stabilize at a 7.0% yield on cost by Q3-Q4 2025. Buffering to a 6.5% yield on cost should create another $9.5M in run-rate NOI. A permanent, cash-neutral financing (let’s assume at 6% rate) take-out of the (9.4% rate) construction loans reduces $3.3M in debt service.
In this ‘pro-forma’ scenario, Clipper can quite easily cover its debt service (1.4x coverage after G&A), even assuming they hand the keys back on both Livingston St. assets. They can likely continue covering the annual $16M dividend as well.
Even in a downside scenario, where Clipper must refinance its entire debt load at 5.75% (a ~150bps increase to in-place rate) with 0% NOI growth, it can still fund debt service and recurring capex. With such a discount to NAV, there is optionality to monetize ~$386M in NAV of real estate to de-leverage, grow or return cash (dividends/buybacks) as necessary. Keep in mind the 4+ year duration on its mortgages.
Clipper is effectively trading as an equity stub with minimal solvency risk, attractive terminal value and upside to NYC residential rental market.
For context, most multifamily REITs are trading in the high-teens/low-twenties on a P/FFO basis (Clipper is <10x P/FFO with NYC real estate exposure). With this suppressed valuation and fixed-term (4+ year) debt, even a small (5.0%) change in NOI can have an outsized (1.5x turn) impact on P/FFO. Notably, my pro-forma NOI conservatively excludes up to $4M in management-guided annual Section 610 reimbursements, which would flow right to FFO.
A leveraged bet on NYC real estate is one I am happy to take, especially with all signs pointing to further rent growth. With new deliveries nearly 50% lower than pre-COVID levels, 2024 new lease trade-outs at 10% in the portfolio, and elevated mortgage rates keeping people renting, there is sustained demand and capped supply.
I also think strong office leasing momentum (24% volume growth in February) will underpin renter preference for Manhattan and the surrounding boroughs.
Given the fundamental backdrop of NYC rental market, upside to NOI growth and attractive in-place debt terms, I think such a wide gap to NAV is unjustified. The stock is now trading at an all-time low valuation on a NAV, cash flow and revenue basis.
With the coming resolution of the Livingston assets, the stabilization at Dean St. and operating leverage with solid market fundamentals, I think there are multiple catalysts to re-rate the stock closer to NAV.
Clipper will probably always trade at some discount to peers/NAV, however, at today’s prices, I think there is a comfortable margin of safety that can offer up to ~95% upside (~80% of NAV) with limited execution risk from management.
Risks and Mitigants:
Weak Management
Management has repeatedly dismissed any interest in share repurchases.
Management also runs Clipper Equity, a privately-run developer/operator, in parallel with Clipper Realty (located in the same office). This entity competes in the same market and may receive favorable treatment regarding new investment opportunities. At least Clipper Realty is internally-managed, so there is no aggressive 3rd party fee structure.
Insiders own 61% of the company, through OP Units, which serves as a mitigant, however these conflicts (and management’s voting power) mean the stock should always trade at a discount.
Capex Spend at Flatbush Gardens
Under the tax abatement deal, Clipper must complete $27M of capital improvements over 3 years (started in June 2023). Management has said spending will be pro-rated annually, so I estimate they are about halfway done (~$15M remaining). Capex is subject to inflation, cost overruns and additional demands from the City.
I am confident they can finance this with operating cash flows, net proceeds from the upcoming 10 W 65th Street sale ($20M - $30M) and a potential cash-out refinancing of Dean St.
Continued Uncertainty of Livingston Assets
The office assets are a clear overhang on the stock. There could be further cash burn by paying current on the loan (and failing to re-tenant it), fund further cash sweeps/deposits, or incur significant TI/LC’s and/or a reduction in rent, even if leased.
Even if Clipper hands back the keys, it is accretive to NAV. In any scenario where Clipper holds on to these assets, I assume there management believes they can to recover some value. Management does not receive AUM-based fees, which would incentivize them to hold on to underwater assets.
Conclusion
Unfortunately, weak management makes Clipper a short-term (1-2 year) hold, rather than an attractive long-term investable franchise. That said, shares are comfortably worth $7 - $8, with enough catalysts to bridge the gap.
The Dean St. stabilization, Flatbush Section 610 reimbursement upside, fundamental market tailwinds and a potentially favorable resolution on Livingston assets could all be catalysts to closing a record-low gap to NAV.
Needless to say, it is hard to go wrong buying NYC real estate for 40 cents on the dollar.
Great analysis, thanks for posting.
If NOI keeps growing and they want to keep leverage constant, there is a chance for special dividends via additional debt / dividend recapitalization, no?
What is management’s justification for not repurchasing shares?