# Clipper Realty Inc. (CLPR) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Clipper Realty Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1649096/000143774922006301/clpr20211231_10k.htm
Accession: 0001437749-22-006301
Filing date: 2022-03-15
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CLPR/
All MD&A years: /company/CLPR/mda/
Next year: /company/CLPR/mda/fy2022/ (FY 2022)

ITEM 7. 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 captions “Selected Financial Data” and “Cautionary Note Concerning Forward-Looking Statements,” and in our financial statements and the related notes thereto appearing elsewhere in this Annual Report on Form 10-K.

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.

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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.

During the period December 2021 through February 2022, the Company purchased the Dean Street property located in Prospect Heights, New York, for approximately $44.0 million.

As of December 31, 2021, the Company owns:

[[GREPCENT_TABLE]]
[["","\u2022","two neighboring residential/retail rental properties at 50 Murray Street and 53 Park Place in the Tribeca neighborhood of Manhattan;"],["","\u2022","one residential property complex in the East Flatbush neighborhood of Brooklyn consisting of 59 buildings;"],["","\u2022","two primarily commercial properties in Downtown Brooklyn (one of which includes 36 residential apartment units);"],["","\u2022","one residential/retail rental property at 1955 1st Avenue in Manhattan;"],["","\u2022","one residential rental property at 107 Columbia Heights in the Brooklyn Heights neighborhood of Brooklyn;"],["","\u2022","one residential rental property at 10 West 65th Street in the Upper West Side neighborhood of Manhattan; and"],["","\u2022","one property at 1010 Pacific Street in the Prospect Heights neighborhood of Brooklyn, to be redeveloped as a residential rental building."],["","\u2022","a group of properties at 1050 Pacific Street, 1048 Pacific Street, 643 Classon Avenue and 953 Dean Street in the Prospect Heights neighborhood of Brooklyn, to be redeveloped as a residential/retail rental building."]]
[[/GREPCENT_TABLE]]

These properties are located in the most densely populated major city in the United States, each with immediate access to mass transportation.

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 62.1% 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 37.9% 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, the 1010 Pacific Street property and the Dean Street property.

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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 disruptions 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. The Tribeca House property experienced declines in leased occupancy and residential rental rate as a result of the COVID-19 pandemic in 2020 but has since recovered with both occupancy and rental rates in 2021; several of our other properties experienced smaller declines in leased occupancy as well. Certain of our commercial tenants requested rent deferrals during 2020. 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 which may ultimately result in a further decrease in occupancy levels and rental rates across our portfolio as residents reduce their spending and replacement tenants become harder to find. 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 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 fourth quarter of 2021 was 98.0%; for full-year 2021, our rent collection rate was 96.6%. At December 31, 2021, our properties were 95% 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.

How We Derive Our Revenue

Our revenue consists primarily of rents received from our residential, commercial and, to a lesser extent, retail tenants.

Trends

During 2021, several of the Company’s residential properties, which had experienced declines in demand and rental rates as a result of the COVID-19 pandemic, experienced a renewed increase in demand and rental rates, as certain renters returned to the New York metro area. While the average rental rate per square foot at the Tribeca House property at December 31, 2021 was $62.54, down from $64.20 at December 31, 2020, and $70.52 at December 31, 2019, the average rent per square foot for new leases beginning in the second half of 2021 was $74.48. At the Aspen property, average residential rent per square foot increased at December 31, 2021, to $35.60, up from $34.64 at December 31, 2020, compared to $36.60 at December 31, 2019. The average rent per square foot for new leases beginning in the second half of 2021 at the Aspen property was $43.37. At the Clover House property, average residential rent per square foot at December 31, 2021, was $63.41, an increase from $49.36 at December 31, 2020, compared to $69.09 at December 31, 2019. The average rent per square foot for new leases beginning in the second half of 2021 at the Clover House property was $75.38. Although urban office markets have also generally been negatively impacted as a result of the COVID-19 pandemic, with an increase in remote working leading to less demand for office space, the Company’s office properties have not been adversely affected from a rent perspective given its long-term leases with the City of New York. At the 141 Livingston Street property, the City’s annual rent on its lease, which expires at the end of 2025, increased by 25% beginning at the end of December 2020. At the nearby 250 Livingston Street property, the City’s lease, which commenced in August 2020, resulted in an initial 57% increase in blended rent per square foot and a 16% increase in rentable square feet through a remeasurement. Separately, certain of our smaller commercial spaces which were vacated as a result of the COVID-19 pandemic have been released at favorable rental rates.

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Throughout 2021, 2020 and 2019, we continued to benefit from relatively low interest rates. Our weighted average interest rate as of December 31, 2021, was approximately 3.8% per annum. Despite recent increases, interest rates continue to be at relatively low levels versus historical norms.

Factors that May Influence Future Results of Operations

We derive approximately 70% of our revenues from rents received from residents in our apartment rental properties and the remainder from commercial and retail rental customers. We believe that we have expertise in operating, renovating and repositioning our properties. As we grow, we will likely add personnel as necessary to provide outstanding customer service to our residents in order to maintain or increase occupancy levels at our apartment communities and to preserve the ability to increase rents. This is likely to result in an increase in our operating and general and administrative expenses over time.

A majority of the leases at our apartment communities are for approximately one-year terms, which, in a rising market, generally enables us to seek increased rents upon renewal of existing leases or commencement of new leases. This may offset the potential adverse effect of inflation or deflation on rental revenue, although residents may leave without penalty at the end of their lease terms for any reason and, in a falling market, may require us to receive decreased rents upon renewal of existing leases or commencement of new leases. Our ability to seek increased rents at our Flatbush Gardens property, our Aspen property and a portion of our 10 West 65th Street property is limited, however, as a result of the rent stabilization laws and regulations of New York City, including the Housing Stability and Tenant Protection Act of 2019, which was signed into law in New York in June 2019. These regulations generally limit rental increases that we can charge at our Flatbush Gardens property, our Aspen property and a portion of our 10 West 65th Street property upon lease renewal; effective October 1, 2020, such increases are 0% for a one-year lease and, for a two-year lease, 0% for the first year of the lease and 1% for the second year of the lease. The regulations also limit the maximum rent we can charge at our Flatbush Gardens property, our Aspen property and a portion of our 10 West 65th Street property on new leases. At our Aspen property, the residential units are subject to regulations established by the HDC, under which there are no rental restrictions on approximately 55% of the units and low- and middle-income restrictions on approximately 45% of the units. There are no rent stabilization restrictions at our Tribeca House properties, our 250 Livingston Street property, our Clover House property and a portion of our 10 West 65th Street property.

We also incur costs on turnover of residents when one resident moves out and we prepare the apartment for a new resident. The costs include the costs of repainting and repairing apartment units, replacing obsolete or damaged appliances and re-leasing the units. While we budget for turnover and the costs associated therewith, our turnover cost may be affected by certain factors we cannot control. Excessive turnover and failure to properly manage turnover cost may adversely affect our operations and could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock.

We seek earnings growth primarily through increasing rents and occupancy at existing properties, and acquiring additional apartment communities in markets complementing our existing portfolio locations. Our apartment and commercial operating properties are concentrated in six neighborhoods within the boroughs of Manhattan and Brooklyn in New York City, which makes us susceptible to adverse developments in these markets. As a result, we are particularly affected by the local economic conditions in these markets, including, but not limited to, changes in supply of or demand for apartment units in our markets, competition for real property investments in our markets, changes in government rules, regulations and fiscal policies, including those governing real estate usage and tax, and any environmental risks related to the presence of hazardous or toxic substances or materials at or in the vicinity of our properties, which could negatively affect our overall performance.

We may be unable to accurately predict future changes in national, regional or local economic, demographic or real estate market conditions. For example, continued volatility and uncertainty in the global, national, regional and local economies could make it more difficult for us to lease apartment, commercial and retail space and may require us to lease our apartment, commercial and retail space at lower rental rates than projected and may lead to an increase in resident defaults. In addition, these conditions may also lead to a decline in the value of our properties and make it more difficult for us to dispose of these properties at competitive prices. These conditions, or others we cannot predict, could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock.

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As a public company with shares listed on a U.S. exchange, we incur general and administrative expenses, including legal, accounting and other expenses, related to corporate governance, public reporting and compliance with various provisions of the Sarbanes-Oxley Act, related regulations of the SEC, including compliance with the reporting requirements of the Exchange Act, and the requirements of the national securities exchange on which our stock is listed.

Significant Accounting Policies

Basis of Consolidation

        The consolidated financial statements of the Company included elsewhere herein are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The effect of all significant intercompany balances and transactions has been eliminated. The consolidated financial statements include the accounts of all entities in which the Company has a controlling interest. All significant intercompany transactions and balances are eliminated in consolidation/combination.

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. Management adjusts such estimates when facts and circumstances dictate. The most significant estimates made include the recoverability of accounts receivable, allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed, and the useful lives of long-lived assets. 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 and real estate under development. 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.

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:

[[GREPCENT_TABLE]]
[["","\u2022","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\u037e or"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","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)."]]
[[/GREPCENT_TABLE]]

An acquired process is considered substantive if:

[[GREPCENT_TABLE]]
[["","\u2022","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\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","The process cannot be replaced without significant cost, effort or delay\u037e or"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","The process is considered unique or scarce."]]
[[/GREPCENT_TABLE]]

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 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 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 commission, 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. Management of the Company does not believe that any of its properties within the portfolio are impaired as of December 31, 2021.

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:

[[GREPCENT_TABLE]]
[["Building and improvements","10 \u2013 44 years"],["Tenant improvements","Shorter of useful life or lease term"],["Furniture, fixtures and equipment","3 \u2013 15 years"]]
[[/GREPCENT_TABLE]]

Capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and 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.

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 combined financial statements. 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.

Revenue Recognition

Rental revenue for commercial leases is recognized on a straight-line basis over the terms of the respective leases. 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 an apartment unit are generally for a one-year term, renewable upon consent of both parties on an annual or monthly basis. Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.

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.

Results of Operations

Our focus throughout the years ended December 31, 2021, 2020 and 2019, 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.

Income Statement for the Years Ended December 31, 2021 and 2020 (in thousands)

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","Increase (decrease)","","","%"],["Revenues"],["Residential rental income","","$","85,771","","","$","90,543","","","$","(4,772",")","","","(5.3",")%"],["Commercial rental income","","","36,958","","","","32,307","","","","4,651","","","","14.4","%"],["Total revenues","","","122,729","","","","122,850","","","","(121",")","","","(0.1",")%"],["Operating Expenses"],["Property operating expenses","","","28,997","","","","29,902","","","","(905",")","","","(3.0",")%"],["Real estate taxes and insurance","","","30,449","","","","28,286","","","","2,163","","","","7.6","%"],["General and administrative","","","10,570","","","","9,728","","","","842","","","","8.7","%"],["Transaction pursuit costs","","","60","","","","\u2014","","","","60","","","","100","%"],["Depreciation and amortization","","","25,762","","","","23,630","","","","2,132","","","","9.0","%"],["Total operating expenses","","","95,838","","","","91,546","","","","4,292","","","","4.7","%"],["Gain on termination of lease","","","\u2014","","","","838","","","","(838",")","","","(100",")%"],["Litigation settlement and other","","","(2,730",")","","","\u2014","","","","(2,730",")","","","(100",")%"],["Income from operations","","","24,161","","","","32,142","","","","(7,981",")","","","(24.8",")%"],["Interest expense, net","","","(41,284",")","","","(40,228",")","","","1,056","","","","2.6","%"],["Loss on modification/extinguishment of debt","","","(3,034",")","","","(4,228",")","","","(1,194",")","","","(28.2",")%"],["Gain on involuntary conversion","","","139","","","","85","","","","54","","","","63.5","%"],["Net loss","","$","(20,018",")","","$","(12,229",")","","$","(7,789",")","","","63.7","%"]]
[[/GREPCENT_TABLE]]

The dollar amounts in the narrative disclosure below are in thousands, other than the base rent per square foot figures.

Revenue. Residential rental income decreased from $90,543 for the year ended December 31, 2020, to $85,771 for the year ended December 31, 2021, primarily due to decreases in rental rates at Tribeca House from residual leases entered into early in the pandemic and a decrease in occupancy at Flatbush Gardens as a result of the COVID-19 pandemic. Base rent per square foot decreased at the Tribeca House property from $64.20 (89.7% leased occupancy) at December 31, 2020, to $62.68 (97.8% leased occupancy) at December 31, 2021. Leased occupancy at the Flatbush Gardens property decreased from 94.7% leased at December 31, 2020, to 92.3% leased at December 31, 2021.

Commercial rental income increased from $32,307 for the year ended December 31, 2020, to $36,958 for the year ended December 31, 2021, primarily due to the commencement of a new lease at the 250 Livingston Street property in August 2020.

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 decreased from $29,902 for the year ended December 31, 2020, to $28,997 for the year ended December 31, 2021, primarily due to decreases in payroll and security costs at the Flatbush Gardens property as well as an overall decrease in the provision for bad debt across the portfolio, partially offset by increases in utility costs across the portfolio.

Real estate taxes and insurance. Real estate taxes and insurance expenses increased from $28,286 for the year ended December 31, 2020, to $30,449 for the year ended December 31, 2021, primarily due to increased real estate taxes and insurance expense across the portfolio.

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General and administrative. General and administrative expenses increased from $9,728 for the year ended December 31, 2020, to $10,570 for the year ended December 31, 2021, primarily due to increases in payroll and non-cash LTIP amortization expense, partially offset by a decrease in legal expenses.

Transaction pursuit costs. Transaction pursuit costs primarily reflect costs incurred for abandoned acquisition, disposition or other transaction pursuits.

Depreciation and amortization. Depreciation and amortization expense increased from $23,630 for the year ended December 31, 2020, to $25,762 for the year ended December 31, 2021, due to additions to real estate across the portfolio, partially offset by reduced intangibles amortization at the Tribeca House property.

Gain on termination of lease. Gain on termination of lease represents the write-off of unamortized assets and liabilities in relation to the termination of a lease at the Tribeca House property in 2020.

Litigation settlement and other. Litigation settlement represents an estimated non-recurring expense that the Company will incur in relation to the settlement of itigation related to Real Property Tax Law (“RPTL”) 421-g. The charge is based on NY Supreme Court rulings on March 4, 2022 that established probability and ability to compute the estimated cost.

Interest expense, net. Interest expense, net, increased from $40,228 for the year ended December 31, 2020, to $41,284 for the year ended December 31, 2021. The increase primarily resulted from the refinancing of the Flatbush Gardens property in May 2020 and the 141 Livingston Street property in February 2021 which resulted in higher outstanding loan balances. Interest expense included amortization of loan costs of $1,247 and $1,212 for the years ended December 31, 2021 and 2020, respectively.

Loss on modification/extinguishment of debt. Loss on modification/extinguishment of debt related to the refinancing of the 141 Livingston Street loan in February 2021 and the Flatbush Gardens loan in May 2020. The amount included charges for early termination 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 units at the Flatbush Gardens property.

Net loss. As a result of the foregoing, net loss increased from $12,229 for the year ended December 31, 2020, to $20,018 for the year ended December 31, 2021.

For comparison of the year ended December 31, 2020, to the year ended December 31, 2019, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Liquidity and Capital Resources

As of December 31, 2021, we had $1,131.2 million of indebtedness (net of unamortized issuance costs) secured by our properties, $34.5 million of cash and cash equivalents, and $17.7 million of restricted cash. See Note 7 “Notes Payable” 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.

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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.

Property-Level Debt

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 (in thousands):

[[GREPCENT_TABLE]]
[["Property","Maturity","","Interest Rate","","","December 31, 2021"],["Flatbush Gardens, Brooklyn, NY","6/1/2032","","","3.125%","","","$","329,000"],["250 Livingston Street, Brooklyn, NY","6/6/2029","","","3.63%","","","","125,000"],["141 Livingston Street, Brooklyn, NY","3/6/2031","","","3.21%","","","","100,000"],["Tribeca House, Manhattan, NY","3/6/2028","","","4.506%","","","","360,000"],["Aspen, Manhattan, NY","7/1/2028","","","3.68%","","","","64,047"],["Clover House, Brooklyn, NY","12/1/2029","","","3.53%","","","","82,000"],["10 West 65th Street, Manhattan, NY","11/1/2027","","","3.375%","","","","32,921"],["1010 Pacific Street, Brooklyn, NY","9/1/2024","","LIBOR + 3.60%","","","","21,084"],["953 Dean Street, Brooklyn, NY","12/22/2022","","Prime Rate + 1.60%","","","","30,000"],["","","","","","","","$","1,144,052"]]
[[/GREPCENT_TABLE]]

Flatbush Gardens

There is $329.0 million of mortgage debt secured by Flatbush Gardens, as of December 31, 2021, in the form of a mortgage note to 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. We have 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.

250 Livingston Street

There is $125.0 million in mortgage debt secured by 250 Livingston Street, as of December 31, 2021, in the form of a mortgage note to Citi Real Estate Funding Inc. The note matures on June 6, 2029, bears interest at 3.63% and requires interest-only payments for the entire term. We have the option to prepay all (but not less than all) of the unpaid balance of the note within three months of maturity, without a prepayment premium.

141 Livingston Street

There is $100.0 million in mortgage debt secured by 141 Livingston Street, as of December 31, 2021, in the form of a mortgage note to Citi Real Estate Funding Inc. The note matures on March 6, 2031, bears interest at 3.21% and requires interest-only payments for the entire term. We have the option to prepay all (but not less than all) of the unpaid balance of the loan within three months of maturity, without a prepayment premium.

47

Tribeca House

There is a $360.0 million loan secured by the Tribeca House properties, as of December 31, 2021, through Deutsche Bank AG. The loan matures on March 6, 2028, bears interest at 4.506% and requires interest-only payments for the entire term. We have the option to prepay all (but not less than all) of the unpaid balance of the note prior to the maturity date, subject to a prepayment premium if it occurs prior to December 6, 2027.

Aspen

There is $64.0 million in mortgage debt secured by Aspen, as of December 31, 2021, in the form of a mortgage note to Capital One Multifamily Finance LLC. The note matures on July 1, 2028, and bears interest at 3.68%. The note required interest-only payments through July 2018, and monthly principal and interest payments of approximately $321,000 thereafter based on a 30-year amortization schedule. We have the option to prepay the note prior to the maturity date, subject to a prepayment premium.

Clover House

There is $82.0 million in mortgage debt secured by Clover House as of December 31, 2021, in the form of a mortgage note to MetLife Investment Management. The note matures on December 1, 2029, bears interest at 3.53% and requires interest-only payments for the entire term. We have 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.

10 West 65th Street

There is $32.9 million in mortgage debt secured by 10 West 65th Street as of December 31, 2021, in the form of a mortgage note to New York Community Bank, entered into in connection with the acquisition of the property. 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 November 2019, and monthly principal and interest payments of approximately $152,000 thereafter based on a 30-year amortization schedule. We have 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.

1010 Pacific Street

There is $21.1 million in mortgage debt secured by 1010 Pacific Street as of December 31, 2021, in the form of a group of mortgage notes to AIG Asset Management (U.S.), LLC, entered into in connection with the commencement of construction at the property. The notes, which provide for maximum borrowing of $52.5 million, have a 36 month term, bear interest at 30 day LIBOR plus 3.60% (with a floor of 4.1%). The notes mature on September 1, 2024 and may be extended until September 1, 2026. The Company may prepay the unpaid balance of the note within five months of maturity.

Dean Street

There is $30.0 million in mortgage debt secured by Dean Street as of December 31, 2021, in the form of a mortgage note to Bank Leumi, N.A., entered into in connection with the acquisition of the property. The note matures on December 22, 2022, is subject to two six month extension options, requires interest-only payments and bear interest at the prime rate (with a floor of 3.25%) plus 1.60% (4.85% as of December 31, 2021). The Company currently intends to refinance the note with a construction loan prior to maturity, although there are no assurances that the Company will be able to do so.

The Company has provided a limited guaranty for the mortgage notes at several of its properties. The Company’s loan agreements contain customary representations, covenants and events of default. Certain loan agreements require the Company to comply with affirmative and negative covenants, including the maintenance of debt service coverage and debt yield ratios. In the event that they are not compliant, certain lenders may require cash sweeps of rent until the conditions are cured. The Company is not in default on any of its loan agreements.

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Contractual Obligations and Commitments

The following table summarizes principal and interest payment requirements on our debt under terms as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","","(in thousands)"],["","","Principal","","","Interest","","","Total"],["2022","","","32,215","","","","43,315","","","","75,530"],["2023","","","2,296","","","","41,792","","","","44,088"],["2024","","","23,459","","","","41,577","","","","65,036"],["2025","","","2,468","","","","40,689","","","","43,157"],["2026","","","2,559","","","","40,598","","","","43,157"],["Thereafter","","","1,081,055","","","","159,655","","","","1,240,710"],["Total","","$","1,144,052","","","$","367,626","","","$","1,511,678"]]
[[/GREPCENT_TABLE]]

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 $205,000 per year.

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 years ended December 31, 2021, 2020 and 2019, we paid dividends and distributions on our common shares, Class B LLC units and LTIP units totaling $16.8 million, $17.2 million and $17.1 million, respectively.

Cash Flows for the Years ended December 31, 2021 and 2020 (in thousands)

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020"],["Operating activities","","$","10,822","","","$","15,990"],["Investing activities","","","(77,944",")","","","(31,714",")"],["Financing activities","","","30,314","","","","47,824"]]
[[/GREPCENT_TABLE]]

Cash flows provided by (used in) operating activities, investing activities and financing activities for the years ended December 31, 2021 and 2020, are as follows:

Net cash provided by operating activities was $10,822 for the year ended December 31, 2021, compared to $15,990 for the year ended December 31, 2020. The decrease during the 2021 period reflected a decrease of $573 of cash generated by operating assets and liabilities (including timing of payments of prepaid expenses and accrued liabilities), plus a decrease of $4,595 of cash flow from operating results.

Net cash used in investing activities was $77,944 for the year ended December 31, 2021, compared to $31,714 for the year ended December 31, 2020. We spent $35,531 and $31,811 on capital projects for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2021, we received $150 of insurance proceeds from the disposal of assets damaged in a fire at a property and funded $40,548 towards the acquisition of the Dean Street property. For the year ended December 31, 2020, we received $111 of insurance proceeds from the disposal of assets damaged in a fire at a property and funded $14 for the purchase of an interest rate cap.

Net cash provided by financing activities was $30,314 for the year ended December 31, 2021, compared to $47,824 for the year ended December 31, 2020. Cash was primarily provided in the year ended December 31, 2021, by proceeds from a new loan on the 141 Livingston Street, 1010 Pacific Street and Dean Street properties ($151,764), partially offset by repayment of the existing loan on the 141 Livingston and 1010 Pacific Street properties ($95,295) and loan issuance and extinguishment costs ($7,260). In the year ended December 31, 2020, by proceeds from a new loan on the Flatbush Gardens property ($329,000), partially offset by repayment of the existing loan on the Flatbush Gardens property ($246,000), loan issuance and extinguishment costs ($5,220) and funds used to repurchase common stock ($10,002). The Company paid distributions of $16,758 and $17,243 in the years ended December 31, 2021 and 2020, respectively.

49

For comparison of the year ended December 31, 2020, to the year ended December 31, 2019, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

During 2021, inflationary pressure, which has been relatively low in recent years in the United States, has affected global markets resulting in higher labor costs, utility costs, insurance costs amongst other operating costs. We do not believe that inflation currently poses a material risk to the Company. The leases at our residential rental properties, which comprise approximately 70% 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, replacing or redeveloping properties in the future.

Non-GAAP Financial Measures

In this Annual Report on Form 10-K, 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 measures” 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 (loss) 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, gain on termination of lease and certain litigation-related expenses, less recurring capital spending.

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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 (loss) 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):

[[GREPCENT_TABLE]]
[["","","Years ended December 31,"],["","","2021","","","2020","","","2019"],["FFO"],["Net loss","","$","(20,018",")","","$","(12,229",")","","$","(4,123",")"],["Real estate depreciation and amortization","","","25,762","","","","23,630","","","","19,649"],["FFO","","$","5,744","","","$","11,401","","","$","15,526"],["AFFO"],["FFO","","$","5,744","","","$","11,401","","","$","15,526"],["Amortization of real estate tax intangible","","","481","","","","481","","","","482"],["Amortization of above- and below-market leases","","","(104",")","","","(390",")","","","(1,180",")"],["Straight-line rent adjustments","","","(202",")","","","(1,180",")","","","1,211"],["Amortization of debt origination costs","","","1,247","","","","1,212","","","","1,687"],["Amortization of LTIP awards","","","2,611","","","","1,805","","","","1,510"],["Transaction pursuit costs","","","60","","","","\u2014","","","","\u2014"],["Loss on modification/extinguishment of debt","","","3,034","","","","4,228","","","","2,432"],["Gain on involuntary conversion","","","(139",")","","","(85",")","","","\u2014"],["Gain on termination of lease","","","\u2014","","","","(838",")","","","\u2014"],["Litigation settlement and other","","","2,730","","","","\u2014","","","","\u2014"],["Certain litigation-related expenses","","","299","","","","724","","","","966"],["Recurring capital spending","","","(205",")","","","(514",")","","","(593",")"],["AFFO","","$","15,556","","","$","16,844","","","$","22,041"]]
[[/GREPCENT_TABLE]]

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 certain litigation-related expenses, less gain on involuntary conversion and gain on termination of lease.

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.

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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):

[[GREPCENT_TABLE]]
[["","","Years ended December 31,"],["","","2021","","","2020","","","2019"],["Adjusted EBITDA"],["Net loss","","$","(20,018",")","","$","(12,229",")","","$","(4,123",")"],["Real estate depreciation and amortization","","","25,762","","","","23,630","","","","19,649"],["Amortization of real estate tax intangible","","","481","","","","481","","","","482"],["Amortization of above- and below-market leases","","","(104",")","","","(390",")","","","(1,180",")"],["Straight-line rent adjustments","","","(202",")","","","(1,180",")","","","1,211"],["Amortization of LTIP awards","","","2,611","","","","1,805","","","","1,510"],["Interest expense, net","","","41,284","","","","40,228","","","","35,187"],["Transaction pursuit costs","","","60","","","","\u2014","","","","\u2014"],["Loss on modification/extinguishment of debt","","","3,034","","","","4,228","","","","2,432"],["Gain on involuntary conversion","","","(139",")","","","(85",")","","","\u2014"],["Gain on termination of lease","","","\u2014","","","","(838",")","","","\u2014"],["Litigation settlement and other","","","2,730","","","","\u2014","","","","\u2014"],["Certain litigation-related expenses","","","299","","","","724","","","","966"],["Adjusted EBITDA","","$","55,798","","","$","56,374","","","$","56,134"]]
[[/GREPCENT_TABLE]]

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, less gain on termination of lease. 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):

[[GREPCENT_TABLE]]
[["","","Years ended December 31,"],["","","2021","","","2020","","","2019"],["NOI"],["Income from operations","","$","24,161","","","$","32,142","","","$","33,496"],["Real estate depreciation and amortization","","","25,762","","","","23,630","","","","19,649"],["General and administrative expenses","","","10,570","","","","9,728","","","","9,167"],["Transaction pursuit costs","","","60","","","","\u2014","","","","\u2014"],["Amortization of real estate tax intangible","","","481","","","","481","","","","482"],["Amortization of above- and below-market leases","","","(104",")","","","(390",")","","","(1,180",")"],["Straight-line rent adjustments","","","(202",")","","","(1,180",")","","","1,211"],["Gain on termination of lease","","","\u2014","","","","(838",")","","","\u2014"],["Litigation settlement and other","","","2,730","","","","\u2014","","","","\u2014"],["NOI","","$","63,458","","","$","63,573","","","$","62,825"]]
[[/GREPCENT_TABLE]]

Recent Accounting Pronouncements

See Note 3, “Significant Accounting Policies” of our consolidated financial statements included in Item 15 for a discussion of recent accounting pronouncements.

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