Is Clipper Realty Inc (NYSE:CLPR) A Healthy REIT?

Clipper Realty Inc is a US$620m small-cap, real estate investment trust (REIT) based in Brooklyn, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how CLPR’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess CLPR.

Check out our latest analysis for Clipper Realty

Funds from Operations (FFO) is a higher quality measure of CLPR’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For CLPR, its FFO of US$10m makes up 19% of its gross profit, which is relatively low, given most REITs’ earnings are predominantly high-quality and recurring funds from operations.

NYSE:CLPR Historical Debt November 16th 18
NYSE:CLPR Historical Debt November 16th 18

In order to understand whether CLPR has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take CLPR to pay off its debt using its income from its main business activities, and gives us an insight into CLPR’s ability to service its borrowings. With a ratio of 1.2%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CLPR over 50 years to pay off using just operating income, which is extremely long. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at CLPR’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 0.29x, CLPR is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

In terms of valuing CLPR, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In CLPR’s case its P/FFO is 59.31x, compared to the long-term industry average of 16.5x, meaning that it is highly overvalued.

Next Steps:

Clipper Realty can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I’ve only covered one metric in this article, the FFO, which is by no means comprehensive. I’d strongly recommend continuing your research on the following areas I believe are key fundamentals for CLPR:

  1. Future Outlook: What are well-informed industry analysts predicting for CLPR’s future growth? Take a look at our free research report of analyst consensus for CLPR’s outlook.
  2. Valuation: What is CLPR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CLPR is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.