Shares of Clipper Realty, Inc. CLPR have been on a remarkable run, with its shares climbing 32% over the past six months. The REIT has significantly outperformed the Zacks REIT and Equity Trust - Other industry’s growth of 20.1% and the S&P 500 composite’s rise of 12.6% over the same time frame.

This REIT, which is into residential & office real estate, has also left its peers like Gladstone Commercial GOOD and Peakstone Realty Trust PKST in the dust, with these stocks only gaining 25.5% and 7.1%, respectively, in the same period.

Six-Months Price Performance

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With this Brooklyn, NY-based REIT riding high, individuals may rush to add it to their portfolio. However, before making any hasty decision, it would be prudent to take a look at the reasons behind the surge, the stock’s growth prospects, as well as risks of investing in the same. The idea is to help investors make a more insightful decision.

Riding High: What’s Driving CLPR's Growth?

Clipper Realty enjoys a robust property base in the New York metropolitan area. The company engages in the acquisition, ownership, management, operation and repositioning of multifamily residential and commercial properties. Its substantial exposure to portfolios in Manhattan and Brooklyn has offered ample scope to enhance its top line.

Despite the overall choppiness in the office real estate sector, Clipper Realty is well-poised for growth, given tenants’ healthy demand for office spaces with class-apart amenities. In the third quarter of 2024, the company’s commercial property leases constituted approximately 26% of total revenues. Moreover, it has commercial leases with the City of New York, a municipal corporation acting through the Department of Citywide Administrative Services, which accounted for approximately 22% of total revenues reported in the third quarter of 2024.

Healthy demand for residential rental units in its markets amid favorable demographic trends is likely to benefit the company in the upcoming quarters. In the third quarter of 2024, the company’s residential rental property leases constituted approximately 74% of total revenues. Residential revenues increased 9.2% year-over-year in the quarter, driven by higher rental rates at all residential properties and higher occupancy. Management expects leasing to remain strong in the foreseeable future as demand remains high and the overall rental housing supply remains constrained.

The company is also well-poised for long-term growth, backed by its development efforts. After a year of full operation, Pacific House at 1010 Pacific Street in Brooklyn has achieved full stabilization and is positively contributing to cash flow. The property is 100% leased and is delivering the projected 7% capitalization rate. At its Dean Street ground-up development, construction is proceeding ahead of schedule. Management is confident of an on-time completion to capture the 2025 leasing season.

Moreover, the interest rate cuts announced by the Federal Reserve in recent times have played a catalyst for this company. Lower interest rates are likely to boost REIT stock prices, including CLPR, for two main reasons. Firstly, companies can borrow at lower costs, which enhances the ability to purchase or develop real estate. Secondly, REITs’ dividend yields grab investors’ attention more than yields on fixed-income and money market accounts in times like this.

Navigating Near-Term Challenges for Clipper Realty

However, Clipper Realty has its share of challenges. With persistent macroeconomic uncertainty and a hybrid working environment, it is expected that near-term demand for office spaces will remain choppy in this market.

Amid higher leasing costs and an elevated supply of office properties, it will be challenging for the company to backfill tenant move-outs and vacancies in the near term.

CLPR Stock is Trading at a Discount

From a valuation perspective, we note that with the recent rally, CLPR is trading at a forward 12-month price-to-FFO, of 9.16X. It is at a discount to the industry average of 16.89X and lower than its one-year median of 12.09X and one-year high of 18.00X.

Although Clipper Realty stock is currently trading at a discount compared to its industry peers, this valuation disparity might not be as favorable as it seems. The lower price could indicate underlying issues rather than representing a clear investment opportunity.

Forward 12 Month Price-to-FFO (P/FFO) Ratio

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What Should Investors Do?

Considering the pros and cons of CLPR, as well as valuation, we conclude that investors interested in buying this stock should wait for a more visible improvement in macroeconomic conditions and demand for office properties and hang on for a better entry point.

However, those who already own this stock may stay invested as the company's strong residential leasing, development efforts and interest rate cut augur well for growth. The stock’s Zacks Rank #3 (Hold) supports our thesis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Gladstone Commercial Corporation (GOOD) : Free Stock Analysis Report

Clipper Realty Inc. (CLPR) : Free Stock Analysis Report

Peakstone Realty Trust (PKST) : Free Stock Analysis Report

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