Business context and reporting period
Creative Media & Community Trust Corporation (CMCT), a Maryland REIT operated by CIM Group affiliates, filed this Form 10-K for the fiscal year ended December 31, 2022. Its businesses comprise office properties, one Sacramento hotel and an SBA 7(a) small-business lending platform. At year-end, CMCT reported 19 real estate assets: 13 office properties with approximately 1.3 million rentable square feet, one 503-room hotel and four development sites. Office, hotel and lending generated approximately 54.8%, 34.6% and 10.6% of segment revenue, respectively.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $101.9 million | $90.9 million |
| Total expenses | $95.0 million | $88.8 million |
| Net income (loss) | $5.9 million | $(0.9) million |
| Net loss attributable to common stockholders | $(25.8) million; $(1.11) per share | $(20.0) million; $(1.04) per share |
| FFO attributable to common stockholders | $(5.4) million | $0.1 million |
| Cash from operating activities | $32.4 million | $46.3 million |
| Cash used in investing activities | $(22.3) million | $(12.7) million |
| Cash from (used in) financing activities | $13.7 million | $(43.6) million |
Common-stockholder loss differs from reported net income because of preferred dividends, deemed dividends and $13.1 million of preferred-stock redemption charges, primarily related to Series L transactions. FFO is a non-GAAP measure and does not represent operating cash flow or funds available for dividends.
At December 31, 2022, total assets were $690.2 million, total liabilities $312.5 million, and total equity $362.0 million. Cash and cash equivalents were $46.2 million, with another $11.3 million restricted. Debt, net, was $184.3 million (approximately $186.4 million principal). The balance sheet also included $83.8 million payable for the Series L redemption. The $97.1 million mortgage on 1 Kaiser Plaza carries a fixed 4.14% rate and matures in July 2026. The new credit facility had $56.2 million outstanding at year-end, a $150 million revolver commitment subject to borrowing-base limits, a 6.93% year-end variable rate and a December 2025 maturity. Junior subordinated notes of $27.1 million bear variable interest. CMCT had $89.3 million of floating-rate debt, which was not hedged; management estimated a 50-basis-point rate change would affect annual earnings by about $446,000.
Office occupancy improved to 81.7% from 77.7%; annualized rent per occupied square foot rose to $54.75 from $52.57. Hotel occupancy increased to 73.0% from 53.6%, ADR to $172.95 from $136.51 and RevPAR to $126.19 from $73.23. Segment NOI was $29.3 million for office, $11.1 million for hotel and $6.4 million for lending, versus $29.5 million, $1.9 million and $15.7 million, respectively, in 2021.
Material changes versus the prior year
- Revenue rose 12.1%. Hotel revenue nearly doubled to $35.2 million as travel and hotel operations recovered from COVID-related disruption; hotel segment NOI increased by $9.2 million.
- Lending revenue fell 45.6% to $10.8 million and lending NOI declined by $9.3 million, mainly due to lower loan-sale volume and market premiums. Loan originations were $40.6 million, down from $133.3 million. CMCT expects lower origination volume and servicing revenue trends to continue into 2023.
- Office revenue increased 5.0% to $55.9 million, while office NOI edged down to $29.3 million as operating expenses rose 12.5%.
- Related-party asset-management and other fees fell to $3.6 million from $9.0 million following a 2022 fee waiver; the revised base fee is generally 1% annually of defined common-stockholder NAV. CMCT also issued preferred shares to the Operator in lieu of some fees.
- Operating cash flow decreased $13.9 million, primarily reflecting lower net proceeds from guaranteed-loan sales and greater working-capital use. Financing cash flow improved, supported by preferred-stock and debt proceeds.
- CMCT repurchased 2.4 million Series L preferred shares in September 2022 and redeemed all remaining Series L shares in cash on January 25, 2023. The redemption cost was $83.8 million plus $4.6 million of accrued dividends. It also repurchased $4.7 million of common stock during 2022.
Outlook, risks and unusual items
Management provided no numerical earnings or cash-flow guidance. It cited elevated inflation, construction and operating costs, higher interest rates, tighter financing conditions, potential refinancing constraints and office-market uncertainty. Office lease exposure merits attention: 15.5% of office rentable area was available for lease at year-end, 11.2% of occupied area was scheduled to expire in 2023, and 40.9% of occupied area had leases expiring in 2025. Kaiser represented 29.8% of annualized office rent and has specified lease termination rights.
CMCT intends to convert two floors of 4750 Wilshire Boulevard from office to multifamily, with estimated project costs of approximately $31 million. In February 2023, co-investors acquired an 80% interest in the property. Subsequent to year-end, CMCT also acquired multifamily interests in Oakland and Los Angeles and completed a $54.1 million securitization of unguaranteed SBA 7(a) loans, with approximately $43.3 million net proceeds. These developments affect capital needs, leverage and the future portfolio mix.
Principal risks include California property concentration and natural-disaster exposure; office vacancy, tenant concentration and remote-work trends; hotel cyclicality; nearly all lending credit exposure being concentrated in hospitality; variable-rate debt; and dependence on CIM affiliates under management agreements with limited termination rights. The filing identifies conflicts of interest and related-party fees as risks. It reports no material pending legal proceedings, but notes a contractor-injury lawsuit for which the potential loss could not be estimated and an SBA-guarantee contingency if loan-servicing deficiencies are found. No impairment of long-lived assets was recorded in 2022 or 2021. The auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the $5.9 million GAAP net income with the $25.8 million common-stockholder loss and $5.4 million negative FFO; assess the recurring cash cost of preferred dividends and redemptions.
- Review liquidity after the January 2023 Series L cash redemption, including facility borrowings, borrowing-base availability, covenant compliance and the effect of subsequent acquisitions and securitization.
- Track floating-rate exposure and refinancing dates, particularly the 2025 credit-facility maturity and 2026 1 Kaiser Plaza mortgage maturity.
- Monitor Kaiser lease termination options, major 2023 and 2025 expirations, office occupancy and leasing costs, and progress and financing of the 4750 Wilshire conversion.
- Evaluate lending credit quality and hospitality concentration, loan-sale premiums, origination trends, and any SBA findings that could impair guarantees.
- Assess whether preferred distributions and common dividends—including the $0.085 quarterly common dividend—remain supported by cash generation and available liquidity.