Creative Media & Community Trust Corporation (CIM Commercial Trust Corporation) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. The filing presents unaudited consolidated results. The company is a REIT focused primarily on office real estate, with hotel and SBA 7(a) lending operations.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 or prior balance-sheet date |
|---|---|---|
| Total revenue | $47.3 million | $48.3 million; down 2.1% |
| Net income | $291.6 million | $0.6 million |
| Net income attributable to common stockholders | $287.6 million; basic EPS $6.57, diluted EPS $6.30 | Net loss of $3.0 million; EPS $(0.07) |
| FFO attributable to common stockholders | $(14.1) million | $10.1 million |
| Cash from operating activities | $14.7 million | $17.7 million |
| Cash from investing activities | $641.7 million provided | $115.3 million used |
| Cash used in financing activities | $422.7 million | $11.5 million provided |
| Cash and cash equivalents | $299.4 million | $54.9 million |
| Debt, net, excluding debt in liabilities associated with assets held for sale | $165.6 million | $588.7 million |
| Total assets | $1.187 billion | $1.342 billion |
The sharp reported earnings increase primarily reflects a $377.6 million gain on real estate sales. Results also include a $66.2 million real estate impairment and $25.1 million loss on early extinguishment of debt. Excluding these unusual items and property depreciation, FFO was negative; GAAP net income and EPS therefore do not represent recurring operating performance. Total segment net operating income fell to $24.8 million from $28.2 million.
Office segment revenue was $33.4 million, down 3.9%; hotel segment revenue was $10.6 million, up 0.9%; lending revenue was $2.9 million, down 2.2%. Office NOI was $19.7 million versus $22.5 million, hotel NOI $3.9 million versus $3.9 million, and lending NOI $1.2 million versus $1.7 million.
At March 31, cash and restricted cash totaled $311.2 million. No borrowings were outstanding on the revolving credit facility, with approximately $226 million available, subject to its borrowing base. The company had $165.6 million of debt outside held-for-sale liabilities; an additional $41.9 million of liabilities was associated with assets held for sale. The filing reports no off-balance-sheet arrangements.
Material changes versus the prior period
- In March, the company sold six properties: three Oakland office properties and a parking garage, one Washington, D.C. office property, and one San Francisco office property. Aggregate sales price was $694.6 million, transaction costs were $13.9 million, and reported gain was $377.6 million. Net cash proceeds from real estate sales were $652.9 million.
- Debt was reduced through repayments and property-sale transactions. The company repaid a $130 million revolving-credit balance, prepaid a $46 million mortgage, legally defeased $205.5 million of mortgages, and had a $28.2 million mortgage assumed by the San Francisco property buyer. The defeasance and prepayment contributed to the $25.1 million debt-extinguishment loss.
- Office operating expenses rose 11.8%, primarily due to property tax effects; lending expenses rose 37.3%, principally reflecting interest on SBA loan-backed notes issued in 2018. Lower depreciation, interest, and general and administrative expenses partly offset weaker segment NOI.
- Office occupancy was 93.0%, compared with 93.9% a year earlier; reported annualized rent per occupied square foot was $46.24 versus $43.51. Hotel occupancy was 82.1%, ADR $171.16, and RevPAR $140.44; RevPAR was nearly unchanged year over year.
Outlook, risks, contingencies, and unusual items
- Management expects the 2019 property dispositions and debt reductions to materially reduce office revenue, property expenses, asset-management fees, depreciation, and interest expense in the remaining quarters; the size and timing depend on further sales, operating changes, and any acquisitions.
- A sale agreement for 1333 Broadway in Oakland, at a contracted price of $115.4 million, was in place at quarter-end, with closing expected in Q2 2019. Management was negotiating potential sales of two Washington, D.C. office properties and a development site, and one Los Angeles office property; no guarantee of completion was given.
- The company described a broader program intended to unlock portfolio value and improve common-stock trading liquidity. It expects to use sale proceeds and other available funds for debt repayment and a return of capital, currently expected to take the form of a special common dividend, but gave no amount or timing. It was also reevaluating its regular common dividend policy. CIM REIT, which held 89.7% of common shares as of May 6, 2019, intended to liquidate; the company expected this could increase public float.
- The $66.2 million impairment was recognized in Q1 based on May 2019 negotiations for potential sales of two Washington, D.C. office properties and a development site; no definitive agreement or non-refundable deposit existed at March 31.
- Key exposures include property-market and leasing conditions, geographic and tenant concentration, interest-rate changes, asset-sale execution, and refinancing/liquidity needs. California generated 76.5% of property revenue in Q1; governmental tenants represented 23.0% of rental and other property income. At quarter-end, 34.9% of debt was floating rate; management estimated a 12.5-basis-point LIBOR change would affect annual earnings by about $92,000, before other impacts.
- The company was pursuing an $11.845 million refund claim against San Francisco for transfer-tax penalties, interest, and legal fees paid in 2017. Management said routine litigation was not expected to have a material adverse effect. The filing also describes potential SBA recourse if loan losses are attributed to significant technical deficiencies, though management did not expect the contingency to be asserted.
- Preferred stock carries cumulative 5.5% annual dividends. Series L dividends are paid annually and may step up if distributions are not timely declared or paid. Common shareholders received a regular quarterly dividend of $0.125 per share. No formal full-year earnings or FFO guidance is provided.
Important facts for investors to verify
- Whether the pending Oakland sale and other contemplated dispositions close, at what proceeds, and with what further impairment or debt-extinguishment costs.
- The intended amount, form, and timing of any return of capital, and any changes to the regular common dividend.
- Recurring earnings and cash generation after removing sale gains, impairment, and debt-extinguishment costs; reconcile GAAP results with negative FFO and segment NOI trends.
- Post-sale portfolio occupancy, rent, tenant/geographic concentration, and cash flows, particularly as office revenue is expected to decline materially.
- Liquidity and obligations after asset sales, including preferred dividends/redemption terms, remaining debt, revolving-facility borrowing-base availability, and the potential CIM REIT share distribution.