Creative Media & Community Trust Corp. — 2018 Form 10-K summary
Filing identity and period: The supplied filing identifies the registrant as CIM Commercial Trust Corporation. It reports the fiscal year ended December 31, 2018, with unaudited quarterly results, including the quarter ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing.
Business context
The company is a REIT focused mainly on Class A and creative office properties in selected U.S. metropolitan communities. It is operated by CIM Group affiliates. At year-end, its portfolio comprised 19 office assets, including ancillary and development properties, and one Sacramento hotel; it also operated an SBA 7(a) small-business lending segment. Office, hotel, and lending contributed approximately 74.9%, 19.6%, and 5.5% of continuing-operations revenue, respectively.
Key financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $197.7 million | $236.4 million |
| Total expenses | $195.7 million | $257.0 million |
| Net income | $1.1 million | $379.8 million |
| Net income (loss) attributable to common stockholders | $(14.3) million | $377.8 million |
| FFO attributable to common stockholders | $38.9 million | $47.5 million |
| Net operating income across segments | $109.5 million | $128.5 million |
| Net cash provided by (used in) operating activities | $60.1 million | $(1.1) million |
Net income fell sharply mainly because 2017 included a $401.7 million gain on real-estate sales. Excluding that comparison effect, operating performance also weakened: segment NOI declined about 14.8%, and FFO declined about 18.1%. The common-stockholder loss in 2018 reflects, among other items, accumulated preferred-stock dividends of $15.4 million. FFO is a supplemental REIT measure, not a substitute for GAAP earnings or operating cash flow.
- Segments: Office revenue was $148.1 million, down 14.9%, and office NOI was $90.8 million, down from $104.2 million. Hotel revenue was $38.8 million and NOI was $13.5 million, both broadly stable year over year. Lending revenue rose 6.3% to $10.9 million; lending expenses rose 16.9% to $5.7 million.
- Operating indicators: Office occupancy was 93.2%, versus 94.2% in 2017; annualized rent per occupied square foot rose to $45.21 from $41.00. Hotel occupancy was 80.1%, versus 81.5%; ADR increased to $161.95 from $157.64 and RevPAR to $129.73 from $128.43.
- Balance sheet at December 31, 2018: Total assets were $1.342 billion; debt was $588.7 million; total equity was $617.3 million; cash and cash equivalents were $54.9 million, plus $22.5 million of restricted cash. Unrestricted cash was $54.9 million. The company reported $83.2 million of net loans receivable.
- Cash flows: Investing activities used $131.7 million, principally reflecting the $112.0 million acquisition of 9460 Wilshire and real-estate improvements. Financing activities used $6.5 million. Total cash, cash equivalents, and restricted cash fell to $77.4 million from $156.3 million.
- Debt and liquidity: Debt included $388.1 million of mortgage principal, a $130.0 million revolving-credit balance, $33.8 million of SBA loan-backed notes, and other debt. The $250 million secured revolver matured in October 2022; $91 million was available at year-end, subject to borrowing-base limits. The company said it was compliant with applicable financial covenants.
- Distributions: Common dividends were $0.50 per share in 2018, compared with $0.594 in 2017; the 2017 figure included special distributions. The board declared a 2019 common-stock initial dividend totaling approximately $21.9 million. Series A and Series L preferred stock carry cumulative 5.5% dividend rates, subject to their terms and declaration/payment conditions.
Material changes and subsequent events
- The company acquired 9460 Wilshire Boulevard in January 2018 for $132 million, funded with Series L preferred-stock proceeds. It made no property dispositions during 2018.
- In March 2019, it sold six assets—five office properties and a parking garage—in Oakland, Washington, D.C., and San Francisco. The company expected an aggregate gain of approximately $353 million. Net proceeds from the sales completed to date exceeded 90% of the relevant September 30, 2018 fair-value NAV, as required by the approved sale framework.
- After those sales, the company repaid the $130 million revolver balance, defeased $205.5 million of mortgage loans, repaid a $46 million mortgage, and had a $28.2 million mortgage assumed by a buyer. A $5.3 million prepayment penalty was paid on the $46 million loan. These transactions occurred after year-end and should not be confused with the December 31 balance sheet.
- The broader plan also contemplated further property sales, repayment of additional debt, a return of capital to common stockholders—potentially by special dividend, private repurchase, or tender offer—and CIM Group’s proposed distribution of its shares to CIM REIT’s 26 institutional investors. These steps were not assured; the filing provides no final amount or terms for a return of capital.
Outlook, risks, contingencies, and unusual items
- Management anticipated materially lower office revenue, expenses, related-party asset-management fees, depreciation, and interest expense in 2019 following the March asset sales and debt actions; the amount depended on further sales, operating changes, financing, and acquisitions. No formal earnings guidance was provided.
- The company was reevaluating its dividend policy as part of the portfolio and liquidity program. It cautioned that future dividends could differ materially from historical levels.
- Concentration is significant: California represented 76.1% of 2018 property revenue and 70.6% of real-estate investments; Washington, D.C. represented 20.6% of property revenue and 27.2% of investments. Government tenants generated about 19.7% of rental and hotel income, and Kaiser about 10.2%. Tenant concentration, regional downturns, government spending, office demand, hotel cyclicality, and natural disasters are key exposures.
- About 16.4% of occupied office square footage, excluding properties sold in March 2019, was scheduled to expire in 2019. Renewal and reletting rates, tenant improvements, and concessions could affect cash flow.
- The company had paid $11.845 million in 2017 in a San Francisco real-property-transfer-tax dispute. Its refund claims were denied in July 2018, and it sued the City in September 2018 seeking recovery; the outcome is uncertain.
- Other material risks include leverage and refinancing, variable interest rates, related-party management and fees, CIM Group control and conflicts of interest, SBA lending and hospitality-loan concentration, environmental and regulatory exposures, and the ability to maintain REIT qualification and distributions.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor reported effective internal controls as of December 31, 2018. No other material legal proceedings were reported beyond routine matters and the San Francisco tax litigation.
Important facts for investors to verify
- Final sale proceeds, realized gains, debt releases or assumptions, and the remaining properties marketed for sale.
- Whether the return-of-capital event and CIM REIT liquidation occur, and their timing, form, per-share value, and effect on public float and trading liquidity.
- Post-sale operating results, especially the remaining office portfolio’s occupancy, lease expirations, rent levels, and tenant concentration.
- Cash available after debt repayment, preferred dividends and redemption obligations, and any revised common-stock dividend policy.
- Progress and potential recovery in the $11.845 million San Francisco tax-refund lawsuit.
- Current debt balances, borrowing-base availability, interest-rate exposure, and the treatment of preferred stock in assessing liquidity and common-stock value.
- Any change in control, governance, or related-party arrangements following the proposed CIM REIT share distribution.