Business context and reporting period
CIM Commercial Trust Corporation (the filing registrant; identified in the request as Creative Media & Community Trust Corp) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The REIT owns and operates primarily office properties in urban communities, alongside hotel, multifamily and SBA 7(a) lending operations. Its stated priorities include growing net asset value and cash flow per common share and providing liquidity to common stockholders. The company was actively selling properties and returning capital during the period.
Key financial results
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 | Comparable 2016 period |
|---|---|---|---|
| Total revenue | $61.3 million | $128.2 million | $68.4 million and $137.0 million |
| Net income | $91.4 million | $285.3 million | $0.9 million and $27.8 million |
| Net income available to common stockholders | $91.3 million; $1.16 per share | $285.2 million; $3.50 per share | $0.8 million; $0.01 per share, and $27.8 million; $0.29 per share |
| Net cash from operating activities | Six-month figure: $21.8 million | Six-month 2016: $33.6 million | |
| FFO available to common stockholders | $2.9 million | $26.3 million | $19.3 million and $39.6 million |
Net income was dominated by real estate sale gains: $116.3 million in the quarter and $304.0 million year to date. The six-month result also included a $13.1 million real estate impairment and $11.6 million of transaction costs, including the San Francisco tax accrual. FFO, which excludes real estate gains, impairment and depreciation and amortization, fell year over year; the company cautions that FFO is not a liquidity measure or a substitute for GAAP cash flow.
Six-month segment net operating income was $74.6 million, up from $69.6 million. Office NOI rose to $60.8 million from $53.0 million, while hotel NOI declined to $8.1 million from $10.0 million, multifamily NOI to $3.7 million from $4.1 million, and lending NOI to $2.0 million from $2.6 million. Quarterly total revenue declined 10.3% year over year; six-month revenue declined 6.4%.
Financial position, cash flow and capital
- At June 30, 2017, total assets were $1.638 billion, versus $2.023 billion at year-end 2016. Cash and cash equivalents were $129.0 million, plus $26.7 million of restricted cash; cash including amounts associated with assets held for sale was $131.9 million.
- Debt, net, was $846.8 million, compared with $967.9 million at December 31, 2016. This excludes $50.2 million of debt classified with assets held for sale. The balance included a $385 million unsecured term loan and $414.7 million of mortgages, net. The company reported covenant compliance at June 30.
- Unused capacity under the unsecured credit facility, subject to covenants, was approximately $89 million at June 30. After quarter-end, the company extended the facility to September 2018; as of August 4, it reported approximately $154 million available and repaid $65 million of the term loan.
- Six-month investing cash flow was positive $638.0 million, principally reflecting $642.9 million of net real estate sale proceeds. Financing cash flow was negative $672.3 million, including the $576 million common-stock repurchase, $30.5 million of common and preferred dividends, and net debt repayments.
- In June, the company repurchased 26.18 million shares from Urban Partners II, an affiliate of CIM Group, for $576 million, or $22 per share. It also declared a $1.98-per-share special common dividend for other common stockholders. Common shares outstanding fell from 84.0 million at year-end to 57.9 million at June 30.
Material changes, outlook and risks
- The company sold six properties during the first half of 2017 for aggregate stated sales prices of approximately $660 million and recognized $304.0 million of gains. Three additional properties—an office property in Los Angeles and multifamily properties in Houston and New York—were classified as held for sale, with aggregate contract prices of $186.3 million. Management expected those sales to close in the second half of 2017.
- Management expected property revenue, related expenses, asset-management fees and depreciation to decline materially as completed and planned dispositions reduce the portfolio. It also expected interest expense to decline as mortgages were repaid, but noted the actual effect depends on sale timing and revolving-credit usage. No specific full-year earnings or FFO guidance was provided.
- An office property was impaired by $13.1 million based on sale negotiations; in August 2017 the company said it had negotiated a sale agreement, but the agreement was not finalized or under nonrefundable deposit as of June 30.
- San Francisco sued the company and subsidiaries over approximately $11.6 million of alleged past-due real property transfer tax, penalties and interest relating to an earlier transaction. The company accrued the claim in transaction costs, disputed the obligation, and was pursuing an appeal after its demurrer was denied. If the writ is denied, payment may be required to continue contesting the claim.
- Office occupancy was 86.6% at June 30 (86.4% excluding sold and held-for-sale assets), compared with 83.5% reported a year earlier. Government tenants accounted for 20.4% of six-month rental and property income; California properties represented 62.2% of six-month property revenue.
- About 48.2% of debt was floating rate before swaps at June 30. The company estimated a 12.5-basis-point LIBOR change would affect annual earnings by approximately $544,000 before considering swaps. Swaps fixed the $385 million term loan rate at an all-in 3.16% through May 2020; $65 million of swaps were terminated following the August repayment.
- Series A preferred shares carried cumulative dividends at 5.5% annually and holder redemption rights subject to specified terms. The company had issued 308,775 units by June 30; no preferred shares had been redeemed. Management said future repurchases and/or special dividends were anticipated, subject to liquidity and other conditions.
- Management disclosed no material changes to the risk factors in its 2016 Form 10-K, no material off-balance-sheet arrangements, and effective disclosure controls. It noted that future financing may not be available on attractive terms or at all.
Important facts for investors to verify
- Whether the three held-for-sale transactions closed on expected terms and timing, and how dispositions affected recurring rental income, NOI and cash flow.
- The resolution and potential cash impact of San Francisco’s $11.6 million transfer-tax claim and the status of the appeal.
- Cash, covenant-based borrowing availability, debt repayment and refinancing needs after the August 2017 transactions.
- Whether recurring operating performance supports distributions and any additional buybacks, given FFO declined despite reported net income growth.
- The terms, related-party implications and capital-allocation effects of the $576 million repurchase from an affiliate, as well as future preferred-stock issuance, redemption and dividend obligations.