Creative Media & Community Trust Corp annual report, FY2017

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Business context and reporting period

Filing identity: The supplied metadata names Creative Media & Community Trust Corp, but the filing itself identifies the registrant as CIM Commercial Trust Corporation. This is its Form 10-K for the fiscal year ended December 31, 2017, filed March 12, 2018; it reports annual results, not a standalone fourth quarter.

The REIT owns and operates urban commercial real estate, principally office properties, and is managed by CIM Group affiliates. At year-end, its portfolio comprised 20 assets, including 18 office-related properties with approximately 3.3 million rentable square feet and one 503-room hotel. Office occupancy was 94.2%; hotel occupancy was 81.5% and RevPAR was $128.43.

Financial performance and position

  • Revenue: $236.4 million, down 11.1% from $265.9 million in 2016. Office revenue fell 7.2%, hotel revenue 20.2%, and multifamily revenue 33.2%, principally reflecting property sales. Lending revenue rose 4.1%.
  • Profit: Net income was $379.8 million, versus $34.6 million in 2016. The result was driven by $401.7 million of real estate sale gains, rather than a comparable increase in recurring operations. Net income available to common stockholders was $379.2 million, or $5.47 per diluted share.
  • FFO: Funds from operations available to common stockholders, a supplemental REIT measure, declined to $47.5 million from $66.8 million. The filing attributes the decline mainly to higher transaction costs, lower segment net operating income, the absence of prior-year discontinued-operations income, higher interest expense, and accumulated preferred dividends.
  • Property operations: Total segment net operating income was $128.5 million, down from $133.4 million. Office NOI was $104.2 million (2016: $105.0 million); hotel NOI was $13.4 million (2016: $15.9 million); multifamily NOI was $5.4 million (2016: $7.9 million); and lending NOI was $5.3 million (2016: $4.6 million). Office occupancy increased from 85.7% in the reported portfolio, although sales changed portfolio composition; on a comparable-property basis, occupancy was 94.1% versus 92.9%.
  • Cash flow and liquidity: Operating cash flow was negative $1.1 million, compared with positive $51.9 million in 2016. Investing activities provided $968.7 million, largely from property-sale proceeds; financing activities used $982.7 million, principally for share repurchases and debt repayment. Cash and cash equivalents were $129.3 million, with another $27.0 million of restricted cash, at year-end.
  • Debt and equity: Consolidated debt was $630.9 million, down from $967.9 million. It included $416.3 million of mortgages, $170.0 million under the unsecured term loan, $27.1 million of junior subordinated notes, and $20.7 million of secured SBA borrowings. No amount was drawn on the unsecured revolver at year-end; reported covenant-limited unused capacity was approximately $97 million. Total assets were $1.336 billion and total equity was $626.7 million.
  • Distributions and capital: Regular common dividends totaled $0.594 per share in 2017, compared with $0.875 in 2016; special dividends were additional. The company repurchased 40.3 million common shares from CIM affiliate Urban II at $22 per share for an aggregate $886.0 million. It also raised $207.8 million net from Series L preferred stock and $28.1 million net from Series A preferred stock and warrants.

Material changes, outlook and notable items

  • The company sold numerous assets in 2017, including all five multifamily properties and several office properties. Real estate sale gains were $401.7 million; the sales also reduced the operating asset base and contributed to lower revenue and NOI.
  • In December 2017, it acquired 1130 Howard Street in San Francisco for $17.7 million. The $132 million acquisition of 9460 Wilshire Boulevard closed in January 2018 and was funded with Series L offering proceeds.
  • Management expected office revenue and expenses, depreciation, and related-party asset-management fees to decrease materially in 2018 as a result of 2017 dispositions, partly offset by the two office acquisitions. The company expected no multifamily revenue in 2018 following sale of that portfolio. Management also expected interest expense to decrease after debt repayments and property sales; the filing gives no quantified earnings or distribution guidance.
  • A $13.1 million impairment was recorded on 370 L’Enfant Promenade before its sale. Transaction costs included an $11.845 million payment to the City and County of San Francisco in a dispute over transfer taxes on a prior transaction. The company said it would contest the claim and filed refund claims in January 2018; recovery, if any, was uncertain.
  • Series L preferred stock carries a cumulative 5.5% annual distribution rate, with the first payment expected in January 2019. The filing states that its stated value is $28.37 per share and that late or missed distributions can trigger a temporary rate increase.
  • Key risks include concentration of property revenue in California (63.2%) and Washington, D.C. (25.1%), tenant concentration, lease expirations, interest-rate and refinancing exposure, and reliance on CIM Group affiliates. CIM affiliates and related insiders held approximately 96.4% of voting power as of March 2, 2018; the company disclosed related-party fees and potential conflicts of interest.
  • The company reported compliance with its debt covenants at year-end, no off-balance-sheet arrangements, no material pending litigation other than the San Francisco tax dispute, and effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

  1. How much of 2017 reported profit and per-share earnings reflects realized property-sale gains, and what recurring earnings or FFO remain after those gains are excluded?
  2. Whether the San Francisco transfer-tax payment will be recovered, and what subsequent legal or financial developments affect that claim.
  3. Post-disposition operating performance, including comparable-property occupancy, lease renewals and tenant retention, and the contribution from the 2018 acquisitions.
  4. Current debt balances, revolver availability, covenant headroom, maturities, interest-rate exposure, and the effect of further refinancing or debt repayment.
  5. Whether operating cash flow can support common and preferred distributions, including the Series L distribution obligations beginning in 2019.
  6. The terms, fairness, and effects of affiliate transactions, share repurchases, related-party management fees, and the high concentration of voting control.