Creative Media & Community Trust Corporation (CIM Commercial Trust) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; amounts below are in millions of dollars unless noted. The company primarily owns and operates office, hotel, and multifamily real estate. Its lending segment is classified as held for sale. Comparisons with 2014 are affected by the March 2014 merger and the inclusion of lending results from the merger date.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $66.9 | $65.2 | $134.2 | $127.8 |
| Continuing-operations income | $1.0 | $4.2 | $0.8 | $14.5 |
| Net income | $5.0 | $8.5 | $7.7 | $19.7 |
| Net income attributable to stockholders | $5.0 | $8.4 | $7.7 | $19.6 |
| FFO | $22.5 | $25.8 | $44.4 | $53.6 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $37.1 | $36.7 |
- Q2 revenue rose 2.7%, but expenses increased 8.0% to $65.9 million; net income fell 41.5%. For the first half, revenue increased 5.0%, while expenses rose 12.8% to $133.4 million and net income declined 60.9%.
- The 2014 first-half results included a $4.9 million bargain-purchase gain. First-half 2015 depreciation and amortization was $36.7 million, up $2.8 million.
- Segment net operating income was $33.7 million in Q2 versus $34.6 million, and $67.8 million for the first half versus $67.2 million. Office and hotel gains were offset by multifamily weakness.
- Cash and cash equivalents were $22.6 million on the balance sheet; including cash in assets held for sale, management reported $31.2 million. Total assets were $2.09 billion and total equity $1.33 billion at June 30.
- Debt was $647.6 million, excluding $39.3 million of debt presented with assets held for sale; debt had been $608.7 million at year-end 2014. Debt expense was $11.0 million for the first half, versus $8.6 million.
- Cash dividends declared and paid in the first half totaled $0.4375 per common share. Operating cash flow was $37.1 million; investing cash outflow was $24.3 million and financing cash outflow was $9.1 million.
Material changes and operating trends
- Office revenue increased 4.2% in Q2 and 5.9% in the first half, supported by acquisitions and higher occupancy at certain Los Angeles properties. Office occupancy was 85.2%, compared with 82.1% a year earlier.
- Hotel revenue increased 6.9% in Q2 and 8.3% in the first half. First-half occupancy was 84.5%, ADR $130.77 and RevPAR $110.56, all above 2014 levels.
- Multifamily revenue fell 22.9% in Q2 and 12.5% in the first half. A New York corporate-housing tenant left in March; the property was 36.4% occupied while being re-leased as individual units. Overall multifamily occupancy was 89.0%, versus 96.6% a year earlier.
- Interest expense increased with higher credit-facility borrowings. Related-party asset-management and other fees also increased. The company transferred most employees to a CIM affiliate effective January 1, 2015, with related services and costs reflected in related-party fees.
- FFO fell 12.6% in Q2 and 17.2% in the first half. Management cited multifamily weakness, higher related-party fees and interest costs; first-half comparison also reflects the prior-year bargain-purchase gain. FFO is a non-GAAP measure and is not a measure of liquidity or funds available for dividends.
Liquidity, outlook, risks and contingencies
- The $850 million unsecured credit facility had $415 million drawn and $435 million available at June 30; it matures in September 2016, with two conditional one-year extensions. The company reported compliance with financial covenants.
- A new unsecured term-loan facility permits borrowings up to $385 million, matures in May 2022 and was undrawn as of August 5, 2015. Management expected to draw it fully before November 2015. It may be used for acquisitions, refinancing and general corporate purposes.
- Management planned to repay two mortgages with a combined June 30 balance of $59.3 million during the second half of 2015. The company also intended to divest its hotel properties, an Orange County office building, and the lending business, to focus more on Class A and creative office properties. No earnings guidance was provided.
- Interest-rate exposure is material: 69.9% of debt, including debt associated with assets held for sale, was floating rate at June 30. Management estimated that a 12.5-basis-point LIBOR change would affect annual earnings by approximately $598,000.
- Government tenants generated 22.8% of first-half rental and property income. Property investment was concentrated in California (52.5%) and Washington, D.C. (31.1%). Management noted that leasing, occupancy, rents, expenses and access to financing depend on market and economic conditions.
- Commitments included $20.4 million of loan commitments and approvals and $23.9 million of future tenant-improvement and construction obligations. A tax-abatement matter was settled for $4.7 million in February 2015. The company reported no other material pending or threatened legal proceedings; it noted that an SBA claim for technical deficiencies, if asserted, could be material.
- Management said long-term funding needs may exceed available cash and that financing or asset-sale proceeds may not be available on attractive terms. It also cautioned that future dividends may differ materially from historical levels.
Key facts for investors to verify
- Progress, timing and net proceeds of the planned lending-business, hotel and office-property dispositions.
- Execution of the anticipated $385 million term-loan draw and refinancing or repayment of 2015 mortgage maturities and the $415 million facility balance due in 2016.
- Lease-up pace, occupancy and costs at the New York multifamily property, and whether its performance recovers.
- Whether office and hotel revenue gains persist as property expenses, real estate taxes, related-party fees and interest costs rise.
- Dividend coverage and liquidity after distributions, capital expenditures, debt service and committed tenant improvements.