Creative Media & Community Trust Corporation — Q3 2023 10-Q
Business context and period. The company is a REIT investing in multifamily and creative office properties, one hotel, and an SBA 7(a) lending platform. This unaudited filing covers the three and nine months ended September 30, 2023; comparisons are with 2022, except balance-sheet comparisons, which are with December 31, 2022. During 2023, the company acquired multifamily assets, expanded its multifamily segment, and sold an 80% interest in an office property.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $28.1m | $24.9m | $89.8m | $76.0m |
| Net income (loss) | $(16.6)m | $(0.2)m | $(42.6)m | $5.0m |
| Net income (loss) attributable to common stockholders | $(22.9)m | $(11.7)m | $(59.5)m | $(16.8)m |
| FFO attributable to common stockholders (non-GAAP) | $(7.5)m | $(6.6)m | $(16.5)m | $(1.8)m |
| Cash from operating activities | — | $16.8m | $28.3m |
Balance sheet and liquidity at September 30: Total assets were $898.1m; net real estate investments $708.2m; debt, net $470.3m, up from $184.3m at year-end 2022; and total equity $375.3m. Cash and cash equivalents were $19.3m, with another $24.0m restricted. The 2022 credit facility had $133.2m outstanding and $73.0m available. After quarter-end, as of November 8, facility borrowings were $143.2m and availability was approximately $63.0m.
Cash flow and financing: Nine-month investing cash outflow was $82.9m, including $96.7m of real estate acquisitions, partly offset by $31.4m of sale proceeds. Financing provided $51.8m. Cash and restricted cash together declined $14.3m to $43.2m. Interest paid was $21.5m, versus $6.0m in the prior-year period.
Property and segment indicators: Segment net operating income was $36.2m for nine months, versus $35.1m. Office occupancy was 82.6% (83.2% in 2022); multifamily occupancy was 84.1%. Hotel nine-month occupancy was 76.9%, ADR $193.84, and RevPAR $149.01, all higher than in 2022. One office tenant accounted for 29.2% of annualized office rental income.
Material changes versus prior period
- Nine-month revenue rose 18.1%, but the company moved from $5.0m net income to a $42.6m net loss. Management attributed the deterioration chiefly to $31.0m higher depreciation and amortization and $15.5m higher non-segment interest expense.
- Interest expense for the nine months increased to $24.7m from $6.8m; depreciation and amortization rose to $46.1m from $15.1m. Newly acquired properties and higher variable borrowing costs were key factors.
- Debt rose alongside acquisitions and financing activity. The company assumed $181.3m of mortgage notes in real estate acquisitions and issued $54.1m of SBA loan-backed notes in a March securitization.
- Hotel revenue increased 20.5% for the nine months, while office revenue declined 1.7%. Multifamily contributed $8.6m of revenue, with no comparable 2022 segment.
- The company redeemed all remaining Series L preferred stock in January 2023 for $83.8m, plus $4.6m of accrued dividends. It continued its Series A1 preferred offering; preferred dividends declared or accumulated were $18.3m for the nine-month period.
Outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management describes continued property acquisitions, development and repositioning as strategic priorities, and says the company may use equity offerings, debt, asset sales, co-investments, or operating cash flows to fund needs. It expects to extend or refinance a variable-rate mortgage maturing in June 2024. Future operating results are not necessarily indicative of full-year results.
- Rates and maturities: 44.4% of debt was floating-rate at September 30. Management estimates a 50-basis-point SOFR change would affect annual earnings by about $1.1m. Variable-rate mortgages mature from June 2024 through July 2025; the credit facility matures December 2025, subject to extension options.
- Liquidity demands: Preferred redemptions and dividends, debt service, acquisitions and development compete for cash. Outstanding SBA loan commitments were $25.9m; future tenant-improvement and construction obligations were $5.8m. The company cautions it may not have sufficient funds or obtain additional financing for all long-term requirements.
- Property and credit exposures: Office leasing and occupancy depend on market conditions; hotel results are seasonal. Loans with credit risk were concentrated in hospitality, and $1.3m were classified in substandard categories. The company services $232.6m of SBA-guaranteed loan balances and notes that SBA claims for technical deficiencies, if asserted, could be material, although management considers such a contingency not probable.
- Other items: Acquisitions included assets from entities indirectly owned by a CIM-managed fund, and CIM affiliates provide management and other services. The company has limited guarantees connected with certain joint-venture mortgages. A contractor-injury lawsuit has an unestimable potential loss; management does not expect a material adverse effect. No material impairment charges were recorded.
Disclosure controls were concluded effective; no material changes to internal control were reported. The company reported no material changes to its previously disclosed risk factors and no material pending legal proceedings, other than routine matters and the noted lawsuit.
Important facts for investors to verify
- Reconcile the sharp rise in debt and interest expense, and assess refinancing or extension plans for the 2024–2025 variable-rate maturities and December 2025 facility.
- Review cash available for debt service, preferred dividends and redemptions, development spending, and the $25.9m loan commitments; distinguish unrestricted cash from restricted balances.
- Assess acquisition economics and performance, including acquired-property depreciation and lease-intangible amortization, and the impact of related-party transactions and joint-venture guarantees.
- Track office occupancy, tenant concentration and lease expirations, as well as hotel trends and hospitality concentration in the lending portfolio.
- Evaluate the sustainability of common and preferred distributions against cash generation and the company’s substantial preferred-stock obligations; FFO is non-GAAP and is not a measure of liquidity.