Creative Media & Community Trust Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparison is with the three months ended March 31, 2022 unless otherwise noted. CMCT is a REIT with office, hotel, multifamily and SBA 7(a) lending operations.
Financial results and position
- Revenue: $28.9 million, up 16.7% from $24.8 million. Hotel revenue rose 47.5% to $11.5 million; office revenue declined 4.4% to $13.5 million; lending revenue declined 6.0% to $2.7 million. Multifamily contributed $1.2 million, with no comparable prior-year segment.
- Profitability: Net loss was $7.6 million versus net income of $2.3 million. Net loss attributable to common stockholders was $12.7 million, or $0.56 per diluted share, versus a $2.8 million loss, or $0.12 per share. FFO attributable to common stockholders, a non-GAAP measure, was a loss of $4.8 million versus positive FFO of $2.2 million.
- Key expenses: Total expenses increased 70.9% to $38.1 million. Interest expense rose to $6.2 million from $2.2 million; depreciation and amortization rose to $9.5 million from $5.0 million. Transaction costs were $3.4 million, primarily transfer taxes on multifamily acquisitions.
- Cash flow: Operating cash flow was $2.8 million, down from $8.6 million. Investing cash outflow was $91.1 million, chiefly reflecting real estate acquisitions; financing cash inflow was $77.7 million. Cash and restricted cash together declined $10.6 million to $46.8 million ($22.5 million cash and $24.3 million restricted cash).
- Debt and liquidity: Debt, net of issuance costs and discounts, was $520.7 million at March 31, versus $184.3 million at year-end. Face-value debt was approximately $525.0 million; 81.5% was floating rate. The 2022 credit facility had $178.2 million outstanding and $28.0 million available at quarter-end. After a $20.0 million revolver paydown on April 28, the company reported $158.2 million outstanding and approximately $48.0 million available as of May 1. The filing estimates a 50-basis-point rate change would affect annual earnings by about $2.14 million at the quarter-end debt level.
- Other balance-sheet metrics: Total assets were $957.6 million, compared with $690.2 million at year-end. Loans receivable, net, were $62.4 million; the CECL allowance was $1.9 million. Stockholders’ equity was $373.9 million.
Material changes and operating developments
- CMCT acquired multifamily interests in Oakland, including Channel House, for approximately $282.9 million in aggregate before transaction costs; the acquisitions were from entities affiliated with CIM Group-managed funds. It assumed $181.3 million of mortgage notes in connection with real estate acquisitions.
- It sold an 80% interest in 4750 Wilshire Boulevard for a stated sale price of $34.4 million, retained a 20% joint-venture interest, received $16.7 million in net proceeds and recorded a $1.1 million gain. A further $17.7 million was recorded as a receivable, expected to be collected over six months.
- Hotel operating indicators improved: occupancy was 80.6% versus 69.2%, ADR was $202.02 versus $173.14, and RevPAR was $162.85 versus $119.78. Office occupancy was 81.3% versus 78.9%; multifamily occupancy was 80.7% for the reported quarter.
- Office annualized rent per occupied square foot was $55.98 versus $53.05. Kaiser accounted for 30.3% of annualized office rental income, creating tenant concentration exposure.
- The company completed a $54.1 million SBA 7(a) loan-backed note securitization in March, generating approximately $43.3 million of net proceeds. It also redeemed all remaining Series L preferred stock in January for $83.8 million, plus $4.6 million of accrued dividends.
Outlook, risks and contingencies
- The filing provides no numerical earnings, revenue or FFO guidance. Management describes plans to pursue acquisitions, development and repositioning, asset sales and co-investments, while noting that future funding needs may exceed available resources.
- Management cites risks from higher interest rates and inflation, occupancy and rent trends, leasing and development execution, general economic and market conditions, and the ability to obtain financing. Most debt was floating rate at quarter-end.
- Office lease expirations over the next four quarters total approximately 126,650 square feet, including month-to-month tenants. The filing cautions that renewal or re-leasing at current rents is not assured.
- Future obligations include $7.4 million for tenant improvements and construction under leases and $8.0 million in loan-funding commitments. The company also provided limited guarantees for certain joint-venture property loans.
- CMCT reports no material pending legal proceedings, but notes a contractor-injury lawsuit for which it cannot estimate potential losses. It also warns the SBA could seek recovery for losses tied to technical deficiencies in loan origination, funding or servicing; the company says it does not expect that contingency to be probable.
- CMCT adopted CECL on January 1, 2023, recording a $619,000 after-tax cumulative-effect reduction to opening equity; the quarter-end expected-credit-loss allowance was $1.9 million. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the newly acquired multifamily assets and 4750 Wilshire conversion meet operating, occupancy and return expectations, including the economics of transactions with CIM-affiliated entities.
- Debt maturities, borrowing-base availability, covenant compliance and the effect of floating rates; confirm the post-quarter credit-facility paydown and available capacity.
- Cash generation and the ability to fund capital needs, preferred and common distributions, redemptions and loan commitments without additional asset sales or financing.
- Office tenant concentration, lease expirations and renewal outcomes, as well as the sustainability of the hotel’s recovery.
- Performance and credit quality of the SBA lending portfolio, including hospitality-sector concentration, CECL assumptions and potential SBA-guarantee recourse.
- Preferred-stock redemption and dividend obligations, and the impact of the company’s substantial preferred financing on common-stockholder returns.