Creative Media & Community Trust Corp quarterly report, Q3 FY2022

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Creative Media & Community Trust Corporation — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.

Business context

CMCT is a REIT focused primarily on Class A and creative office properties, with one Northern California hotel and an SBA 7(a) lending platform. At quarter-end, it reported 19 real estate assets, including 13 office properties, one hotel and four development sites; one office asset is held through an unconsolidated joint venture.

Financial performance and position

  • Revenue: Q3 revenue was $24.9 million, up 2.5% from $24.2 million. Nine-month revenue was $76.0 million, up 15.6% from $65.8 million.
  • Profit: Q3 net loss was $0.2 million, versus net income of $1.6 million. Net loss attributable to common stockholders was $11.7 million, or $0.50 per share, versus a $3.2 million loss, or $0.14 per share. Nine-month net income was $5.0 million, versus a $1.5 million net loss; the common-stockholder loss was $16.8 million, or $0.72 per share, versus a $15.6 million loss, or $0.88 per share. Preferred dividends and redemption-related charges materially widened the loss attributable to common stockholders.
  • Segment operating performance: Q3 segment net operating income (NOI) was $10.1 million, down from $13.3 million; nine-month NOI was $35.1 million, roughly level with $35.0 million. Q3 office NOI was $6.5 million, hotel NOI $2.4 million and lending NOI $1.2 million. Nine-month hotel NOI increased to $8.0 million from $0.1 million, while lending NOI declined to $4.6 million from $12.0 million.
  • Cash flow: Nine-month operating cash flow was $28.3 million, versus $13.9 million. Investing used $23.6 million, versus $5.7 million; financing used $11.5 million, versus $25.7 million. Cash and restricted cash totaled $26.8 million at September 30, 2022, down from $33.7 million at year-end 2021.
  • Assets and liquidity: Total assets were $665.6 million, compared with $660.9 million at December 31, 2021. Cash and cash equivalents were $14.8 million and restricted cash $12.0 million. Net debt was $216.4 million, versus $201.1 million. The company reported $119.9 million available under its revolving facility at September 30.
  • Debt and rates: The $85.0 million revolver balance was variable-rate; the facility’s rate was 4.33% at quarter-end. The $97.1 million mortgage was fixed at 4.14% and due July 2026. Overall, 55.5% of debt was floating-rate. Management estimated a 50-basis-point LIBOR change would affect annual earnings by approximately $604,000.

Material changes versus the prior comparable period

  • Hotel recovery drove higher revenue: Q3 hotel revenue rose 54.4% to $8.5 million; nine-month hotel revenue rose 138.4% to $25.8 million. Nine-month hotel occupancy was 73.5%, versus 48.2%, and RevPAR was $125.64, versus $61.67.
  • Office performance improved in occupancy and rental rates: portfolio occupancy was 83.2%, versus 77.7%, and annualized rent per occupied square foot was $54.40, versus $52.50. However, Q3 office NOI declined, reflecting higher operating expenses and a loss from the new joint venture.
  • Lending revenue fell as loan-sale volumes and sale premiums declined; nine-month lending revenue decreased 47.1%. Management expected lending revenue to be materially lower in Q4 2022 than Q4 2021.
  • Related-party asset management and other fees fell to $0.9 million in Q3 from $2.3 million and to $2.8 million for nine months from $6.8 million, primarily following a fee waiver effective January 1, 2022.
  • In September, CMCT repurchased 2.44 million Series L preferred shares for a total cost of $70.1 million, including transaction costs. The transaction generated a $4.8 million preferred-stock redemption charge included in the common-stockholder loss. The company also repurchased 662,462 common shares for $4.7 million under its $10 million repurchase program.

Outlook, risks and contingencies

  • Financing: The revolver’s maturity was extended to October 2023. Management was pursuing a refinancing, but stated there was no assurance it would occur. The company believed cash, Series A1 preferred proceeds, operating cash flow and new financing would cover obligations for at least 12 months from issuance of the financial statements.
  • Series L redemption: Beginning in November 2022, Series L holders could require redemption; the aggregate stated value was $83.7 million at September 30, plus accrued unpaid dividends. CMCT could choose cash or common shares. Management said it believed it had sufficient liquidity to pay cash for any shares it chose to redeem, but holder elections and the company’s actions were uncertain.
  • Development and capital needs: The planned 4750 Wilshire conversion was estimated to cost approximately $32.8 million, to be funded by co-investor and company equity contributions and a third-party repositioning loan. The company cautioned that long-term funding might not be available on acceptable terms.
  • Other risks: Risks include higher interest rates and inflation, COVID-19 effects, leasing and occupancy uncertainty, and the concentration of 29.5% of Q3 annualized rental income with Kaiser. The company guaranteed the joint venture’s $23.9 million mortgage loan; partner indemnification applies subject to stated exceptions. The SBA could seek recovery for losses tied to technical deficiencies on guaranteed loans; $261.8 million of guaranteed SBA loans were serviced by CMCT.
  • Contingencies and unusual items: A contractor-injury lawsuit involving a subsidiary was outstanding; the company could not estimate a potential loss range and said insurance was maintained. No material impairment of real estate was recorded. At filing, the result of Los Angeles Proposition ULA was pending; if enacted, higher transfer taxes could reduce proceeds from sales of affected properties.
  • No formal earnings or full-year financial guidance was provided. The filing identifies forward-looking expectations and cautions that actual results may differ. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.

Important facts for investors to verify

  • Progress and terms of refinancing the revolver before its October 2023 maturity, including the subsequent reported reduction in its balance to $55.0 million as of November 9, 2022.
  • Series L holder redemption elections, the company’s redemption decision and the resulting cash or share settlement and liquidity impact.
  • Whether hotel recovery continues and whether office leasing, occupancy and rent levels offset rising property operating costs.
  • Future SBA loan origination and sale volumes, premiums, and the lending segment’s concentration in hospitality borrowers.
  • Actual cost, financing and co-investor participation for the 4750 Wilshire project, and the outcome and implications of Proposition ULA.
  • Preferred dividend and redemption obligations, including their effect on cash available to common stockholders and common distributions.