Business context and reporting period
CIM Commercial Trust Corporation (Nasdaq/TASE: CMCT), a REIT focused primarily on office properties and also operating a hotel and SBA 7(a) lending business, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and position
- Third quarter: Revenue was $24.2 million, up 39.9% year over year. Net income was $1.6 million, versus a $5.3 million net loss; after preferred-stock dividends and adjustments, the loss attributable to common stockholders was $3.2 million, or $0.14 per share, compared with $9.7 million, or $0.65 per share. FFO attributable to common stockholders was $1.8 million versus a $4.4 million loss.
- First nine months: Revenue was $65.8 million, up 10.8%. Net loss narrowed to $1.5 million from $10.6 million; common-stockholder loss was $15.6 million, or $0.88 per share, versus $24.6 million, or $1.67 per share. FFO attributable to common stockholders was a $0.5 million loss versus an $8.9 million loss.
- Drivers and margins: Third-quarter segment net operating income (NOI) was $13.3 million, versus $6.6 million. Lending NOI rose to $4.9 million from $0.3 million and hotel NOI was $0.9 million versus a $1.1 million loss; office NOI was $7.5 million versus $7.4 million. For nine months, total segment NOI increased to $35.0 million from $25.2 million, largely from lending. Office occupancy was 77.7%, down from 79.5%; annualized rent per occupied square foot was $52.50, up from $50.39.
- Cash flow: Nine-month operating cash flow was $13.9 million, versus $7.2 million; investing cash outflow was $5.7 million, versus $31.9 million; financing cash outflow was $25.7 million, versus $30.8 million of inflow. Cash and restricted cash totaled $26.1 million at quarter-end, including $14.6 million of unrestricted cash.
- Debt and liquidity: Net debt declined to $222.2 million from $324.3 million at December 31, 2020. The company had $75.0 million drawn on its secured revolver, with approximately $91.0 million available, and a further $10.0 million available under an unsecured facility. The $97.1 million mortgage is fixed-rate at 4.14%; the revolver was variable-rate at 2.13% at September 30. Total assets were $675.0 million and total equity was $375.5 million.
Material changes versus the prior comparable period
- Revenue and earnings improved year over year, particularly in the third quarter, as hotel activity recovered from pandemic lows and lending income increased. The lending revenue increase included higher premiums on sales of SBA-guaranteed loan portions.
- Office revenue declined 3.9% in the quarter and 5.5% for the nine-month period. Hotel revenue rose sharply in the quarter but remained lower for the nine months than in 2020.
- Debt declined by approximately $102.1 million from year-end 2020. The company raised $78.8 million gross through a rights offering, issuing 8.5 million common shares at $9.25 per share; common shares outstanding increased from 14.8 million at year-end to 23.4 million.
- The company acquired a small Los Angeles office property for $2.9 million during the nine-month period. Real estate investments, net, decreased to $498.9 million from $506.0 million.
Outlook, risks, contingencies, and unusual items
- Management expected to extend the $75.0 million revolver maturity from October 2022 to October 2023, subject to conditions, and/or refinance it; it stated it expected to be able to implement either or both options.
- Management warned that COVID-19 would likely continue to affect the company through the remainder of 2021. Hotel fourth-quarter NOI was expected to be below pre-pandemic levels. Parking tenants paid 80.5% of contractual rent for the third quarter through November 4, 2021; 19.5% remained uncollected and none was recorded as bad debt.
- Enhanced SBA support ended: the guarantee rate reverted from 90% to 75%, and reduced secondary-market fees ended October 1, 2021. Management said this could materially reduce future loan originations and sale premiums. Nearly all credit-risk loans were concentrated in hospitality, although 99.9% were current at quarter-end.
- Tenant and geographic concentrations are significant: Kaiser represented 30.9% of annualized rental income, and California office properties represented 83.1%. Future lease renewals and re-leasing rates are not assured.
- Commitments included $24.4 million to fund loans and $8.1 million of future tenant-improvement and construction obligations. The company is pursuing an $11.8 million refund claim against San Francisco for previously paid transfer-tax penalties, interest, and legal fees; the outcome is uncertain. A separate contractor-injury lawsuit has an unestimable potential loss, though management does not expect a material adverse effect.
- Preferred dividends are cumulative and subject to board declaration and available funds. The company paid $15.4 million of preferred dividends and $4.0 million of common dividends in the first nine months. Management said it was very likely no incentive fee would be payable for 2021. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Progress and terms for extending or refinancing the revolver before its October 2022 maturity, and continuing access to borrowing capacity.
- Whether lending earnings and loan-sale premiums remain sustainable after the SBA guarantee and fee-support changes.
- Hotel recovery, office occupancy and leasing trends, parking rent collections, and the impact of COVID-19 on tenants and borrowers.
- Cash available after debt service, preferred dividends, loan commitments, and property obligations; distinguish unrestricted cash from restricted cash.
- Potential outcomes of the San Francisco tax litigation and contractor-injury lawsuit, and the implications of the company’s tenant and California concentration.