Creative Media & Community Trust Corp quarterly report, Q3 FY2019

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Creative Media & Community Trust Corporation (CIM Commercial Trust Corporation) — Q3 2019 Form 10-Q

Reporting period: Three and nine months ended September 30, 2019. The unaudited filing describes a REIT focused primarily on Class A and creative office properties, with hotel and SBA 7(a) lending operations. All amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where indicated.

Financial results and key metrics

  • Q3 revenue: $29.2 million, down 38.6% from $47.6 million a year earlier. Rental and property income fell to $17.3 million from $36.6 million, primarily reflecting asset sales; hotel income was $7.7 million, and interest and other income was $4.2 million.
  • Q3 earnings: Net income was $2.9 million versus a $0.5 million net loss in Q3 2018. Net loss attributable to common stockholders narrowed to $1.6 million from $4.4 million; basic loss per share was $0.11 versus $0.30. Q3 included only $0.3 million of property-sale gain and no real estate impairment or early debt-extinguishment loss.
  • Nine-month results: Revenue was $113.3 million, down 23.1%. Net income was $347.0 million versus $2.0 million; net income attributable to common stockholders was $334.3 million, or $22.90 per basic share, versus a $9.4 million loss, or $0.64 per share. The 2019 result was dominated by $433.1 million of gains on property sales, partly offset by $69.0 million of real estate impairment and $30.0 million of losses on early debt extinguishment.
  • Operating performance: Q3 segment net operating income (NOI) was $12.9 million, down from $25.3 million. Office NOI was $9.6 million, hotel NOI $2.4 million, and lending NOI $0.9 million. Nine-month NOI was $55.8 million versus $82.9 million. Q3 FFO attributable to common stockholders was $3.3 million versus $8.9 million; nine-month FFO was negative $7.8 million versus positive $30.4 million. FFO is a non-GAAP measure and does not represent liquidity or funds available for dividends.
  • Cash flow: For the first nine months, operating cash flow was $33.6 million, compared with $49.8 million in 2018. Investing activities provided $920.5 million, principally from real estate sales; financing activities used $1,006.2 million, including the $613.3 million special common dividend and debt repayments. Cash and restricted cash ended at $26.1 million, down from $77.4 million at the start of the period.
  • Balance sheet and debt: At September 30, total assets were $659.9 million, versus $1,342.4 million at year-end 2018; real estate investments, net, were $506.0 million versus $1,040.9 million. Debt, net, was $227.7 million versus $588.7 million. Total equity was $360.6 million; redeemable preferred stock outside permanent equity was $37.2 million. The revolving facility had $68.5 million drawn and approximately $175.1 million available at September 30.
  • Margins and portfolio indicators: Office NOI was $9.6 million on $16.9 million of Q3 office revenue; hotel NOI was $2.4 million on $8.5 million of hotel-segment revenue. The filing does not present these as formal margin measures. At quarter-end, office occupancy was 87.2%, compared with 93.6% a year earlier; excluding sold properties, the comparable 2018 figure was 94.3%. Annualized rent per occupied square foot was $47.96, versus $43.52 excluding sold properties. Hotel nine-month occupancy was 80.3% and RevPAR was $131.97, down from $134.14.

Material changes and unusual items

  • The company completed a 2019 asset-sale program covering ten properties, with aggregate gross sales prices of $991.0 million and reported gains of $433.1 million. Net cash proceeds from real estate sales were $941.0 million. It used sale proceeds in part to reduce debt and fund a $42-per-share special common dividend of $613.3 million, paid August 30, 2019.
  • Debt reduction included mortgage prepayments, buyer assumption of a mortgage, and legal defeasance of other mortgages. These actions generated $30.0 million of nine-month early-extinguishment losses. Debt defeasance required investments in securities to fund remaining loan payments.
  • The common stock underwent a one-for-three reverse split effective September 3, 2019; reported historical per-share and share figures reflect the split.
  • After quarter-end, the company borrowed $76.5 million under its revolving facility to place funds in escrow for a tender offer to buy up to 2,693,580 Series L preferred shares at $29.12 per share. At November 5, revolving-facility borrowings were $146.5 million, with approximately $97.1 million available.
  • The company reported no formal earnings guidance. Management expected the property disposals to materially reduce office revenue, office expenses, depreciation and amortization, and asset-management fees in Q4 versus Q4 2018. It also expected interest and other income to decline after the special dividend; future interest expense would depend partly on new revolving-facility borrowings.

Outlook, risks and contingencies

  • Management cited planned development and repositioning work, including estimated costs of $15.0 million at 3601 S Congress Avenue, $14.5 million at 4750 Wilshire Boulevard, and $26.0 million of Sheraton Grand Hotel renovations. Spending through September 30 was $4.2 million, $0.3 million, and $2.3 million, respectively. These are plans, not earnings guidance.
  • Key operating exposures include office leasing and occupancy, the ability to renew or re-lease space at market rents, regional economic conditions, and hotel demand. Kaiser and government tenants were material office revenue sources; California accounted for 77.7% of nine-month property revenue and 94.8% of real estate investments at September 30.
  • Approximately 58.2% of debt was floating rate at quarter-end. The filing estimates a 12.5-basis-point LIBOR change would affect annual earnings by approximately $169,000, before considering changes in debt balances or other effects. The company had terminated its remaining interest-rate swaps in March 2019 and noted LIBOR’s planned phaseout.
  • Long-term funding needs include development, capital spending, loan originations, debt refinancing, and preferred and common distributions. Management cautioned that financing may not be available on attractive terms or at all. The revolving facility is subject to a borrowing-base calculation, though not financial covenants.
  • Commitments included $14.5 million of loan commitments and $8.8 million of future tenant-improvement and construction obligations. No material pending litigation was reported; the company is pursuing an $11.8 million San Francisco transfer-tax refund claim. The filing also describes potential SBA recovery claims for loan-program technical deficiencies, which management did not consider probable based on historical experience.

Important facts for investors to verify

  1. Whether recurring cash flow and FFO can support preferred and common distributions after the large portfolio reduction and special dividend.
  2. The completed sales’ effects on ongoing office revenue, occupancy, NOI, and the remaining portfolio’s geographic and tenant concentration.
  3. Post-quarter debt levels, borrowing-base availability, tender-offer completion and funding, and the company’s capacity to meet future maturities and investment commitments.
  4. The assumptions and valuation evidence behind the $69.0 million impairment, $433.1 million sale gain, and $30.0 million debt-extinguishment losses.
  5. Progress, total costs, financing, and expected returns for the stated development, repositioning, and hotel-renovation plans, as well as lease-up of the Los Angeles property.