Business context and reporting period
CIM Commercial Trust Corporation, a Maryland REIT, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. It primarily owns and operates office properties in urban communities, with hotel and SBA 7(a) lending operations. The portfolio included 19 office properties (including a parking garage and two development sites) and one hotel; office occupancy was 93.6%.
Key financial metrics
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 |
|---|---|---|
| Total revenue | $47.6 million | $147.6 million |
| Net income (loss) | $(0.5) million | $2.0 million |
| Net income (loss) attributable to common stockholders | $(4.4) million; $(0.10) per share | $(9.4) million; $(0.21) per share |
| Segment net operating income | $25.3 million | $82.9 million |
| FFO attributable to common stockholders | $8.9 million | $30.4 million |
For the nine months, operating cash flow was $49.8 million, investing cash outflow was $126.9 million, and financing cash inflow was $39.3 million. Cash, cash equivalents and restricted cash totaled $118.6 million at September 30, including $97.0 million unrestricted cash and $21.5 million restricted cash.
Total assets were $1.392 billion; debt, net, was $664.4 million; total liabilities were $725.1 million; and total equity was $623.4 million. Debt included $416.3 million of fixed-rate mortgages and floating-rate borrowings, including a $170.0 million unsecured term loan, SBA-backed notes and other debt. The company reported compliance with applicable financial covenants at quarter-end. Interest expense was $6.3 million for the quarter and $19.3 million year to date. A 12.5-basis-point LIBOR change was estimated to affect annual earnings by approximately $315,000 before considering swaps.
Material changes versus prior comparable periods
- Quarterly revenue fell 14.0% year over year; nine-month revenue fell 19.6%. Office revenue declined, principally reflecting property sales in 2017; the company also had no multifamily operations in 2018 after selling those properties.
- Quarterly net loss compared with $72.4 million of company-attributable income in 2017; nine-month income attributable to the company fell to $2.0 million from $357.7 million. The 2017 comparisons included real estate sale gains of $74.7 million for the quarter and $378.7 million year to date.
- FFO was down 19.5% for the quarter and 18.4% year to date. Management cited lower segment NOI and accumulated Series L preferred dividends, partly offset by lower interest and related-party fees.
- Segment NOI was $25.3 million for the quarter versus $27.9 million; office NOI was $21.9 million versus $22.6 million. Hotel NOI rose to $2.6 million from $2.4 million, while lending NOI declined to $0.8 million from $1.6 million.
- Operating cash flow increased from $17.2 million to $49.8 million year to date, while investing cash flow shifted from $828.0 million provided to $126.9 million used, largely reflecting 2017 asset-sale proceeds and the 2018 Beverly Hills acquisition.
Outlook, commentary, risks and unusual items
- Management expected office revenue, expenses, depreciation and asset-management fees to decrease materially for the remainder of 2018 due to prior property sales, partly offset by acquisitions. Interest expense was also expected to decline, but the amount would depend on borrowings and repayments.
- The company was exploring a potential recapitalization, including sales of selected California and Washington, D.C. properties, repayment of revolving debt, a return of capital to common stockholders and a possible distribution of shares by its major shareholder. No sale agreements or letters of intent had been executed; completion and terms were uncertain. The company also planned to determine preferred-stockholder alternatives after any recapitalization.
- Subsequent to quarter-end, the company entered a secured revolving facility of up to $250 million, subject to a borrowing base. On October 30, it borrowed $170 million to repay and terminate its unsecured term loan. As of November 2, $170 million was drawn and approximately $45 million remained available.
- In September 2018, the company sued San Francisco seeking a refund of $11.845 million in penalties, interest and legal fees paid in 2017 over a disputed property transfer tax. The city had denied the company's refund claims; the company said it intended to pursue the litigation. Management stated it knew of no other material pending legal proceedings.
- Key exposures include geographic concentration (California represented 76.9% of property revenue for the first nine months), tenant concentration (government tenants contributed 19.6% and Kaiser 10.1% of rental and hotel income), interest-rate risk, and reliance on financing and property cash flows. Loans subject to credit risk were 97.6% concentrated in hospitality, although all were current at September 30.
- Series A and Series L preferred shares carry cumulative 5.5% annual dividends. Series L distributions were accumulating and first cash payment was scheduled for January 2019. Common dividends declared in 2018 were $0.125 per share quarterly; future dividends are discretionary and not assured.
- No real estate impairment was recorded in 2018 year to date, compared with $13.1 million in 2017. No material changes to previously reported risk factors were disclosed. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the proposed property sales and recapitalization proceeded, including sale prices, debt repayment, capital returns, public float changes and preferred-stockholder treatment.
- Post-quarter-end revolving-facility terms, borrowing availability, covenants and the effect of replacing unsecured term debt with secured debt.
- Office leasing and occupancy trends, lease expirations, tenant renewals and the impact of prior asset sales on recurring revenue and cash flow.
- Coverage and payment of cumulative Series A and Series L dividends, alongside common dividends and redemption obligations.
- Outcome and potential financial impact of the San Francisco refund litigation, and any SBA claims related to loan-origination or servicing deficiencies.