Business context and reporting period
This is CIM Commercial Trust Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The company is a Maryland REIT focused primarily on Class A and creative office properties in urban communities, with office, hotel, multifamily and lending operations. At quarter-end, its real estate portfolio included 20 office properties, five multifamily properties, one hotel, three parking garages and two development sites.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $64.3 million | $68.5 million | $201.3 million | $206.9 million |
| Net income attributable to stockholders | $9.1 million | $5.2 million | $36.9 million | $13.0 million |
| Net income per share | $0.10 | $0.05 | $0.39 | $0.13 |
| Funds from operations (FFO) | $11.9 million | $23.1 million | $51.5 million | $67.5 million |
| Segment net operating income | $30.3 million | $33.0 million | $99.9 million | $102.3 million |
- Q3 total expenses were $70.5 million, including $10.3 million of interest expense and $17.7 million of depreciation and amortization. The quarter’s $14.9 million real-estate sale gain helped lift GAAP net income; FFO excludes that gain.
- For the nine months, operating cash flow was $50.2 million, compared with $54.7 million. Investing activities provided $16.4 million, largely reflecting $94.6 million of net proceeds from hotel sales; financing activities used $72.8 million.
- At September 30, cash and cash equivalents were $133.8 million and restricted cash was $40.0 million. Total assets were $2.056 billion and total debt was $969.2 million, compared with $2.092 billion and $694.0 million, respectively, at December 31, 2015. The company reported compliance with its credit-facility financial covenants.
- The company had $200 million available under its revolving credit facility and $385 million outstanding under its unsecured term loan. Its $385 million term loan’s rate was hedged at an all-in 3.16% through May 2020. A 12.5-basis-point LIBOR move was estimated to change annual earnings by about $563,000 before swap effects.
- Common dividends declared and paid during each of the first three quarters were $0.21875 per share; total dividends paid in the first nine months were $58.9 million.
Material changes versus the prior comparable period
- Revenue fell 6.0% in Q3 and 2.7% year to date, while segment NOI declined about 8.3% in Q3 and 2.4% year to date. FFO fell about 48.6% in Q3 and 23.7% year to date.
- GAAP net income rose to $9.1 million for Q3 and $36.9 million year to date, primarily because of $14.9 million and $39.7 million, respectively, in gains on real estate sales. This improvement contrasts with lower FFO.
- Interest expense increased $4.6 million in Q3 and $7.5 million year to date, principally reflecting new $392 million mortgage financing and higher average borrowings and rates. Debt increased substantially from year-end.
- Two hotels were sold in 2016: Courtyard Oakland for $43.8 million, generating a $24.7 million gain, and LAX Holiday Inn for $52.5 million, generating a $14.9 million gain. Hotel revenue declined as a result.
- The company repurchased and retired 10 million shares through a tender offer at $21 per share and another 3.63 million shares from an affiliate at $22 per share. Total reported cash outlay for share repurchases was approximately $289.9 million. Shares outstanding declined from 97.6 million at year-end to 84.0 million at September 30.
Outlook, commentary and risks
- Management said it anticipates additional share repurchases but provided no quantified earnings or operating guidance. It stated that it expected to dispose of its remaining commercial real-estate loan portfolio in Q4 2016. In September, it discontinued efforts to sell the SBA 7(a) lending platform and reclassified that activity to continuing operations.
- Office occupancy was 84.6%, essentially flat year over year; multifamily occupancy improved to 95.1% from 90.9%. The company cautioned that a large Washington, D.C. tenant departure would continue to weigh on revenue through the first half of 2017, despite a signed replacement lease expected to commence occupancy in mid-2017.
- California generated 63.9% of property revenue for the first nine months; governmental tenants accounted for 19.9% of rental and other property income. These concentrations expose results to regional property conditions and tenant demand.
- Liquidity demands include $141.7 million in loan commitments and $33.2 million of future tenant-improvement and construction obligations; $22.1 million of the latter was funded in restricted cash. Management warned that financing may not be available on attractive terms or at all, and REIT distribution requirements contribute to ongoing liquidity needs.
- Management identified potential SBA liability if the SBA attributes losses on guaranteed loans to technical deficiencies; it said assertion was not expected based on historical experience, but could have a material adverse effect. No material litigation or material changes to previously disclosed risk factors were reported. Related-party management and service fees are material, and a substantial portion of the tender-offer proceeds went to an affiliate.
- The company reported no off-balance-sheet arrangements and concluded disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the large gap between GAAP net income and FFO, including the contribution of property-sale gains and discontinued operations.
- Review the debt increase, mortgage terms and maturities, available revolver capacity, covenant headroom and sensitivity to interest rates.
- Assess cash generation against dividends, repurchases, loan funding and property capital needs; note that operating cash flow was below dividends paid for the nine-month period.
- Confirm the status and proceeds of the expected commercial real-estate loan portfolio disposition and monitor the lending business’s transition to continuing operations.
- Track office leasing and occupancy, especially the Washington, D.C. replacement tenant, as well as California expense trends and geographic and tenant concentration.
- Review related-party arrangements and the terms, funding and pricing of repurchases from Urban II; also check the status of the registered preferred-stock offering, which had no shares outstanding at September 30, 2016.