CIM Commercial Trust Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The company invests primarily in Class A and creative office properties in urban U.S. markets, alongside multifamily, hotel and lending operations. It is managed by CIM Group affiliates and reports as a REIT.
Key financial results
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $265.9 million | $276.9 million |
| Net income | $34.6 million | $24.4 million |
| Net income available to common stockholders | $34.5 million | $24.4 million |
| FFO available to common stockholders | $66.8 million | $93.7 million |
| Cash provided by operating activities | $51.9 million | $77.0 million |
| Total assets | $2.023 billion | $2.092 billion |
| Total debt | $967.9 million | $694.0 million |
- Net income rose 41.6%, principally because of $39.7 million of real estate sale gains. FFO fell 28.6%; the filing attributes the decline mainly to lower discontinued-operations income, higher interest expense and lower segment net operating income.
- Revenue decreased 4.0%. Interest expense increased to $33.8 million from $22.8 million, reflecting higher average borrowing and the 2016 mortgage financing.
- Cash and cash equivalents were $144.4 million; restricted cash was $32.2 million. The company reported $200 million available on its revolving credit facility and compliance with debt covenants at year-end.
- Common dividends totaled $77.3 million, or $0.875 per share, unchanged from 2015. Dividends exceeded 2016 FFO available to common stockholders. The company repurchased 13.6 million shares for $290.1 million through a tender offer and a private transaction.
- Debt included $532.4 million of mortgages and $412.1 million of other principal, including an unsecured term loan. The term loan’s rate was swapped to a 3.16% all-in fixed rate through May 2020. The filing reports no off-balance-sheet arrangements.
Portfolio and changes versus 2015
- At year-end, the portfolio comprised 31 assets: 24 office properties and ancillary assets totaling about 5.6 million rentable square feet, five multifamily properties with 930 units, and one 503-room hotel. Office occupancy was 85.7% (86.9% in 2015); multifamily occupancy was 92.0% (92.4%); the remaining Sheraton hotel’s 2016 RevPAR was $119.44.
- Office revenue was $187.4 million, down 0.4%, and office segment NOI was $105.0 million versus $107.5 million. Multifamily revenue increased 8.5% to $20.3 million and NOI rose to $7.9 million from $6.6 million. Lending revenue increased 15.2% to $9.8 million.
- Hotel revenue decreased 21.3% to $48.4 million, largely because the company sold the Courtyard Oakland in February and LAX Holiday Inn in July 2016. Hotel NOI fell to $15.9 million from $19.5 million. The two hotel sales generated $39.7 million of gains in total.
- No real estate acquisitions were made in 2016. On December 29, the company sold its commercial real estate lending subsidiary to a CIM Group-affiliated fund for its $27.6 million carrying value, with no gain or loss. It discontinued plans to sell its SBA 7(a) platform and reclassified those activities to continuing operations.
Outlook, risks and unusual items
- Management expected hotel revenue to decline materially in 2017 following the two hotel sales. Interest expense was also expected to increase because 2016 mortgage borrowings would be outstanding for a full year. Revenue at a Washington, D.C. office property was expected to remain lower in the first half of 2017 following a large tenant departure; a replacement tenant was not expected to take occupancy until mid-2017.
- In February 2017, the company agreed to sell 211 Main Street in San Francisco for approximately $293 million, with closing expected in the first quarter of 2017. Management said additional dispositions were likely in 2017; proceeds could support stockholder liquidity. These are forward-looking expectations, not completed results.
- In 2017, a taxing authority asserted approximately $11.4 million of past-due real property transfer taxes, penalties and interest related to prior years. The company intends to contest the claims, said loss was not then considered probable and reasonably estimable, and recorded no liability at December 31, 2016.
- Key risks include high leverage and refinancing or interest-rate exposure; geographic concentration (California represented 63.4% of revenue and Washington, D.C. 21.3%); office vacancies and lease expirations; dependence on government tenants; and hotel, multifamily and lending-market conditions. Government agencies accounted for 19.9% of rental and other property income.
- CIM Group affiliates control approximately 98% of voting power, and the company relies on affiliated managers and advisors. Related-party arrangements include asset-management, service and property-management fees. The company also reported that the lending loan portfolio was 94.6% concentrated in hospitality.
Most important facts for investors to verify
- Whether the 211 Main Street sale closed, its final proceeds and any resulting gain, debt repayment or change in recurring revenue.
- Post-disposition office occupancy, leasing progress at the Washington, D.C. property, and the effect of upcoming expirations and vacancy on cash flow.
- Debt maturities, facility availability, covenant headroom, variable-rate exposure and the 2017 interest-cost outlook.
- How recurring earnings and cash flows compare with net income boosted by sale gains, FFO and common-dividend requirements.
- Outcome and potential financial exposure from the $11.4 million transfer-tax claims, and the terms and valuation support for the related-party lending subsidiary sale.
- Future share repurchases or other liquidity measures, related-party governance and fees, and concentration of voting control and rental income.