PMC Commercial Trust — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The filing identifies the registrant as PMC Commercial Trust; the supplied company metadata names Creative Media & Community Trust Corp. Financial statements are unaudited and amounts below are in millions unless otherwise noted.
Business context and financial results
The company is a REIT lender focused principally on commercial mortgage and SBA 7(a) loans, with substantial exposure to hospitality properties. At June 30, 2012, 94% of loans were concentrated in hospitality.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $3.964 | $3.847 | $7.751 | $7.903 |
| Expenses | $3.999 | $2.666 | $7.811 | $5.573 |
| Continuing income (loss) | ($0.093) | $1.235 | ($0.099) | $2.359 |
| Net income (loss) | ($0.415) | $1.339 | ($0.570) | $2.255 |
| Net loss per share | ($0.04) | $0.13 | ($0.05) | $0.21 |
Six-month revenue declined 1.9%, while expenses rose 40.2%. The principal earnings drag was $2.202 million of strategic-alternatives review costs, including $1.352 million in Q2. Excluding those costs, management reported six-month continuing income of $2.103 million and net income of $1.632 million. The company said these were its first recorded net losses.
Balance sheet, debt, liquidity and cash flow
- Total assets were $254.853 million, including net loans of $243.759 million, up from $234.427 million at year-end 2011. Total liabilities were $111.074 million and total equity was $143.779 million.
- Total debt was $101.470 million, compared with $95.861 million at December 31, 2011. Components included $40.213 million of secured borrowings, $27.070 million of junior subordinated notes, $21.000 million drawn on the revolving facility and $13.187 million of SBIC debentures. The $5.264 million structured-note balance was repaid in February.
- Cash and cash equivalents fell to $1.309 million from $6.502 million at year-end; restricted cash was zero after release of $2.233 million. The $35 million unsecured revolver matures June 30, 2014. The company reported covenant compliance at quarter-end; a potential increase to $40 million in January 2013 is conditional.
- For the six months, operating cash flow was negative $6.885 million, investing cash flow was positive $0.116 million and financing cash flow was positive $1.576 million. Cash decreased $5.193 million.
- Management’s non-GAAP “Modified Cash” was $0.780 million, versus $2.661 million a year earlier. Dividends declared were $3.388 million; distributions exceeded Modified Cash by $2.583 million. After adjustment for strategic-review cash costs, Modified Cash was $2.302 million and dividends exceeded it by $1.061 million.
- The company funded $26.6 million of loans in the first half and forecast 2012 fundings of $50–$60 million. Loan commitments and approvals were $22.3 million at quarter-end.
Material changes and credit quality
- Strategic-review expenses drove much of the year-over-year earnings deterioration. The company incurred an additional $0.600 million in July; the review had no stated completion schedule and there was no assurance it would result in a transaction.
- Premium income fell year over year for the first half, partly because fewer SBA guaranteed-loan sales were made solely for cash premiums. Hybrid loan sales defer book gain recognition; $3.058 million of deferred cash premiums was to be amortized against interest expense over loan lives. July sales included $3.3 million of guaranteed SBA loans and $0.433 million in cash premiums.
- Loan-loss provision, net, was $0.593 million for the first half, up from $0.379 million. The company foreclosed on collateral for a limited-service hospitality loan in May and recorded a $0.799 million principal write-off during the period. Net loan-loss reserves were $1.606 million at quarter-end.
- Of credit-risk loans before reserves and deferred costs, 92.9% were rated satisfactory, 5.8% substandard and 0.1% doubtful. Delinquencies over 89 days were $1.458 million; five troubled-debt-restructured commercial loans had a recorded investment of $7.725 million. Non-accrual loans totaled $2.456 million.
- Four hospitality properties in real estate owned had sale contracts, with closings expected in Q3 and Q4 2012; some sales involved seller financing. REO was $2.539 million at June 30.
Outlook, risks and contingencies
- Management said economic conditions appeared to be improving, but warned that borrower cash flows, hospitality performance and collateral values remained vulnerable. Further defaults, foreclosures, impairments and credit losses could materially affect results.
- Funding depends on loan principal collections, SBA secondary-market sales and revolver access. Management said short-term sources were expected to be sufficient, but capital-market funding for securitizations and trust-preferred securities was unavailable or unacceptable. A loss of SBA loan-sale access or breach of debt covenants could impair liquidity and dividends.
- The company estimated that each 25-basis-point decline in rates would reduce annual net income by about $0.272 million, based on its June 30 position; each 100-basis-point increase would raise annual interest expense by about $0.883 million. Most loans and debt were variable rate.
- The board’s dividend decision considers Modified Cash, taxable income, liquidity and other factors. The company must generally distribute at least 90% of REIT taxable income to retain REIT status; this does not guarantee a particular dividend level.
- Outstanding loan commitments were $22.3 million. The filing also describes routine loan-collection litigation and a possible SBA recovery claim for losses attributable to technical deficiencies; management did not expect the SBA contingency to be material.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported apart from the added risk of net losses and continuing strategic-review costs.
Most important facts to verify
- Confirm the issuer identity and relationship between PMC Commercial Trust in this filing and Creative Media & Community Trust Corp in the request metadata.
- Track the strategic-alternatives review, subsequent costs, any transaction developments and their effect on earnings.
- Assess cash availability, revolver capacity and covenants, conditional facility increase, SBA debenture commitments and loan-sale market access.
- Review hospitality-sector concentration, troubled and non-accrual loans, foreclosure recoveries, REO sale closings and future loan-loss provisions.
- Compare dividends with Modified Cash and taxable income, noting the company’s reliance on principal collections to cover distributions.