Business context and reporting period
CIM Commercial Trust Corporation, a Maryland REIT, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. Its business includes owning and operating office and hotel properties and originating SBA 7(a) small-business loans. The filing describes a portfolio concentrated in urban markets; at quarter-end, office properties were 94.0% occupied, and the hotel’s six-month RevPAR was $141.10.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $51.6 million | $61.3 million | $100.0 million | $128.2 million |
| Net income | $1.9 million | $91.4 million | $2.6 million | $285.3 million |
| Net income (loss) attributable to common stockholders | $(1.9) million | $91.3 million | $(4.9) million | $285.2 million |
| Common-stockholder diluted EPS | $(0.04) | $1.16 | $(0.11) | $3.50 |
| Segment net operating income | $29.4 million | $32.5 million | $57.6 million | $74.6 million |
| Operating cash flow | — | $36.9 million | $21.8 million |
All dollar amounts are approximate. Q2 rental and other property income was $34.9 million, hotel income $10.2 million, and interest and other income $3.1 million. Q2 interest expense was $6.8 million; six-month interest expense was $13.4 million. The filing does not present a single company-wide operating margin measure.
At June 30, 2018, total assets were $1.388 billion, including net real estate investments of $1.076 billion. Debt, net was $666.9 million, compared with $630.9 million at year-end 2017. Cash and cash equivalents were $91.2 million and restricted cash $22.8 million. Total equity was $624.4 million, alongside $42.0 million of redeemable preferred stock.
For the six months, investing activities used $120.8 million, principally including $112.0 million for the Beverly Hills office acquisition; financing activities provided $41.5 million. Cash, cash equivalents and restricted cash declined by $42.3 million to $114.0 million.
Material changes versus the prior comparable period
- Revenue fell 15.9% in Q2 and 22.1% for the six months. The 2017 comparisons included real-estate sale gains of $116.3 million for Q2 and $304.0 million year to date; there were no such gains in 2018. This substantially explains the decline in reported net income.
- Common-stockholder results also reflect preferred dividends. In 2018, $6.3 million of Series L preferred dividends accumulated during the six months, while $1.2 million of Series A dividends were declared; no Series L shares were outstanding in the 2017 comparison.
- Office segment revenue declined 13.7% in Q2 and 21.7% year to date, mainly following property sales in 2017. Hotel revenue increased 3.2% in Q2 and 1.5% year to date. Lending revenue rose 31.0% in Q2 and 29.5% year to date.
- FFO attributable to common stockholders was $11.4 million in Q2, up from $2.9 million, but $21.6 million for the six months, down from $26.3 million. Management identifies lower segment NOI and accumulated preferred dividends among the year-to-date drivers. FFO is a non-GAAP measure and the company cautions it is not a liquidity measure or a substitute for operating cash flow.
- Office occupancy increased to 94.0% from 86.6% year over year; annualized rent per occupied square foot was $44.54 versus $41.04. Hotel occupancy was 84.1% versus 84.0%, and RevPAR was $141.10 versus $138.97.
Outlook, risks and unusual items
- No formal earnings guidance is provided. Management expects office revenue, office expenses, asset-management fees and depreciation to decrease materially for the remainder of 2018 because of 2017 property dispositions, partly offset by acquisitions completed in December 2017 and January 2018. Management also expects interest expense to decrease, but says the amount depends on borrowings and the terms of any new financing.
- The unsecured credit facility, with approximately $200 million available and no revolver borrowings at June 30, was due to mature in September 2018. The company was discussing financing options with banks, including possible refinancing of its term loan, but said there was no assurance discussions would produce new arrangements. It reported compliance with its debt covenants.
- Debt included $416.3 million of fixed-rate mortgages and floating-rate borrowings; $170 million of term-loan debt was effectively fixed at 3.16% through May 2020 by interest-rate swaps. Management estimated that a 12.5-basis-point LIBOR change, before swap impact, would affect annual earnings by about $318,000.
- The company paid $11.845 million in 2017 for penalties, interest and legal fees related to a San Francisco real-property transfer-tax dispute. Its refund claims were denied in July 2018; it intends to contest the asserted obligations and says the recoverable amount, if any, is uncertain.
- Other exposures include $21.98 million of outstanding SBA lending commitments, $20.3 million of future tenant-improvement and construction obligations, and potential SBA recourse for certain technical deficiencies in loan origination or servicing. Government tenants accounted for about 19% of Q2 rental and hotel income; California represented 77.7% of property revenue. Management reported no material pending litigation apart from routine matters and the disclosed tax dispute, and no material change to previously disclosed risk factors.
- Common dividends declared were $0.125 per share in each of the first two quarters of 2018. Series A and Series L preferred stock each carry a stated 5.5% annual dividend rate, subject to declaration and legally available funds; the first Series L distribution was scheduled for January 2019. The filing notes that future distributions are not assured.
Important facts for investors to verify
- Whether the company refinanced or replaced the unsecured credit facility before its September 2018 maturity, and on what terms.
- How the San Francisco tax dispute progressed after the July 2018 denial of refund claims, including any further payments or recovery.
- Whether occupancy, leasing spreads and office cash rents offset the continuing revenue impact of prior property sales.
- Cash available for debt service, capital needs and common and preferred distributions, considering accumulated preferred dividends and future obligations.
- The composition, pricing and dilution implications of continued Series A preferred-unit issuance and associated warrants.