CIM Commercial Trust Corporation — Q2 2016 Form 10-Q
Business context and period. The filing is for the quarter and six months ended June 30, 2016. CIM Commercial Trust, a Maryland REIT, primarily owns and operates office properties, with multifamily and hotel assets; its lending segment was classified as held for sale and reported in discontinued operations. Unless noted otherwise, amounts below are in millions of dollars.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $65.4 | $66.9 | $131.8 | $134.2 |
| Income from continuing operations | $(2.0) | $1.0 | $23.6 | $0.8 |
| Net income attributable to stockholders | $0.8 | $5.0 | $27.8 | $7.7 |
| EPS | $0.01 | $0.05 | $0.29 | $0.08 |
| FFO | $19.3 | $22.5 | $39.6 | $44.4 |
| Cash from operations | Not presented quarterly | Not presented quarterly | $33.6 | $37.1 |
- Six-month net income included a $24.7 million gain on the February sale of Courtyard Oakland; without that gain, reported earnings were substantially lower. Q2 net income declined 82.8% year over year.
- Six-month FFO fell 10.7%, reflecting lower discontinued-operation income, higher interest expense, slightly lower segment NOI, and higher related-party fees. FFO is a non-GAAP REIT measure and is not a substitute for cash flow.
- Segment NOI was $32.6 million in Q2 versus $33.7 million; the approximate NOI margin on segment revenue was 49.9% versus 50.4%. For the first half, NOI was $67.1 million versus $67.8 million, with an approximate margin of 50.9% versus 50.5%.
- At June 30, assets were $2.151 billion, total liabilities $1.087 billion, and equity $1.064 billion. Cash and cash equivalents were $37.6 million, with $82.5 million of restricted cash. Cash including cash held within assets for sale was $69.3 million.
- Reported debt was $939.8 million, up from $656.8 million at year-end 2015; this excludes $42.0 million of debt associated with assets held for sale. The increase primarily reflected $392 million of new fixed-rate mortgages. The $385 million unsecured term loan was swapped to an all-in fixed rate of 3.16% through May 2020.
- Operating cash flow was $33.6 million; investing cash outflow was $53.0 million and financing cash outflow was $51.9 million. Financing included $40.5 million of dividends and approximately $210.1 million of cash outlay for the share tender offer.
Changes, outlook, and risks
- Portfolio and operating trends: Office revenue declined 2.0% in the first half, and office occupancy was 83.5%, down from 85.2%. Management said a newly signed 113,000-square-foot Washington, D.C. tenant was not expected to occupy until mid-2017, so the related revenue shortfall was expected to continue through the rest of 2016. Hotel revenue declined after the Oakland hotel sale; multifamily revenue rose with improved occupancy at the New York property.
- Dispositions: The company was actively marketing the remaining lending business. After quarter-end, it sold LAX Holiday Inn on July 19 for $52.5 million and reported an approximate $16.4 million gain. Proceeds from the Oakland hotel sale had been held for a planned like-kind exchange but were released in August after the company decided not to pursue one.
- Debt and liquidity outlook: The $850 million unsecured credit facility matured in September 2016, with two possible one-year extensions; management intended to exercise the first in August. At June 30, none was drawn and $450 million was available under the revolver. The company reported compliance with financial covenants. It also noted that future financing may not be available on attractive terms or at all.
- Capital actions: The oversubscribed tender offer repurchased and retired 10 million shares at $21 each, reducing shares outstanding to 87.7 million at June 30. A registration statement for up to $900 million of Series A preferred stock and warrants became effective July 1; no preferred shares were outstanding at quarter-end. The preferred stock carries a 5.5% cumulative dividend when declared.
- Dividends: Common dividends declared and paid during the first half totaled $0.4375 per share. Future dividends are not assured and depend on board decisions, REIT requirements, earnings, and other factors.
- Exposure and contingencies: California generated 64.9% of first-half property revenue and Washington, D.C. 20.9%; government tenants contributed 19.5% of first-half rental and other property income. A 12.5-basis-point LIBOR move was estimated to affect annual earnings by about $565,000 before considering swaps. Outstanding loan funding commitments were $162.8 million, and future tenant-improvement and construction obligations were $35.4 million, of which $22.3 million was funded in restricted accounts. The filing identifies possible SBA recovery claims for loan-origination or servicing deficiencies, though management did not expect such claims to be probable. No material litigation was reported.
- No formal earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and that leasing, economic, interest-rate, and financing conditions could affect results. The company said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the company exercised the credit-facility extension and the resulting maturity and borrowing availability.
- Final proceeds, gain, and use of proceeds from the July 2016 LAX Holiday Inn sale, and progress on selling the remaining lending segment.
- Whether the preferred-stock offering proceeded, including issuance size, dilution, dividend obligations, and warrant terms.
- Office leasing and occupancy progress, particularly the Washington, D.C. vacancy and the expected mid-2017 tenant move-in.
- Debt, restricted-cash availability, loan commitments, and capacity to fund dividends, capital needs, and other obligations.
- Whether reported earnings and FFO trends persist after separating the Oakland sale gain and discontinued lending operations.