Business context and reporting period
CIM Commercial Trust Corporation (the filing registrant; now identified in the request as Creative Media & Community Trust Corp) filed this unaudited Form 10-Q for the quarter ended September 30, 2015. Its primary business was owning and operating Class A and creative office properties, alongside hotel and multifamily properties. The lending segment was classified as held for sale and reported in discontinued operations.
At quarter-end, the company reported 21 office properties, five multifamily properties, three hotels, three parking garages and two development sites. It acquired a California parking lot in August for $11.1 million. Management said it intended to sell the lending business, hotel properties and an Orange County office building to focus more on office properties.
Financial and operating results
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2014 period; nine-month lending comparisons are affected by the 2014 merger closing on March 11, so 2014 includes lending activity only from the acquisition date.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $66.4 vs. $63.1; up 5.2% | $200.6 vs. $190.9; up 5.1% |
| Income from continuing operations | $0.2 vs. $1.0 | $1.0 vs. $15.4 |
| Income from lending operations held for sale | $5.0 vs. $3.3 | $12.0 vs. $8.6 |
| Net income attributable to stockholders | $5.2 vs. $4.3; $0.05 vs. $0.04 per share | $13.0 vs. $23.9; $0.13 vs. $0.25 per share |
| Funds from operations (FFO) | $23.1 vs. $22.0; up 5.3% | $67.5 vs. $75.6; down 10.7% |
| Net cash provided by operating activities | Not separately presented for the quarter | $54.7 vs. $52.4 |
For the first nine months, revenue growth was outweighed by expenses rising 10.6% to $199.6 million. Net income fell mainly because 2014 included a $4.9 million bargain-purchase gain, while 2015 had higher related-party fees, depreciation, interest expense and corporate costs. Q3 expenses rose 6.5% to $66.2 million; quarterly net income increased as stronger property and lending results more than offset higher costs.
Real-estate segment net operating income was $32.5 million in Q3, up from $31.1 million, and $100.2 million for nine months, up from $98.3 million. Office and hotel results improved; multifamily NOI declined, primarily because a New York corporate-housing tenant left in March 2015 and the property was being re-leased as individual units. Nine-month hotel RevPAR was $111.68, up from $101.97. Office occupancy was 84.7% versus 83.3%; multifamily occupancy was 90.9% versus 95.1%, including 70.0% at the New York property.
At September 30, total assets were $2.09 billion, reported debt was $664.1 million, and total equity was $1.30 billion. The balance-sheet debt figure excludes debt within liabilities associated with assets held for sale; those liabilities included $38.3 million of secured borrowings. Cash and cash equivalents were $32.7 million, plus $6.6 million classified with assets held for sale. The $850 million unsecured credit facility had $492 million outstanding and $358 million available. Cash generated from operations was $54.7 million; investing used $28.3 million and financing used $14.6 million. The company paid $64.0 million in dividends during the nine-month period and declared $0.21875 per share in each of the three 2015 quarters.
Material changes and management commentary
- Reported debt increased from $608.7 million at December 31, 2014 to $664.1 million at September 30, 2015. The company repaid about $71.2 million of fixed-rate mortgages using its unsecured credit facility, while credit-facility borrowings increased.
- The existing credit facility was scheduled to mature in September 2016, with two one-year extension options subject to conditions. After quarter-end, on November 2, the company drew $385 million under a new term loan maturing in May 2022 and used the proceeds to repay existing unsecured facility balances. At November 5, $492 million was outstanding across the credit and term-loan facilities and $450 million was available.
- Interest-rate swaps were entered into to fix the LIBOR component of the $385 million term loan through May 2020. Their quarter-end fair-value liability was $6.3 million, recorded as a loss in other comprehensive income; the company estimated $4.8 million would be reclassified to interest expense over the next 12 months.
- Related-party asset-management and other fees were $22.0 million for nine months, up from $18.6 million. Management cited higher appraised investment values and capital spending/acquisitions, among other service costs. The filing describes multiple service and staffing arrangements with affiliates.
- Management reported higher office and hotel revenue, but noted rising property taxes in California and the Washington, D.C. area and expected the D.C.-area increases to continue for the rest of 2015. New leases signed for nine months had average new cash rents of $38.00 per square foot versus $40.96 of expiring rents.
- No numerical earnings or dividend guidance was provided. Management cautioned that results may differ from expectations and that future dividends depend on factors including earnings, REIT taxable income, economic conditions and portfolio performance.
Risks, contingencies and unusual items
- Interest-rate exposure increased: 79.2% of debt, including debt associated with assets held for sale, was floating-rate at September 30. Management estimated a 12.5-basis-point LIBOR change would affect annual earnings by approximately $693,000, before considering changes in balances or fair value.
- The company had $23.6 million of outstanding loan commitments and approvals and $34.1 million of future tenant-improvement and construction obligations. The filing also disclosed long-term ground-lease commitments.
- The SBA could seek recovery for losses on guaranteed loans if it attributes a loss to significant origination, funding or servicing deficiencies. Management did not expect the contingency to be asserted based on historical experience, but said an assertion could be materially adverse.
- A New York property-tax-abatement matter was settled in February 2015 for $4.7 million. The company reported no other material pending or threatened litigation, and no material changes to the risk factors in its 2014 Form 10-K.
- Government tenants generated 22.9% of nine-month rental and property income; California represented 62.6% of property revenue and 52.8% of real-estate investment at quarter-end. These concentrations expose results to tenant, regional and property-market conditions.
- Management reported no impairment of long-lived assets for the periods presented, no off-balance-sheet arrangements, and compliance with financial covenants at September 30. Disclosure controls were deemed effective, with no material internal-control changes reported during the quarter.
Important facts for investors to verify
- Confirm the subsequent $385 million term-loan draw, repayment of existing borrowings, remaining facility availability and applicable covenants and pricing.
- Track execution and timing of the planned lending-business, hotel and Orange County office dispositions, including any effects on reported results and liquidity.
- Monitor re-leasing, occupancy and rents at the New York multifamily property, along with office lease expirations and the gap between new and expiring cash rents.
- Assess floating-rate exposure, swap valuation and future interest expense, particularly the large 2016 maturity shown for the facility outstanding at quarter-end.
- Review the sustainability of dividends against operating cash flow, capital needs, debt service and REIT distribution requirements; FFO is not a substitute for cash flow or a measure of funds available for dividends.
- Evaluate the effect of related-party fees and affiliate service arrangements, as well as the stated tenant, geographic and SBA-related risks.