Creative Media & Community Trust Corp quarterly report, Q2 FY2014

Creative Media & Community Trust Corporation (then CIM Commercial Trust Corporation) — Q2 2014 Form 10-Q

Business context and reporting period

The filing covers the quarter and six months ended June 30, 2014. The company owns and manages office, hotel and multifamily properties and operates a lending business, principally making loans to hospitality borrowers. The March 11, 2014 merger with CIM Urban was accounted for as a reverse acquisition: CIM Urban is the accounting acquirer, and the 2014 results include the lending business only from the acquisition date. Accordingly, reported year-over-year comparisons are not fully comparable. The company changed its name from PMC Commercial Trust in April 2014 and completed a one-for-five reverse stock split.

Financial and operating metrics

Amounts below are in millions of dollars unless noted.

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Revenue	$71.5	$59.8	$135.6	$118.1
Net income	$8.5	$4.8	$19.7	$10.6
Net income attributable to stockholders	$8.4	$4.7	$19.6	$10.5
Basic and diluted EPS	$0.09	$0.05	$0.20	$0.11

Reported net margin was approximately 11.9% in Q2 2014 versus 8.0% in Q2 2013, and 14.6% for the first half versus 9.0%. First-half 2014 net income included a $4.9 million noncash bargain purchase gain.
Segment net operating income was $39.0 million in Q2, up from $34.2 million, and $72.5 million for the first half, up from $67.6 million. Q2 lending contributed $4.4 million of segment net operating income; lending operations entered the reported results after the merger.
At June 30, total assets were $2.073 billion, including $1.712 billion in net real estate and $193.3 million in net loans receivable. Cash and cash equivalents were $20.0 million, with another $7.2 million restricted.
Total debt was $601.3 million, up from $395.1 million at December 31, 2013. Total liabilities were $673.8 million and equity was $1.399 billion.
For the first half, operating cash flow was $36.7 million versus $32.2 million; investing cash outflow was $38.1 million versus $11.0 million; financing cash flow was positive $4.7 million versus negative $19.4 million. Cash increased $3.2 million to $20.0 million.
Office occupancy was 82.1%, down from 86.3% a year earlier; multifamily occupancy was 96.6%, versus 96.3%. Six-month hotel occupancy rose to 82.3% from 77.4%, while ADR declined to $122.51 from $134.36 and RevPAR to $100.83 from $104.03. Excluding the LAX Holiday Inn, 2014 hotel occupancy, ADR and RevPAR were 77.7%, $144.68 and $112.37.

Material changes versus comparable periods

Q2 revenue rose 19.4% and net income 77.1%; first-half revenue rose 14.8% and net income 85.6%. The first-half income increase reflects the bargain purchase gain and acquired lending operations, among other factors.
Hotel revenue increased 39.3% in Q2 and 41.6% for the first half, primarily because the LAX Holiday Inn, acquired through foreclosure in October 2013, was operated as a hotel in 2014 rather than represented by a mortgage note in 2013. Office and multifamily revenue grew more modestly.
Operating expenses rose 13.8% in Q2 and 12.0% for the first half. Management cited higher property costs, including electricity and California real estate taxes, and higher public-company general and administrative expenses. The filing says California property-tax increases versus 2013 were expected to continue for the remainder of 2014.
First-half pro forma results assuming the merger occurred January 1, 2013 were revenue of $138.9 million and net income of $15.5 million in 2014, versus $128.6 million and $14.6 million in 2013; pro forma EPS was $0.16 and $0.15, respectively. The 2014 pro forma results exclude merger transaction costs and the bargain purchase gain.

Outlook, risks, contingencies and unusual items

Management said available cash, operating cash flow, existing facilities and loan collections were not expected to cover all near-term liquidity needs. It was negotiating a $550 million unsecured term loan and revolving facility, with an accordion feature to increase total capacity to $850 million, and expected to close by the end of Q3 2014. Closing was not assured; delay or failure could adversely affect liquidity. The company stated that other financing sources were believed available.
Debt included $288.7 million drawn on unsecured revolving lines and a $20 million term note maturing in September 2014. The filing’s debt schedule showed $211.9 million of principal payments due in the second half of 2014, including $208 million of “all other principal.” Existing revolving facilities had near-term maturity or extension considerations; review the facility terms and subsequent amendments.
About 59% of debt was floating-rate at June 30. Management estimated that a 12.5-basis-point LIBOR change would affect annual earnings by approximately $441,000, based on then-current floating-rate debt.
Loans were 94.4% concentrated in hospitality. Of $153.2 million of loans subject to credit risk, 99.4% were current; approximately 0.5% were over 89 days delinquent. Management classified $2.3 million as Substandard or Doubtful and $1.9 million as OAEM. The SBA may seek recovery for losses on guaranteed loans if it identifies significant origination, funding or servicing deficiencies; management did not consider such recovery probable, but said it could be material if asserted.
The company settled merger-related shareholder litigation. The settlement included $772,000 of plaintiffs’ attorneys’ fees and a manager trading plan to purchase up to 550,000 shares; about 248,000 shares had been acquired through July 31. The manager was also expected to acquire 100,000 shares at $25 per share in August at the plaintiffs’ request.
Government tenants accounted for 25.1% of first-half rental and other property income; California represented 60.3% of first-half property revenue. These concentrations, property operating costs, refinancing needs and lending credit quality are relevant risks.
Management reported disclosure controls were effective, but excluded CIM Urban from its assessment of changes in internal control over financial reporting for the quarter because of limited time and resources after the merger; it planned to include CIM Urban in the year-end assessment. No material change to previously disclosed risk factors was reported.
The board declared a $0.21875-per-share common dividend in June, paid June 27. Management cautioned that future dividends may differ materially from historical levels and depend on earnings, REIT taxable income, portfolio performance and other factors.

Important facts for investors to verify

Whether the planned refinancing closed, and the resulting facility size, pricing, covenants, maturities and repayment of existing borrowings.
The source and timing of the $211.9 million scheduled second-half 2014 debt payments, and the company’s liquidity after dividends, capital expenditures and loan originations.
Underlying comparable-property results, including office leasing and occupancy trends, California tax expense, and hotel performance excluding the LAX Holiday Inn.
Loan portfolio performance and reserve assumptions, especially hospitality concentration, criticized loans and any SBA servicing or guarantee claims.
Merger-related adjustments, the bargain purchase gain, and the distinction between reported results and the pro forma comparison.
Completion of the merger-litigation settlement share purchases and the year-end internal-control assessment covering CIM Urban.