Business context and reporting period
PMC Commercial Trust and subsidiaries’ unaudited Form 10-Q covers the quarter and six months ended June 30, 2011. The registrant named in the filing is PMC Commercial Trust; the supplied company metadata identifies Creative Media & Community Trust Corp., so the entity relationship should be verified. PMC was a REIT focused on commercial real-estate lending, including hospitality-property mortgages and SBA 7(a) loans.
Financial and operating results
Amounts below are in millions of dollars, except per-share data. Cash flow figures are for the six months ended June 30.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $3.847 | $3.935 | $7.903 | $7.390 |
| Income from continuing operations | $1.235 | $1.226 | $2.359 | $2.493 |
| Net income | $1.339 | $1.223 | $2.255 | $2.501 |
| Basic and diluted EPS | $0.13 | $0.12 | $0.21 | $0.24 |
- For the first half, interest income was $6.756 million, interest expense $1.930 million, and provision for loan losses, net, $0.379 million. The comparable 2010 period had a $0.098 million net reduction of loan losses.
- Six-month operating cash flow was negative $2.645 million; investing cash flow was positive $6.294 million and financing cash flow negative $1.582 million. Cash increased $2.067 million to $4.709 million. Restricted cash was $7.211 million.
- At June 30, loans receivable, net, were $232.292 million; total assets $252.801 million; total debt $95.510 million; and total equity $149.652 million. Debt increased from $92.969 million at year-end 2010.
- The $30 million revolving facility had $12.8 million outstanding. The company reported compliance with its covenants at June 30.
- Quarterly dividends were $0.16 per share; first-half distributions were $3.383 million. Management’s non-GAAP Modified Cash was $2.955 million, below distributions by $0.426 million.
Material changes versus comparable periods
- Q2 revenue declined 2.2%, while net income rose 9.5%, helped by $0.104 million of income from discontinued operations versus a $0.003 million loss a year earlier.
- First-half revenue increased 6.9%, largely reflecting higher premium income from SBA loan sales. First-half expenses increased 10.9%, mainly due to the swing in loan-loss provision and higher salaries; net income fell 9.8%.
- Credit indicators improved in some respects: loans more than 89 days delinquent were $2.346 million at June 30, down from $7.549 million at December 31, 2010; non-accrual loans fell to $4.585 million from $12.275 million. However, total reserves rose to $1.860 million from $1.609 million, and loans classified as OAEM increased to $21.992 million from $16.886 million.
- Real estate owned declined to $1.914 million from $3.477 million. First-half discontinued operations recorded a $0.104 million loss, including $0.232 million of impairment losses and $0.442 million of operating losses, partly offset by property-sale gains.
- The revolving facility was amended in June: maturity extended to June 30, 2014, with a lower rate of prime less 0.50% or 30-day LIBOR plus 2%, at the company’s option. Availability could increase to $35 million in 2012 and up to $40 million in 2013, subject to specified conditions.
Outlook, commentary and risks
- Management expected $40–$50 million of loan fundings during 2011, predominantly through SBA 7(a); first-half fundings were $13.976 million. It also expected to use up to $15 million of SBA-committed SBIC debentures as eligible loans are funded and approved.
- Management described improving economic conditions but cautioned that hospitality borrowers continued to face weak cash flows, delinquencies, tax and franchise-fee arrears, property deterioration, bankruptcy and foreclosure. It said additional reserves, REO impairment and foreclosure-related costs could be material.
- Approximately 94% of loans were concentrated in hospitality at June 30; 19% were secured by Texas properties. An affiliated obligor group represented about 6% of loans.
- Low interest rates weighed on income from variable-rate loans. Management estimated each 25-basis-point rate decline could reduce annual net income by about $269,000; a 100-basis-point increase in rates on variable-rate debt could increase annual interest expense by about $770,000, assuming balances remain unchanged.
- Capital-market access remained constrained. Management cited reliance on principal collections, SBA secondary-market loan sales and the revolver; inability to sell guaranteed SBA loan portions or obtain alternative funding could restrict lending and pressure liquidity. The filing says first-half Modified Cash did not cover dividends, and the shortfall was funded partly from loan principal collections.
- Other items include $18.7 million of outstanding loan commitments, subject to draw and expiration; an Arlington bankruptcy settlement that would become final upon approval of the liquidation plan; and a contingent SBA right to recover losses related to technical deficiencies in loan origination, funding or servicing. Management did not expect that SBA contingency to be material.
- The filing reported no material change to previously disclosed risk factors apart from added exposure to U.S. debt-ceiling, credit-rating and related market uncertainty. It provided no formal earnings guidance.
Key facts for investors to verify
- Whether this PMC Commercial Trust filing is the correct filing for the company identified in the request as Creative Media & Community Trust Corp.
- Subsequent delinquency, non-accrual, OAEM, impaired-loan and reserve trends, including outcomes for bankruptcy and foreclosure cases.
- Whether forecast 2011 loan fundings and the conditional SBIC debenture capacity were achieved, and the terms and volume of SBA loan sales.
- Dividend coverage and liquidity: Modified Cash was below first-half distributions, while operating cash flow was negative.
- Revolver availability, covenant compliance, scheduled debt payments and the effect of continued concentration in hospitality lending.