Business context and reporting period
CIM Commercial Trust Corporation, a Maryland REIT focused primarily on office properties in urban communities, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The company sold numerous office and multifamily properties during the period and classified two additional properties as held for sale. Results therefore reflect a substantially changing portfolio.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $55.4 million | $64.3 million | $183.6 million | $201.3 million |
| Net income | $72.4 million | $9.1 million | $357.7 million | $36.9 million |
| Net income available to common stockholders per share | $1.25 | $0.10 | $4.86 | $0.39 |
| FFO available to common stockholders | $11.0 million | $11.9 million | $37.3 million | $51.5 million |
| Segment net operating income | $27.9 million | $30.3 million | $102.5 million | $99.9 million |
Net income growth was driven mainly by real estate sale gains: $74.7 million in Q3 and $378.7 million for the first nine months, versus $14.9 million and $39.7 million, respectively, in 2016. The nine-month result also included a $13.1 million real estate impairment and $11.9 million of transaction costs. FFO, which excludes real estate sale gains, impairment, and depreciation and amortization, fell 16% for the nine-month period.
At September 30, cash and cash equivalents were $253.0 million, restricted cash was $25.4 million, total assets were $1.591 billion, and total equity was $711.9 million. Debt, net, was $780.0 million, down from $967.9 million at December 31, 2016; the balance sheet also reported $36.9 million of liabilities associated with assets held for sale, including $28.6 million of debt. Operating cash flow was $17.2 million for the nine months, compared with $50.2 million a year earlier. Investing activities provided $834.7 million, predominantly from property sales; financing activities used $741.7 million.
At period-end, approximately $21 million of borrowing capacity remained under the unsecured credit facility, subject to covenants. The company reported compliance with its financial covenants. Its $320 million unsecured term loan was effectively fixed at a 3.16% rate through May 2020 using swaps. Approximately 54.7% of debt was fixed-rate before the effect of swaps; management estimated a 12.5-basis-point LIBOR change would affect annual earnings by about $460,000 before swaps.
Material changes versus the prior comparable period
- Revenue declined 13.9% in Q3 and 8.8% year to date, principally reflecting property dispositions. Q3 segment NOI fell to $27.9 million from $30.3 million; year-to-date segment NOI rose to $102.5 million from $99.9 million.
- Office revenue was down 12.9% in Q3; hotel revenue was down 8.0%; multifamily revenue was down 47.1%. Dispositions were the primary factor. The company expected further material declines in office and multifamily revenue after additional sales.
- The company repurchased 26.2 million common shares from an affiliate for $576 million, or $22 per share, reducing common shares outstanding from 84.0 million at year-end 2016 to 57.9 million. It paid special common dividends of $0.28 and $1.98 per share, in addition to regular dividends.
- Office occupancy was 88.2% including sold and held-for-sale properties; excluding those properties, it was 94.2%, compared with 93.0% for the comparable portfolio a year earlier. Comparable annualized rent per occupied square foot was $40.54 versus $38.90.
Outlook, commentary, risks and unusual items
- No quantified earnings or FFO guidance was provided. Management expected office and multifamily revenue, asset-management fees, depreciation, and interest expense to decline materially in the remainder of 2017 as property dispositions took effect. The size of some expected changes depended on disposition timing and future credit-facility usage.
- Management anticipated possible further share repurchases and/or special dividends, and stated that a substantial portion of disposition proceeds might be used to provide common-stockholder liquidity. The company also noted that future funding sources may not be available on acceptable terms or at all.
- After quarter-end, the company sold 370 L’Enfant Promenade on October 17 for $126.7 million and reported an approximately $2.0 million gain. It expected the sale of the held-for-sale Houston multifamily property, contracted for $64.0 million, to close in Q4 2017.
- The company paid $11.845 million in August in a dispute with the City and County of San Francisco over claimed past-due real property transfer tax. The payment was expensed; the company said it would continue to contest the claim and could not determine whether any amount would be recovered.
- Series A preferred stock had a 5.5% cumulative annual dividend rate and holder redemption rights subject to stated terms. The company had issued 568,921 units by September 30 and filed an October registration statement for a proposed Israeli preferred-stock offering of up to approximately $280 million; completion and terms were not assured.
- Key risks include reduced recurring income following property sales, limited remaining revolver capacity, refinancing and interest-rate exposure, tenant and geographic concentration, and the potential cash demands of dividends, repurchases, and preferred-stock redemptions. Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and common-stockholder EPS came from property-sale gains, and how recurring cash earnings compare with FFO.
- Post-disposition rental income, occupancy, leasing trends, and portfolio concentration, particularly in California and Washington, D.C.
- Closing proceeds and debt treatment for the Houston property, and the realized outcome of the San Francisco tax litigation and appeal.
- Available liquidity under credit agreements after covenant restrictions, debt maturities and refinancing needs, and the impact of interest-rate changes after swaps.
- The terms, funding, and cash-flow implications of any further share repurchases, common or preferred dividends, or proposed preferred-stock offerings.