Creative Media & Community Trust Corp quarterly report, Q2 FY2023

Creative Media & Community Trust Corporation — Q2 2023 Form 10-Q

Business context and reporting period. The unaudited quarter and six months ended June 30, 2023 cover a REIT operating office, hotel and multifamily real estate, alongside an SBA 7(a) lending business. At quarter-end, CMCT reported 25 real estate assets, including interests held through unconsolidated joint ventures. The filing cautions that interim results are not necessarily indicative of full-year results.

Key financial results

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Total revenue	$32.8 million	$26.4 million	$61.7 million	$51.2 million
Net income (loss)	$(18.4) million	$2.9 million	$(25.9) million	$5.2 million
Net income (loss) attributable to common stockholders	$(23.8) million	$(2.3) million	$(36.5) million	$(5.2) million
Common-stock loss per share, diluted	$(1.05)	$(0.10)	$(1.61)	$(0.22)
FFO attributable to common stockholders (non-GAAP)	$(4.2) million	$2.6 million	$(9.0) million	$4.8 million
Net cash provided by operating activities	Not presented for quarter	Not presented for quarter	$9.4 million	$25.3 million

Q2 revenue rose 24.1%, while total expenses more than doubled to $50.1 million. Six-month revenue increased 20.5%, but expenses rose 92.9% to $88.2 million. Management attributed the losses chiefly to higher depreciation and amortization, interest expense and, year to date, $3.4 million of transaction costs. Reported FFO is also negative; the company cautions that FFO is not a measure of liquidity or cash available for dividends.

Segment net operating income (NOI) was $12.0 million in Q2, versus $12.8 million a year earlier, and $25.0 million for six months, essentially flat with the prior year. Calculated NOI as a share of segment revenue was approximately 36.7% in Q2 (48.6% prior year) and 40.5% for six months (48.8% prior year). These are derived ratios, not company-reported margins.

Balance sheet, debt and liquidity

At June 30, 2023, total assets were $919.7 million, up from $690.2 million at December 31, 2022. Net real estate investments were $711.8 million, compared with $502.0 million.
Debt, net of issuance costs and discounts, was $487.8 million, versus $184.3 million at year-end. Face-value debt was approximately $492.4 million. Debt growth reflected real estate acquisitions and additional borrowings.
Cash and cash equivalents were $24.6 million; restricted cash was $23.8 million. The company reported $58.0 million available under its $150 million revolver at June 30. The facility bears a 7.69% variable rate at quarter-end and matures in December 2025, with conditional extension options.
About 80.3% of debt was floating rate. Management estimated that a 50-basis-point change in LIBOR and SOFR would affect annual earnings by approximately $2.0 million, based on June 30 debt levels.
Operating cash flow decreased to $9.4 million from $25.3 million year over year. Investing activities used $77.7 million, primarily reflecting acquisitions; financing activities provided $59.1 million. Cash and restricted cash together declined $9.1 million during the six months.
Debt principal maturities shown in the filing include $87.6 million in 2024, $243.3 million in 2025 and $104.4 million in 2026. The 2025 amount includes $148.2 million under the credit facility.

Material changes and operating trends

CMCT acquired multifamily properties and related sites in Oakland, California, including Channel House and 1150 Clay, from entities affiliated with CIM Group. The reported aggregate acquisition amount was approximately $282.9 million, excluding transaction costs; the transactions included $181.3 million of assumed mortgage notes. The acquisitions contributed new multifamily revenue and substantial acquired-lease amortization.
Hotel revenue increased 21.8% in Q2 and 33.3% for six months, with management citing recovering hospitality demand and improved occupancy and average daily rates. Six-month hotel occupancy was 80.9%, ADR was $201.59 and RevPAR was $163.18, all above 2022 levels.
Office portfolio occupancy was 83.0%, compared with 78.1% a year earlier; annualized rent per occupied square foot was $56.71, versus $54.13. CMCT noted that 29.3% of annualized office rental income came from Kaiser Foundation Health Plan, creating tenant concentration exposure.
Multifamily occupancy was 83.9% at quarter-end. The reported monthly rent per occupied unit was $2,914.
CMCT sold an 80% interest in 4750 Wilshire Boulevard for a gross $34.4 million, recognized a $1.1 million gain, and retained a 20% joint-venture interest. It received $16.7 million net at closing and reported a remaining $5.2 million receivable at June 30.
The company completed a securitization of unguaranteed SBA 7(a) loans, issuing $54.1 million of notes and receiving approximately $43.3 million net of fees and reserve and escrow funding.
CMCT redeemed all remaining Series L preferred stock in January 2023 for $83.8 million, plus $4.6 million of accrued dividends. It continued issuing Series A1 preferred stock; preferred dividends, redemptions and offering activity are material to common-stockholder returns and funding.

Outlook, risks and contingencies

The filing provides no specific quantitative earnings or FFO guidance. Management describes potential funding sources including preferred or common equity, debt, asset sales, co-investors and operating cash flow, but cautions that long-term funding may not be available on acceptable terms. Renovation of the hotel and development of sites could add to liquidity requirements. The common-stock dividend was $0.085 per share quarterly during the periods reported; future dividends remain subject to board discretion, available funds and other constraints.

Risks highlighted include higher interest rates and inflation, leasing and occupancy changes, the ability to renew or re-lease space at current rents, and general economic and market conditions. Management reported no material changes to the risk factors in the 2022 Form 10-K.
CMCT had $7.8 million of commitments to fund SBA loans and $6.5 million of future tenant-improvement and construction obligations. Restricted cash included $2.5 million reserved for tenant improvements.
The company serviced $241.4 million of guaranteed SBA 7(a) loans. The SBA could seek recovery from CMCT if losses on guaranteed loans were attributed to technical deficiencies; management said it did not expect this contingency to be asserted based on historical experience.
CMCT provided limited guarantees associated with certain unconsolidated joint-venture mortgages and construction financing. A contractor-injury lawsuit involving a subsidiary was disclosed; the company could not estimate a loss range but did not expect a material adverse effect. No other material pending or threatened legal proceedings were reported.
CMCT adopted the CECL credit-loss standard on January 1, 2023, recording a $619,000 net opening-equity adjustment. Its loan-loss allowance was $1.7 million at June 30; loans subject to credit risk were entirely concentrated in hospitality.

Important facts for investors to verify

How the newly acquired Oakland multifamily assets perform, including occupancy, rents, lease-up and acquired-intangible amortization.
Debt covenants, revolver borrowing availability, 2025 refinancing needs and sensitivity to further rate changes.
Cash generation relative to debt service, preferred-stock obligations, common dividends and planned investment needs.
Preferred-stock issuance, redemption terms and dividend accruals, including their effect on cash available to common shareholders.
Office tenant concentration, lease expirations and the progress, funding and guarantee exposure of the 4750 Wilshire conversion.
SBA loan credit quality, securitization performance and any changes to the $1.7 million expected-credit-loss allowance.