Business context and reporting period
CIM Commercial Trust Corporation (then PMC Commercial Trust) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. The company invests in commercial real estate in urban markets and originates loans, primarily to hospitality businesses. On March 11, 2014, it completed its merger with CIM Urban REIT; the merger was accounted for as a reverse acquisition, with CIM Urban as the accounting acquirer. Accordingly, 2013 results reflect CIM Urban alone, while 2014 includes PMC Commercial only from the acquisition date. Comparisons are therefore not fully like-for-like.
After quarter-end, the company reincorporated in Maryland, changed its name to CIM Commercial Trust Corporation, converted preferred shares into common shares, and effected a 1-for-5 reverse stock split. Most share and per-share data in the filing do not reflect the split.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $64.1 million | $58.3 million in Q1 2013; up 10.0% |
| Net income | $11.2 million; $11.219 million attributable to shareholders | $5.8 million; $5.826 million attributable to shareholders |
| EPS | $0.02 basic and diluted | $0.01 basic and diluted |
| FFO | $27.8 million | $23.0 million; up 21.3% |
| Operating cash flow | $12.0 million | $13.1 million |
| Cash and cash equivalents | $24.1 million | $16.8 million at Dec. 31, 2013 |
| Total assets | $2.051 billion | $1.834 billion at Dec. 31, 2013 |
| Total debt | $569.7 million | $395.1 million at Dec. 31, 2013 |
| Total equity | $1.413 billion | $1.376 billion at Dec. 31, 2013 |
Rental and other property income was $59.8 million, versus $55.2 million. Total expenses rose 10.2% to $57.8 million. The filing does not present a consolidated operating margin as a headline metric. Cash used in investing was $1.1 million; cash used in financing was $3.6 million. Cash increased by $7.3 million during the quarter.
Reported net income included a $4.918 million noncash bargain-purchase gain from the merger. Excluding the gain, reported pre-tax income was $6.3 million. Segment net operating income was $33.5 million versus $33.4 million: office $25.3 million, hotel $4.5 million, multifamily $2.9 million, and lending $0.9 million (lending results cover only the post-acquisition period). FFO also includes the bargain-purchase gain; management attributes its increase chiefly to that gain and the new lending segment, partly offset by $468,000 of merger costs. FFO is a non-GAAP REIT measure, not a substitute for operating cash flow or liquidity.
Material changes and operating trends
- Debt increased $174.6 million from year-end, reflecting the merger, lending-related borrowings and higher revolver usage. Floating-rate borrowings were 54.4% of debt at quarter-end, compared with 41.8% at year-end. Management estimated that a 12.5-basis-point LIBOR change would affect annual earnings by approximately $387,000.
- Hotel revenue rose 44.2%, 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 the 2013 comparison. Hotel expenses also rose 49.6%.
- Office revenue declined 0.4%, while office expenses increased 9.6%, mainly due to electricity costs in Washington, D.C., and real estate taxes in California. Management expected California property taxes to continue increasing for the rest of 2014.
- Office and multifamily occupancy were 84.8% and 94.4%, respectively, down from 86.2% and 95.2%. Office rent per leased square foot increased to $35.21 from $34.73; multifamily monthly rent per leased unit increased to $1,859 from $1,774.
- Following the merger, 19 office, five multifamily and three hotel properties were reported across four states and Washington, D.C. California accounted for 60.2% of property revenue; government tenants generated approximately 26% of rental and other property income.
Liquidity, debt, outlook and risks
At March 31, total debt included $229.3 million of mortgages, $40.2 million of SBA-related secured borrowings, $245.4 million under revolving lines, a $30 million term note due September 2014, and $27.1 million face value of junior subordinated notes. The filing reports $12.6 million available under the company lending facility and $17 million under a CIM Urban revolver at quarter-end. The company reported compliance with applicable debt covenants. In April, the borrowing capacity of one CIM Urban revolver was increased to $200 million; as of April 30, $188 million was drawn and $12 million remained available.
Management said expected cash on hand, operating cash flow, existing facilities and loan collections would not cover all anticipated near-term liquidity needs, including capital expenditures, loan originations, debt service and dividends. It expected to seek additional credit facilities or debt issuance, but cautioned that financing or facility extensions might not be available on acceptable terms or at all. No earnings or dividend guidance was provided. The filing notes that REIT distribution requirements, market conditions and access to financing may affect liquidity and dividends.
Other notable exposures include a loan portfolio 95% concentrated in hospitality, with $1.25 million classified as doubtful and $2.0 million as substandard at quarter-end; possible SBA recovery claims if loan-program technical deficiencies cause losses; and environmental liabilities associated with real estate ownership. A merger-related shareholder lawsuit was settled: the court approved the settlement on April 4, 2014; the company agreed to pay $772,000 in plaintiffs’ legal fees, and the manager’s trading plan provided for purchases of up to 2.75 million shares at prices up to $5. The filing says other routine litigation is not expected to have a material adverse effect.
Disclosure controls were judged effective. However, CIM Urban was excluded from the quarter-end evaluation of changes in internal control over financial reporting because of the short time since the merger; management planned to include it in the year-end assessment. The company acquired a Los Angeles office building in April; the filing text does not provide a clear purchase price.
Most important facts for investors to verify
- Review the merger’s reverse-acquisition accounting and the bargain-purchase gain; assess performance using pro forma results as well as reported figures.
- Confirm near-term refinancing and repayment requirements, facility availability, covenant terms, and the effect of increased floating-rate debt.
- Evaluate whether operating cash flow and financing access can fund debt service, investment needs and distributions; management says expected sources alone are insufficient for all needs.
- Track office and multifamily occupancy, hotel operating performance, California tax increases, and tenant and geographic concentrations.
- Monitor hospitality loan delinquencies and classifications, SBA compliance exposure, the settled litigation obligations, and integration of CIM Urban into internal controls.
- Use post-reverse-split share counts and per-share figures when comparing subsequent disclosures; this filing’s share and per-share data generally predate the split adjustment.