Creative Media & Community Trust Corporation (CIM Commercial Trust Corporation) — 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014. The filing is under the name CIM Commercial Trust Corporation; the supplied company name appears to refer to the same issuer. Amounts below are in millions unless noted.
Business context and reporting comparability
The company owns and operates office, hotel and multifamily properties and operates a lending business, principally making loans to hospitality-related borrowers. It completed its merger with CIM Urban on March 11, 2014. The merger was accounted for as a reverse acquisition, with CIM Urban as the accounting acquirer: 2014 results include CIM Urban for the periods presented but include PMC Commercial only from the acquisition date. Accordingly, reported year-over-year comparisons are not like-for-like. The company also changed its name, reincorporated in Maryland and effected a one-for-five reverse stock split in April 2014.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $68.2 | $57.5 | $203.8 | $175.6 |
| Net income | $4.3 | $1.8 | $24.0 | $12.4 |
| Net income attributable to stockholders | $4.3 | $1.8 | $23.9 | $12.3 |
| Diluted EPS | $0.04 | $0.02 | $0.25 | $0.13 |
| FFO | $22.0 | $18.4 | $75.6 | $63.7 |
For the nine-month period, reported net income included a $4.9 million non-cash bargain purchase gain. Merger-adjusted pro forma results, assuming the combination occurred January 1, 2013, showed revenue of $207.1 million and net income of $18.6 million in 2014, compared with $191.4 million and $19.0 million in 2013; these pro forma figures exclude specified transaction costs and one-time gains.
- Cash flow, nine months: Operating cash flow was $52.4 million versus $49.6 million; investing used $39.4 million versus $13.8 million; financing provided $0.9 million versus using $50.0 million. Cash and cash equivalents ended at $30.6 million, up from $16.8 million at year-end 2013. Restricted cash was an additional $9.2 million.
- Balance sheet: Total assets were $2.079 billion and total equity $1.382 billion at September 30, 2014. Net real estate investments were $1.701 billion; loans receivable, net, were $191.9 million.
- Debt and liquidity: Debt was $624.2 million, up from $395.1 million at December 31, 2013. The new $850 million unsecured facility had $330 million drawn and $520 million available at September 30; $350 million was drawn and $500 million available at October 31. The facility matures in September 2016, with two conditional one-year extensions. The company reported covenant compliance.
- Debt maturities: The filing lists $77.1 million of mortgage principal due in 2015 and $330 million of other principal due in 2016, primarily under the unsecured facility. Management intended to use the facility’s $75 million delayed-draw term loan to repay approximately $73.6 million of mortgages maturing in 2015.
- Property and segment performance: Nine-month segment net operating income was $77.8 million for offices, $12.9 million for hotels, $7.6 million for multifamily and $8.4 million for lending. Office occupancy was 83.3%, down from 86.3%; multifamily occupancy was 95.1%, versus 94.9%. Office rent per occupied square foot was $36.08 versus $35.88.
Material changes and management commentary
- Reported nine-month revenue rose 16.0% and net income rose 93.8%; the comparison reflects the merger, new lending results, the bargain purchase gain and lower transaction costs, among other factors.
- Hotel revenue increased 46.0% for nine months, mainly because the LAX Holiday Inn—acquired through foreclosure in October 2013—was operating as a hotel in 2014 rather than represented by a mortgage note in 2013. Office revenue increased 1.1%; multifamily revenue increased 2.7%.
- Management reported higher California property taxes and expected further increases for the remainder of 2014. It also expected higher multifamily legal costs and higher corporate general and administrative costs, including costs to explore strategic alternatives.
- Management said the lending business would continue to deploy capital through SBA 7(a) and other lending programs, while the company was exploring strategic alternatives that could separate the lending business from the urban office REIT.
- After quarter-end, the company acquired a three-building, approximately 32,000-square-foot creative office portfolio in Culver City for approximately $18.5 million.
- No quantified earnings or FFO guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and that forward-looking plans are subject to uncertainty.
Risks, contingencies and unusual items
- Interest rates: Floating-rate borrowings represented 64.0% of debt at September 30. The company estimated that a 12.5-basis-point LIBOR change would affect annual earnings by approximately $497,000, based on then-current floating debt.
- Concentrations: California represented 60.3% of nine-month property revenue and 51.7% of real estate investment value. Government tenants contributed 24.9% of nine-month rental and other property income. Hospitality represented 94.3% of the loan portfolio.
- Loan exposure: At September 30, 99.9% of loans subject to credit risk were current; $0.2 million was 29–59 days delinquent. Management classified $1.0 million as substandard and $0.2 million as doubtful. SBA guarantees reduce credit risk on guaranteed portions, but the SBA may seek recovery for losses caused by servicing or origination deficiencies.
- Merger and other unusual items: The company recognized a $4.9 million bargain purchase gain and a $1.2 million gain from settling a contractual obligation. The merger-related shareholder litigation was settled; settlement terms included attorney fees of $772,000 and share purchases by the manager under a trading plan.
- Other commitments: Loan commitments and approvals totaled $20.8 million. The company disclosed executive severance and retention-share arrangements, long-term ground-lease obligations, and routine legal matters; management did not expect other pending litigation to have a material adverse effect.
- Controls: Management concluded disclosure controls were effective. CIM Urban was excluded from the quarter’s assessment of changes in internal control over financial reporting because of the short time since the merger; management said it would be included in the year-end assessment.
Important facts for investors to verify
- Use merger-adjusted pro forma results, not reported year-over-year growth alone, to assess underlying earnings trends; check the treatment of the bargain purchase gain and other one-time items.
- Review refinancing progress and covenant headroom for the 2015 mortgage maturities and the $330 million facility maturity in 2016, including the conditional extension provisions.
- Monitor office occupancy and lease expirations, California property-tax increases, and the performance and costs of the LAX hotel.
- Assess credit quality and concentration in hospitality lending, SBA compliance exposure, and the effects of loan-sale structures on reported debt and cash flows.
- Track floating-rate debt, available facility capacity, dividend requirements and cash needs for acquisitions, capital expenditures and loan originations.
- Evaluate related-party management and service fees, strategic alternatives for the lending business, and the scope and outcome of the year-end internal-control assessment.