Creative Media & Community Trust Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; financial statements are unaudited. The filing identifies the registrant as CIM Commercial Trust Corporation, a Maryland REIT focused primarily on Class A and creative office properties, with hotel and SBA 7(a) lending operations. Dollar amounts below are in millions unless noted.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $36.9 | $51.5 | $84.1 | $99.8 |
| Net income | $52.6 | $1.9 | $344.2 | $2.6 |
| Net income (loss) attributable to common stockholders | $48.3 | $(1.9) | $335.9 | $(4.9) |
| Basic EPS | $1.10 | $(0.04) | $7.67 | $(0.11) |
| FFO attributable to common stockholders | $3.0 | $11.4 | $(11.1) | $21.6 |
| Segment net operating income | $18.0 | $29.4 | $42.8 | $57.6 |
Reported earnings were dominated by real estate disposal gains: $55.2 million in Q2 and $432.8 million for the first half. First-half results also included $69.0 million of real estate impairment and $30.0 million of losses on early debt extinguishment. FFO, which excludes real estate sale gains, impairment and depreciation/amortization, declined materially; it is a non-GAAP measure and is not a measure of liquidity or funds available for dividends.
- Revenue and operations: Q2 revenue fell 28.5% year over year; first-half revenue fell 15.7%. Office segment revenue declined 41.8% in Q2 and 23.7% in the first half, principally reflecting property sales and reduced revenue at a Los Angeles property undergoing repositioning. Hotel revenue fell 5.6% in Q2 and 2.4% in the first half. Lending revenue increased 9.9% and 3.5%, respectively.
- Cash flow: First-half operating cash flow was $26.2 million, down from $36.9 million. Investing activities provided $749.0 million, chiefly from property sales; financing activities used $466.9 million, including debt repayment and mortgage defeasance. Cash and restricted cash totaled $384.5 million at June 30.
- Balance sheet and debt: Total assets were $1.197 billion, compared with $1.342 billion at December 31, 2018. Cash and cash equivalents were $373.7 million, restricted cash $10.8 million, and net real estate investments $504.3 million. Debt, net, was $162.3 million, down from $588.7 million; the company also reported $3.2 million of liabilities associated with assets held for sale. The revolver had no balance outstanding and approximately $210 million available, subject to its borrowing base.
- Portfolio operating indicators: Office occupancy was 88.1% at June 30, versus 94.0% a year earlier; annualized rent per occupied square foot was $48.94 versus $44.54. The hotel reported first-half occupancy of 81.9%, ADR of $172.12 and RevPAR of $140.93.
Material changes and significant transactions
- The company sold ten properties during 2019 as part of its asset-sale program, generating an aggregate gross sales price of $991.0 million. Four transactions completed by June 30 produced $810.0 million in stated sales prices and $432.8 million in reported gains; investing cash flow included $765.1 million of net sale proceeds through June 30.
- Sale proceeds funded substantial debt reduction. Certain mortgages were prepaid, assumed by buyers or legally defeased; defeasance and repayment costs contributed to the $30.0 million first-half early-extinguishment loss. The company terminated its remaining interest-rate swaps in March.
- At June 30, three Washington, D.C. properties were classified as held for sale after a $69.0 million impairment charge. Their sale closed in July 2019; management expected an additional gain of approximately $0.2 million.
- Common dividends declared for the first half were $0.125 per share per quarter. On August 8, the board announced a new regular quarterly rate of $0.025 per share, declared a special dividend of $14.00 per share, or $613.3 million in total, and announced a 1-for-3 reverse stock split effective September 3, 2019. The special dividend was to be funded primarily from asset-sale proceeds after debt repayment and revolver borrowings.
Outlook, risks and unusual items
- Management expected office revenue, property expenses, asset-management fees, depreciation and interest expense to decline materially during the remainder of 2019 following the sales. The effect on interest expense would depend on future revolver borrowings and any new debt. No earnings or revenue guidance was provided.
- The company said it expected to retain substantial borrowing capacity and that the revolving facility would remain in place after the portfolio program. It was exploring a possible repurchase of approximately 30% of Series L preferred shares beginning no later than Q1 2020, but stated there was no assurance it would proceed or on what terms.
- Office exposure remains concentrated: California represented 75.6% of first-half property revenue, and Washington, D.C. 20.1%. Government tenants accounted for 22.7% of first-half office-segment revenue; Kaiser accounted for 13.5%. Management cautioned that renewals and re-leasing may not occur at current rents.
- Other disclosed matters include a lawsuit seeking a refund of $11.845 million paid to San Francisco for disputed real-property transfer taxes, and a contractor-injury lawsuit for which potential loss could not be estimated. The company also disclosed potential SBA recovery claims for technical deficiencies in loan origination, funding or servicing, though it did not consider such a claim probable based on historical experience. Management reported no material adverse environmental issue and no material change to previously disclosed risk factors.
- The company reported effective disclosure controls as of June 30 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the special dividend was paid as announced, how much was funded with revolver borrowings, and the resulting post-distribution cash, debt and borrowing availability.
- Actual completion economics and proceeds for all ten property sales, including the July Washington, D.C. sale and the expected gain of approximately $0.2 million.
- Post-sale office occupancy, rental income, leasing progress at the Los Angeles repositioning property, and the effect of the smaller portfolio on recurring FFO and cash flow.
- Debt balances and terms after defeasances, the borrowing-base capacity of the revolver, and exposure to floating interest rates; swaps had been terminated by March 2019.
- The status and financial impact of the proposed Series L preferred-stock repurchase, the San Francisco tax-refund litigation, and the contractor and SBA contingencies.
- Effects of the 1-for-3 reverse split and the reduced regular common dividend on per-share comparisons and preferred-stock warrant terms.