Creative Media & Community Trust Corporation (NASDAQ:CMCT) Q4 2022 Earnings Call Transcript

Creative Media & Community Trust Corporation (NASDAQ:CMCT) Q4 2022 Earnings Call Transcript March 31, 2023

Operator: Hello, and welcome to the Creative Media & Community Trust Q4 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Steve Altebrando, Portfolio Oversight for CMCT. Please go ahead.

Steve Altebrando: Good morning, everyone, and thank you for joining us. My name is Steve Altebrando, the Portfolio Oversight for CMCT. Also on the call, today is Shaul Kuba, our Chief Investment Officer; David Thompson, our Chief Executive Officer; and Barry Berlin, our Chief Financial Officer. This call is being webcast and will be temporarily archived on the Investor Relations section of our website, where you can also find our earnings release. Our earnings release includes a reconciliation of non-GAAP financial measures discussed during today’s call. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us.

Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. With that, I’ll turn the call over to David Thompson.

David Thompson: Thanks, Steve, and thank you, everyone, for joining our call today. This morning, we announced our fourth quarter 2022 earnings. We’re pleased to report that CMCT generated core FFO of $0.11. We continue to see a strong rebound in our hotel asset, and we also saw an improvement in our office NOI from the prior quarter. In addition, our office lease percentage increased in 2022, despite headwinds nationally for the office sector and the high number of lease expirations we had coming into the year. We believe this speaks to the quality of our portfolio and leasing team. We have quality assets in highly desirable markets and submarkets such as Beverly Hills, Culver City, Hollywood and Austin. Our office assets generally fall into the following categories: Ultra-prime location, like 9460 Wilshire and Beverly Hills, best-in-class, like one Kaiser in Oakland or Penfield in Austin or specialty office that we believe is more immune from work from home trends, like the medical office concentration we had in Los Angeles at 11600 and 11620 Wilshire, buildings that are located just minutes from the West L.A. VA Medical Center and UCLA Medical Center.

As we continue into 2023, I would like to highlight a few key points about our strategy. First, we are executing on our previously announced plan to grow the multifamily side of our portfolio to achieve more balance between creative office and multifamily. We are seeking newer vintage, highly amenitized, premier multifamily assets and high barrier to entry markets. For example, in the first quarter of this year, we acquired two multifamily assets in the Bay Area and one in Los Angeles, totaling 696 units. Shaul will give more color on these exciting investments. Second, we made progress on our value-add and development pipeline. Most notably, we announced earlier this month that we closed a co-investment and construction loan at our 4750 Wilshire property in Los Angeles.

The unleased portion of the building is now being converted to luxury residential apartments. We have a significant pipeline of multifamily development opportunities on land we already own. As we have previously mentioned, for value-add and development assets, we will look to co-invest to increase our diversification and supplement returns by generating fee income when advantageous. Third, we reduced our corporate overhead by 28% in 2022. This was driven by the permanent reduction in our management team. And fourth, we took steps to improve our liquidity and balance sheet. This is extremely important in the current environment where capital is becoming more scarce and expensive and as we consider future opportunities. I would now like to turn the call over to Shaul Kuba.

Shaul Kuba: Thank you, David. I’d like to take the time to highlight some of our exciting reset acquisition and provide an update on the status of our development pipeline. As we discussed last quarter, we are focused on growing the multifamily side of our portfolio. As David described, we have focused our acquisition targets on new vintage, highly amenitized premier asset in high barrier to entry market. First, in Echo Park in Los Angeles, we acquired 1902 Park Avenue, a 75-unit apartment building in an off-market transaction. The building is adjacent to 1910 West Sunset, a creative office building we acquired last year from the same seller. We are excited to grow our footprint in Echo Park, a thriving walkable submarket with a dozen of building and entertainment option.

Our basis in 1902 Park Avenue is highly attractive at approximately $300,000 per door which we believe is substantially below replacement cost for a building that was constructed in 2012. Next, in Auckland, we acquired the channel house, a 333-unit, 8-story apartment building and 1150 Clay, a 288-unit 16-story apartment building. Both assets are a premier Class A buildings that were completed in 2021. The assets are currently in lease-up, and we expect net operating income to significantly increase. At the end of 2022, the Channel House was 76% occupied and 1150 Clay was 77% occupied. Oakland is a submarket that saw significant supply growth from 2018 through 2022. However, going forward, the pipeline for new development is significantly below the average for the top 25 U.S. market.

And given cost inflation, we estimate our basis is significantly below replacement costs. The Channel House is in the heart of Jack London Square, a waterfront community with dining, retail, view of San Francisco and easy access to both Downtown San Francisco and Oakland. 1150 Clay is an easy walk to Downtown Oakland and located one block from BART station, offering direct access to San Francisco. We believe we have a very attractive basis of approximately $415,000 per door for channel house and $535 per door for 1150 Clay. Turning to our development pipeline. As we previously mentioned, we did an extensive review of our portfolio last year to evaluate where we can create additional value. Based on the review, we believe we can develop more than 1,500 multifamily unit on land we already own, in Austin, Los Angeles, the Bay Area and Sacramento.

We will have the option to start construction on two ground-up opportunity in Los Angeles in 2023. First, in Echo Park, we have been working on plans for a 36-unit multifamily property. This building will be on an adjacent land parcel to the office asset we own at 1910 West Sunset Boulevard and also adjacent to the recently acquired apartment building at 1902 Park Avenue, I just described. Next, in Jefferson Park section of Los Angeles, we have made progress on the development of our two multifamily property there, where we plan to develop about 150 units across both sides. We are working towards receiving the necessary approval and will have the option to break ground on the first site in 2023 for a total of 40 units. We are excited about those developments as they are strategically located in the path of growth in close proximity to Culver City and just 1.5 miles from University of Southern California.

For the balance of our pipeline, we are in the process of obtaining all the necessary approval as well as completing design work, which we believe will increase the value of those holding and allow future growth. With that, I will turn it over to Steve to provide an update on the portfolio.

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Steve Altebrando: Thanks, Shaul. I’ll provide an update on our recently announced co-investment and our leasing activity. As David mentioned, in the first quarter, we closed on a co-investment with three international institutional investors for the conversion of 4750 Wilshire Boulevard in Los Angeles from an office building to a mix of ground level office space that is 100% leased today and 68 new luxury multifamily apartments. We also closed on a construction loan in the quarter, fully funding the project. The conversion of the unleased portion of the building into multifamily rentals began in March, and we expect the conversion to take about 18 months. We believe this is a highly attractive project as 4750 Wilshire is located in Hancock Park and affluent residential submarket at L.A., where housing is supply constrained.

The co-investment on 4750 Wilshire will ultimately reduce our ownership to 20%. We expect to benefit from the expected value creation of the asset and we’ll also earn a management fee as well as an opportunity to earn and promote. Turning to leasing. We leased approximately 38,000 square feet in the fourth quarter and another 31,000 square feet through the first two months of 2023. For the full year of 2022, we leased approximately 157,000 square feet and increased our lease percentage to 84.5% from 80.5% a year earlier. We had approximately 40,000 square feet of signed leases that have not yet commenced at year-end. We entered 2022 with nearly 15% of our leases expiring in 2022 and this year, it is a much more manageable 11%. And in total, we estimate we will renew over 70% of these leases.

We have only one tenant expiration over the size of 10,000 square feet in 2023. With that, I’ll turn it over to Barry.

Barry Berlin: Thank you, Steve. Moving on to financial highlights. Our segment net operating income was reduced by $400,000 to $11.7 million compared to $12.1 million in the prior year comparable period. By business segment, this change is broken out as a $1.9 million reduction in our Lending segment NOI, partially offset by an increase in our Hotel segment NOI of $1.3 million and around a $300,000 increase in our office segment NOI. Drilling deeper into our business segments, first, our Office segment NOI increased to $6.9 million from $6.6 million in the prior year comparable period, driven by an increase in the NOI for our same-store office properties, primarily due to a decrease in real estate tax expenses at an office property in Austin, Texas, partially offset by a decrease in rental revenues and an office property in San Francisco, California due to a decrease in occupancy.

Our Office segment did continue to see improved activity and we signed approximately 38,000 square feet of leases during the quarter. Second, our Hotel segment NOI increased to $3.1 million from $1.8 million in the prior year comparable period. This was driven by improved occupancy, which went up to 72% from 70% and we saw improved ADR, which increased to $179 per room for around $154 per room. Third, our lending division NOI decreased by around $1.9 million to a more normalized $1.8 million in the fourth quarter of 2022. It is important to note that in each of the quarters of 2021, due to COVID-driven additional government support of our SBA 7(a) loan product, we had a significant bump in loan origination and loan sales, which had a significant market premiums.

This drove NOI up to $3.6 million last year for the three months ended December 31, 2021 that increased government support did in fact end at the end of 2021. For our overhead, the largest is the reduction in asset management fees, which was reduced by around $1.4 million to just over $800,000 from $2.2 million in the prior year comparable period due to the fee waiver that went into effect January 1, 2022. This decrease was partially offset by an increase in corporate level interest expense by around $650,000 and an increase in general and administrative expenses of around $300,000. Below the Company net income line, we recorded a preferred stock activity. As announced in December 2022, we repurchased the remaining portion of our Series L preferred stock and recognized $7.9 million in preferred stock redemption loss due to the expensing of upfront costs associated with the issuance of those securities.

We also had declared or accumulated preferred stock dividends of approximately $1.8 million in the fourth quarter compared to $5 million in the prior year comparable period. This decrease was related to a change in the timing of our declaration of the dividends on our Series A1, A and D preferred stock as compared to the fourth quarter of 2021. Therefore, our net loss attributable to our common stockholders was $8.9 million in the fourth quarter of 2022 compared to a $4.3 million loss in the fourth quarter of 2021. Primarily as a result of the consumable preferred stock redemption costs of $7.9 million, our FFO was reduced to a negative $0.61 per diluted share compared to a positive $0.038 in the prior year comparable period. We are pleased to report that we closed on a recast of our revolving credit facility in December 2022 and giving us total borrowing capacity of $206.2 million and extended the facility another three years with the option for two one-year extensions.

As of the end of December, we had $56.2 million outstanding on our credit facility with $150 million available for future borrowings. Due to the robust acquisition activities, mentioned earlier, as of the date of this call, we had $178 million outstanding on our facilities with approximately $28 million available for future borrowings. Another positive during the fourth quarter was an increase in the issuance of our Series A1 preferred where we generated around $69 million of cash proceeds during the fourth quarter. With that, our hosts can now turn the call over for questions.

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Q&A Session

Operator: Today’s first question comes from Gaurav Mehta with E.F. Hutton.

Gaurav Mehta: First question I wanted to ask you was on your acquisitions. I was wondering if you could provide some color on the cap rate on these acquisitions? And are these fully stabilized on one of the assets you said, , but is there any value-add opportunities in these acquisitions?

Steve Altebrando: So if you look at our three multifamily acquisitions that we made, they’re all in the process of — well, at least the two Oakland assets are in the process of leasing up, so the in-place cap rate is not overly relevant, I would say, a target for a deal profile like that would be to get somewhere to around a 6% return on cost in the medium term, and more like a seven over the longer term. So that’s really what we’re targeting with those assets, but at the time of acquisition, they were about 75% occupied. When both of those buildings were open in 2021. And then for the Echo Park deal, which is from an occupancy standpoint, stabilized; however, the rents are significantly below market. So — and it is a constraint — housing-constrained area. So similarly, that would be an asset that we would target over about the medium term trying to get to about a 6% return on cost.

Gaurav Mehta: Okay. Second question on the balance sheet. Can you provide some color on the demand for your preferred stock? Should we expect similar demand that you saw last year? Are you seeing any changes?

Steve Altebrando: We generally have been seeing a normalized month, roughly $10 million of inflows. So I think that’s the best way to project going forward.

Gaurav Mehta: So $10 million of inflows every month?

Steve Altebrando: Correct.

Operator: The next question comes from Craig Kucera with B. Riley Securities.

Craig Kucera: I want to circle back to the — several of the acquisitions you did in this first quarter where you assumed debt. Can you give us some color on what the coupons are those and maybe the terms or anything else in that regard?

Steve Altebrando: Yes, sure. So we did assume two mortgages which were part of the attractiveness of the deal actually because they were basically mortgages that are below market today. For Channel House, the spread — they’re both floaters, but Channel House was SOFR plus 336 and Clay was SOFR plus 350. And in terms of maturities, they all have extension options but really run through about mid-2025 plus extension options.

Craig Kucera: Okay. Great. And you had obviously a pretty significant change in the diluted share count related to the warrants. I guess, how should we think about that going forward? Is that going to be kind of included as part of your diluted share count going forward? Or is that really kind of price dependent? Or any color there would be helpful.

Steve Altebrando: Yes. It actually is because of the share price, not the warrants. So the way the calculation works is you effectively — you assume that the stock — that the shares outstanding — the preferred out — shares outstanding will be converted into common. And that amount is based on the current stock price. So it’s added to the share count, but it’s a little bit of a quirky calculation because these price levels of the common stock, we’re not interested in converting any preferred into common. That’s why that calculation runs that way.

Craig Kucera: And that conversion is at your discretion versus the holder?

Steve Altebrando: Correct. It’s at our discretion.

Craig Kucera: Got it. And most of my questions were about sources and uses, which you covered. So that’s it for me.

Operator: The next question comes from John Moran with Robotti & Co.