Q3 2022 Creative Media & Community Trust Corporation Earnings Call
Hello, and welcome to the creative Media and community Trust third quarter 2022 earnings Conference call.
Participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one auto Touchtone phone to withdraw your question. Please press Star then two.
Two please.
Please note. This event is being recorded I would now like to turn the conference over to Steve Altra, Brian Dow. Please go ahead.
Good morning, everyone and thank you for joining US my name is Steve out the brand out of the portfolio oversight for CMC.
Also on the call today is David Thompson, our Chief Executive Officer, Shao, Kouba, CIM cofounder and CMC T Board member 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 latest investor presentation.
Our earnings release also includes reconciliations 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 and 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.
That I will turn the call over to David Thompson.
Thanks, Steve and thank you everyone for joining our call today yesterday, we announced our third quarter 2022 earnings some highlights from the quarter first we had continued strong leasing activity, which is positioning us well for next year.
Second we made significant progress on our value add and development pipeline.
Third we took steps to improve our liquidity and balance sheet. This is extremely important in the current rising interest rate environment, where we expect future acquisition opportunities.
And fourth we Accretively deployed capital through both common and preferred share repurchases.
Our core <unk> per share was negative seven cents in the third quarter.
While we completed a significant amount of new leases this year and have a strong pipeline, we will not see the full benefit until next year. Most notably this includes our lease signed in August with the Rolls Royce dealership and our Beverly Hills property, which will start generating revenue in 2023.
Trends at our one hotel continued to improve on a year over year basis, and the outlook for 2023 looks strong based on a pick up in group bookings for the third quarter is typically a seasonally slower quarter for the hotel.
And in our lending business, we had a slowdown in originations in the quarter due to among other things the reduced volume of commercial real estate transactions market wide.
We also had some onetime costs in our JV property in Echo Park.
And to some nonrecurring items in our G&A.
Finally, the amount of our preferred dividend payment is increasing as a result of the significant amount of preferred stock we raised in the third quarter.
Our third quarter FY Bo picks up dividends, we declared in the fourth quarter, even though we did not have the benefit of the capsule for full quarter, Barry will provide some more detail on these items.
As we've discussed on previous calls we are committed to balancing our portfolio, both creative office and multifamily assets.
Right now we're focused on growing the multifamily side of our portfolio in order to achieve that balance.
We have a significant pipeline of multifamily development opportunities on land that we already own.
As we have previously mentioned.
For value add and development assets, we'll look to co invest to increase our diversification supplement returns by generating fee income where abbott's agents.
We have a lot of work to do in front of us, but we believe we have an opportunity to create significant value for our shareholders by using our resources and access to capital.
I would now like to turn the call over to shallow Cooper.
Thank you.
Wanted to highlight two significant updates in the quarter.
First we leased approximately 59000 square feet in the third quarter.
This was an increase from about 39000 square feet in the second quarter.
Our most notable lease being at our Beverly Hills building 90, 460 Wilshire Boulevard.
Sign a 20 year lease with Rolls Royce dealership.
Approximately 18000 square feet of the remaining retail.
We expect to start recognizing revenue on this lease in 'twenty to 'twenty three.
Second we did an extensive review of the portfolio to evaluate where we can create additional value.
Based on this review we believe we can develop over 1600 multifamily units based on land we already own.
This is an exciting update for CMC.
And a shareholder.
In Austin, we are evaluating adding one or more multifamily building to our 16 acre pension creative office campus.
In June the <unk>.
City Council approved zoning changes that allow us to add more density on this property, which is located just south of the CBD.
We are excited about this potential opportunity at this tremendous campus, which was transformative to this section of Boston.
In East Austin, we are working towards multifamily development of two adjacent properties.
1007, and one zero to one east seventh Street.
We submitted our entitlement application in this third quarter those properties are very well located with Nomura <unk> dining and entertainment option within walking distance and we didn't close proximity to Austin CBD Central business District.
We are also working on pre development work for potential multifamily development in Auckland and Sacramento.
We recently submitted a request to entitle, our ultra and development asset for multifamily.
It is currently entitled for office.
We believe entitled laying this asset will create incremental value for the land near term.
And in Sacramento, we are evaluating build type multifamily.
Over a large parking garage we'd already on.
Those exciting opportunity are resolved.
The extensive review of this portfolio.
Now for a quick update on some of the value add and development opportunities we have been working on.
At 47 50 will share.
In Los Angeles, we expect to start construction on the conversion of.
The unused portion of the building into a luxury multifamily rental in early 'twenty 'twenty three.
We anticipate a construction timeline of about 18 months.
The total cost of the conversion is expected to be approximately $33 million.
We are in active discussion with several institutional co investors and seek to close transaction over the next several months.
Since we are expecting to bring co investor and take.
And construction loan, we expect <unk> to generate meaningful proceeds from this transaction.
<unk> will also earn a management fee on committed equity and have an opportunity to earn a promote.
As we discussed.
On our last call, we expect to break ground in 2023 on our 36 unit multifamily property in Echo Park neighborhood of Los Angeles at 1910, West Sunset Boulevard.
Which we acquired with a joint venture partner earlier this year.
The asset is located in the middle of a trendy sub market and part of walkable area that also had dozens of dining and entertainment options.
In the Jefferson Park section of Los Angeles, We have made progress on day development of our two multifamily properties there.
We plan to develop about.
150 unit across both site.
We are working towards receiving the necessary approvals and still expect to break ground.
On the first site in 2023, and the second site in 2024.
We are excited about those developments as they are strategically located in the path of growth.
In close proximity to Congress C D and just a mile and a half from the University of Southern California.
Right now.
We are working hard to go vertical on those project by getting all the necessary approvals as well as completing the design.
Obviously, we will continue to monitor the construction cost as we move forward.
Given increased borrowing costs.
The lower availability of credit and widening cap rate, we expect that overall development will slow and as a result development cost may potentially come down.
With that I will turn the call over to Steve for more detail on the portfolio and recent capital market activities.
Thanks, Shaul starting off with the portfolio our stabilized portfolio was 86, 5% leased at the end of the third quarter.
As Joel mentioned, we leased approximately 59000 square feet in the third quarter and at least about 120000 square feet year to date.
And as David touched on we will begin to generate revenue on several of these leases and leases in our pipeline starting next year.
Our cash lease spreads for all recurring leases decreased slightly to negative one 2% through the first nine months of 2022.
This lease spread excludes our recent retail lease at our Beverly Hills property since the space was vacant for more than 12 months.
We continue to have a strong pipeline of leasing activity. We have about 50000 square feet of leases that are either signed in Q4 in LOI or legal or represent in place tenants that we expect to renew.
We entered this year with nearly 15% of our leases expiring in 2022, which was about 151000 square feet of expirations.
In total our leases executed in LOI or legal or expected to renew now exceed this amount.
Our lease expirations will decline to just 11, 9% in 2023 at six 6% in 2024.
Turning to our capital markets activity, we announced the $10 million common share repurchase program in the second quarter of 2022.
We have repurchased $4 7 million of common stock, including $4 4 million in the third quarter at an average price of $7 10 per share.
Also in the third quarter, we repurchased approximately $67 million of series L preferred stock at a three 4% discount stated value.
We believe these two transactions are highly accretive for our common shareholders.
With that I'll turn it over to Barry.
Thank you, Steve first I'd like to take a moment to thank beta blocker for guiding us the past few years as our CFO and for assisting me through the transition to be here CFO Nate.
<unk> worked closely together and I will continue to work closely with me upon CFC.
Moving onto the financial highlights our high level third quarter results are as follows during the third quarter, our core <unk> reduced to a negative seven cents per diluted share compared to a positive eight cents in the prior year comparable period.
This change was primarily driven by a reduction in segment NOI and the distributions for our preferred stock issuances.
Our segment operations, NOI was reduced $10 $1 million compared to $13 $3 million in the prior year comparable period.
This quarter over quarter change is broken out as a $3 $7 million reduction in our lending segment NOI of $1 billion reduction in our office segment NOI being partially offset by the positive trend in our hotel segment NOI by $1 $5 million.
Drilling deeper into our business segments first our lending division NOI decreased by around $3 7 million. So a more normalized $1 $2 million in Q3 2022, it's important to note that in 2021, we had a significant bump in loan originations and loan sales, which had significant market premiums. This was due to COVID-19 driven.
Additional government support of our SBA loan product that drove NOI up to $4 $9 million last year for the three months ended September 32021 that increased government support did end in 2021.
Second our office segment NOI decreased to $6 5 million from $7 $5 million in the prior year period.
The NOI at our same store office properties remained relatively constant at $6 $7 million compared to $6 $8 million in the prior year quarterly period, the NOI attributable to our non same store properties had a reduction of around $900000.
Also of note is that the office segment reduction included the loss from our JV investment acquired in February of this year of around $200000 for the third quarter of 2022. The JV loss did include a one time upfront costs related to the JV JV as mortgage debt origination.
Our office segment did continue to see improved activity and we signed approximately 59000 square feet of leases during the quarter.
Third our hotel segment, NOI increased $2 $4 billion from around $900000 in the prior year comparable period.
This was driven by improved occupancy, which went up to 74% from 67% and we saw improved ADR was increased to around $164 from $137.
Port of her Uber has the largest impact is the reduction in asset management fees, which was reduced to below $93000 from $2 $3 million in the prior year comparable period due to the fee waiver that went into effect January one 2022 as a result, our net loss income for the company before preferred equity activity was a loss of $45000.
Q3 of 22 versus a profit of $2.570 million in Q3 of 2021.
Although the company net loss income line, we recorded a preferred stock activity in September 2022, we repurchased a portion of our L shares in <unk>.
$4 $8 million and deemed dividends are impacting our bottom line due to the expensing of upfront costs from what we issued those securities.
We also had declared or accumulated preferred stock dividends of approximately $6 $6 million in the quarter compared to $4 $7 million in the prior year comparable period. This increase is relating to the new issuances of series a and series a one preferred securities. This includes the impact of forward dividends declared for the fourth quarter of around one.
$3, we're lending to our preferred issuance during the third quarter of 2022 as David noted our preferred cash dividends paid were approximately $5 $3 million or also about $1 $3 billion less than what runs through our net income available for our common shareholders.
Turning to our liquidity, we had approximately $85 million drawn our revolver at the end of the quarter with an estimated $120 million of availability as of September 30th.
Our credit facility as extended matures in late 2023, we expect to close on a recast of the facility shortly which should extend the facility. Another three years plus we will have the option for two one year extension options.
Finally, we generated around $57 million in cash proceeds from preferred stock issued in the third quarter, which is the largest quarterly amounts in series a preferreds had been offered and momentum continuing into the fourth quarter with proceeds of $38 million in October , giving us additional financial flexibility with that I will now turn the.
Call over to David for some closing remarks.
Thanks, Barry in closing I'd like to reiterate our key strategic goals first continue to make tangible progress on our stabilized and value add assets as well as our development pipeline.
We believe our asset light approach will enable us to generate strong returns on invested capital.
Second we are focused on creating greater financial flexibility as Barry mentioned, we are working to recast our credit facility, which matures in late 2023, and we expect to close a new facility in the fourth quarter.
We raised approximately $46 5 million in net proceeds from our series a one third stock so far in the fourth quarter further enhancing our flexibility.
This allows us to take advantage of potential acquisition opportunities or opportunities in the capital markets like we have seen of late.
Third we're working to keep our cost structure in check, including the continued benefits of our reduced management fee announced earlier this year.
That reduction in amounts to approximately 21 per share in annual cost savings.
We're also focused on keeping our recurring G&A expenses down.
Fourth we're shifting the balance of the portfolio more towards multifamily and creative office over time.
Taken together, we believe these priorities combined into a compelling business model for <unk>, which will provide strong returns on capital on a model, where CIM group's distribution and development capabilities provide a significant competitive advantage.
<unk> has more than 180 global institutional investors. It has developed over $11 billion of assets across the United States and has more than 100 professionals in our development group expertise in urban planning construction design architecture Engineering and project management.
To wrap up we have great assets in highly desirable submarkets, such as Beverly Hills Culver City Hollywood in Austin.
We are encouraged by the pickup in our leasing activity and declines in explorations as we head into 2023 2024.
We have a very attractive growth pipeline, where we are making tangible progress in development of construction activity. We look forward to sharing more updates on future calls Gabelli.
Our value add and development assets, we'll see co investors to increase our diversifications and supplement returns by generating fee income.
Finally, we have significantly reduced our cost structure.
Operator, you May now open the call to questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from.
Diouf Mehta with E F. Hutton. Please go ahead.
Yeah. Thanks for taking my question.
I wanted to ask you about your.
Our development pipeline and your comment on maybe adapter for expanding our multifamily.
Can you maybe help us understand how you're viewing acquisition opportunities.
Given that cap rates are expanding and how does that compare to the yields that you're getting on your development pipeline.
Yeah.
Yeah sure.
This is Steve So I think with respect to the development pipeline and the yields that we're looking to build to give it given the move that we've seen in cap rates clearly that hurdle has has increased.
But you are also seeing in the market continued rent growth and our expectations.
That development costs could come down as well.
So generally speaking for multifamily and it depends a little bit on the market, but we're generally trying to get to about <unk>.
<unk> return on cost.
And given the increase in market cap rates, that's still a wide enough spread that you're you're still creating pretty meaningful value through through development.
But at the same time, we are continuing to also look for not only development, but given the move in cap rates, we're looking for stabilized multi family I'm, sorry stabilized and some value add multi.
Multifamily deals as well, where as you know a year ago. Those skills were just very difficult to find given where cap rates are in now.
We think we're going to see a little bit more opportunity on the more stabilized side.
Okay.
On your prep what stock capital raising.
Uh huh.
Can you maybe talk about.
The uses of the cash that you're generating.
And for Q, I think earning release.
You guys said $46 million of preferred stock.
Yeah.
He has been poor.
Do you plan to use that you plan to carry that cash on the balance sheet are deploying that towards acquisitions.
Yes, I can talk about that a little bit. So I mean, we haven't some amounts outstanding under our revolving credit facility. So we can immediately use the cash to pay that down.
As you know we've got our series L preferred.
<unk> can be redeemed.
In the fourth quarter.
It's about roughly $80 million of used to the extent, we decided to use cash for that as you know we have the option to redeem that and shares given where the share is trading today that would.
Be highly unlikely. So we will again, we will have a use for it.
Some of that cash to help us.
Again pay down the revolver and then also too to.
To the extent, we decided to use cash for the redemption of the series L. Preferred later this quarter.
Again, as we spoke to there is a number of other opportunities where we think we can continue to generate.
Cash and stress.
To strengthen our liquidity.
Expect that preferred volume is going to continue to be strongest has been thus far in the fourth quarter again, we will we're renegotiating our facility and expect to have the new facility in place this quarter.
The co invested shall we spoke about and again I think all of that helps position us for taking advantage of some of the growth that we've got built into our pipeline and again.
At other opportunities.
Okay. Thanks for taking my questions.
Yeah.
The next question comes from Eric Baron with first Foundation. Please go ahead.
Hi, guys can you hear me.
Yes, yes, great. Thanks, and thanks for doing the call and thanks for having such great attendance on it.
So my question is on multifamily specifically Oakland.
There's the things that you filed.
They're they're pretty exciting.
46 story 600 unit. So it's a huge chunk of your multifamily opportunity well something like 40%. So the question is can you just give us a little bit more color I see it's you know near term opportunity zones I don't know if it did one.
I don't maybe talk about what amount of capital is the right amount of capital for you guys could contribute a what would you target bringing it from outside.
But maybe just address the Oakland multifamily.
Yeah.
Yeah, Let me let me answer this is Joe.
Uh huh.
They they land that we own in Oakland.
It is.
Prime for.
Entitlement for multifamily.
The office market in Oakland is.
Prady.
I would say.
At the moment.
Saturated with vacancy so we decided to.
Take advantage of the existing entitlement that we have converting them to a multifamily we're probably going to be done with that process and about.
18 months to 24 months and at that point, we're going to evaluate how much coinbase dayrates for that project.
We own the land free and clear so we don't have any debt or.
Based on these.
Very low and the intent is to raise coinbase for it when we're ready to present it.
Yeah.
Okay. Thanks, good luck.
And then just.
Just a quick clarification is it in the opportunity zone, there or is it fall outside it's hard to see the.
The maps.
I don't think it's an opportunity zone, but I don't know for a fact, okay, maybe Steve you know some of them.
I don't.
The cross yeah, Yeah, I don't believe it's in but but either way would not have.
Much of a benefit for us.
Okay. Thanks.
This concludes our question and answer session.
Well at our conference. Thank you for attending today's presentation you may now disconnect.
Thank you.
Okay.
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