Q4 2022 Creative Media & Community Trust Corporation Earnings Call
Hello, and welcome to the creative media and community Trust Q4, 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing to Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Steve Auto Brando portfolio oversight for C. M. C. T. Please go ahead.
Good morning, everyone and thank you for joining US My name is Steve Ulta brand out of the portfolio oversight for CMC T.
Also on the call today shallow Cooper, our Chief Investment Officer, David Thompson, Our Chief Executive Officer, and Barry <unk>, 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 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.
But 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.
Thanks, Steve and thank you everyone for joining our call today.
This morning, we announced our fourth quarter 2022 verdicts, we're pleased to.
The report that <unk> generated core <unk> of 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 coming up.
For the year.
We believe this speaks to the quality of our portfolio and leasing.
We have quality assets highly desirable markets submarkets, such as Beverly Hills Culver City Hollywood in Austin.
Our office assets generally fall into the following categories Ultra Prime location like 90, 460, Wilshire Beverly Hills Best in class like won Kaiser and Oakland or 10 field in Austin.
Our specialty office that we believe is more immune from work from home trends like the medical office concentration we have in Los Angeles at 11, 611, six twice Wilshire buildings.
Buildings that are located just minutes from the West L. A VA medical center at 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 monetize premier multifamily assets in 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 shall will give more color on these exciting investments.
Second we made progress on our value add and development pipeline most.
Most notably we announced earlier this month, we closed a co investment and construction loan or 4700, 50 bolstered property in Los Angeles.
Unleashed 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.
Co invest to increase our diversification supplement returns by generating T cells, when you add that changes.
Third we reduced our corporate overhead by 28% in 2022. This was driven by the permanent reduction in our man.
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 Shao <unk>.
Thank you David.
I'd like to take the time to highlight some of our exciting Richard acquisition and provide an update on the status of our development pipeline as.
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 amenities premier asset in high barrier to entry market.
First in Echo Park in Los Angeles, We acquired 19 O. Two Park Avenue 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.
We are excited to grow our footprint in Echo Park, a thriving walkable submarket with doesn't own building an entertainment option.
Our bases in 19 or to a park Avenue is highly attractive.
At approximately 300000 per door.
Which we believe is substantially below replacement cost for building that was constructed in 2012.
Next in Oakland, We acquired the Channel House, a 333 unit eight story apartment building and 11 50 Clay at 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 the house was 76% occupied and 11 50 clay was 77% occupied.
Oakland is a sub market that so 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 base is a significantly below replacement cost.
Okay.
The channel House is in the heart of Jack Linden Square, a waterfront community with dining retail.
Are you, a San Francisco and easy access to both downtown San Francisco and Oakland.
11, 50 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 very attractive basis of approximately 415000 per door for channel House and 535 per door for 11 50 Kelly.
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 1500 multifamily units on land, we already own in Austin, and 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 36 unit multifamily property. This building will be on an adjacent land parcel to the office asked.
But we on at 1910 West Sunset Boulevard.
And also adjacent to the recently acquire a parkman building at 19 O. Two Park Avenue I just described.
Next in.
And 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 side.
We are working towards receiving the necessary approval and will have the option to break ground on the first site in 2023 four.
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 a mile and a half from University of Southern California.
For the balance of our pipeline we are in the process of obtaining all the necessary approval as.
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.
Thanks, Sean 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 40 50 Wilshire Boulevard in Los Angeles from an office building to a mix of ground level office space that is one.
3rd% 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 <unk> portion of the building and some multifamily rentals began in March and we expect the conversion to take about 18 months.
We believe this is a highly attractive project. That's 4700 50 wheelchairs located in Hancock Park and affluent residential submarket about L. A warehousing is supply constrained.
The co investment on 47, 50, Wilshire will ultimately reduce our ownership to 20% we expect to benefit from the expected value creation of the asset and will also earn a management fee as well as an opportunity.
Okay.
Turning to leasing we leased approximately 38000 square feet in the fourth quarter and another 31000 square feet.
The first two months of 2023.
For the full year of 2022, we leased approximately 157000 square feet and increased our lease percentage to 84, 5% from $80 five a year earlier.
We had approximately 40000 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 exploration over the size of 10000 square feet in 2000, 22023 with that I'll turn it over to Barry.
Thank you Steve moving onto the financial highlights our segment net operating income was reduced by 400000 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 one point nicely about reduction in our lending segment NOI, partially offset by an increase in our hotel segment NOI of $1 $3 million and around the $300000 increase in our office segment NOI.
Willing deeper into our business segments first our all other segment NOI increased to $6 9 million from $6 $6 million in the prior year comparable period, driven by an increase in the NOI from our same store office properties, primarily due to a decrease in real estate tax expenses and 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.
The improved activity and we signed approximately 38000 square feet of leases during the quarter.
Second our hotel segment NOI increased to $3 1 million from $1 $8 billion 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 rate around $154 per room.
Third our lending division NOI decreased by around $1.9 billion to a more normalized $1 $8 million in the fourth quarter of 2022.
It is important to note that each of the quarters of 2021 due to Covid driven additional government support of our SBA seven eight wealth 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 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 $800000 from $2 2 million hours in the prior year comparable period.
The fee waiver that went into effect January one 2022.
This decrease was partially offset by an increase in corporate level interest expense by around $650000 and an increase in general and administrative expenses of around $3000.
Although 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 and 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 billion in the prior year period.
This decrease was related to a change in the timing of a declaration of the dividends on our series they want a and D preferred stock as compared to the fourth quarter of 2021.
Therefore, our net loss attributable to common stockholders was $8 9 billion.
Quarter of 2022 compared to a $4 3 million dollar loss in the fourth quarter of 2021.
Primarily as a result, the mobile preferred stock redemption costs of $7 9 billion or <unk> was reduced to a negative 16.1 cents per diluted share compared to a positive three eight cents in the prior year comparable period.
We are pleased to report that we closed on the recast of our revolving credit facility in December 2022, giving us total borrowing capacity of $206 $2 billion 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 issuances of our series a one preferred where we generate around $69 million of cash proceeds during the fourth quarter.
With that our host can now turn the call over for questions.
Thank you very much 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 to withdraw from the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Okay.
Today's first question comes from Gaurav Mehta with E. F. Hutton. Please go ahead.
Thank you first question I wanted to ask you was on your acquisition I was wondering if you could provide some color on the cap rate on these acquisitions and are these are fully stabilized I know on one of the asset you said, Lisa but is there any value add opportunities in these acquisitions.
Okay.
Hey.
How are you good morning.
So if you if you look at our the three multifamily acquisitions that we made they're all.
They're all in the process of well at least the two Oakland assets are in the process of leasing up so they get that the in place cap rate not overly irrelevant.
I would say a target for.
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 that's really what we're targeting with those assets, but yes.
At the time of acquisition they were about 75% occupied.
But both of those buildings were opened in 2021, and then for the Echo Park deal, which is from an occupancy standpoint stabilized. However, the rents are significantly below market.
And it is a constrained housing constrained area. So similarly that would be an asset that we would target over over about the medium term trying to get to about a 6% return on cost.
Okay.
Second question on the balance sheet can you provide some color on the demand for your.
Stock should we expect similar demand that you saw last year are you seeing any changes.
We generally have been seeding in it now.
Normalized months roughly $10 million of inflows.
I think that's the best way that project gone.
Forward.
So 10 million plus every month.
Correct.
Okay.
Thank you that's all I had.
The next question comes from Craig Kucera with B Riley Securities. Please go ahead.
Yeah, Hey, good morning, guys.
I want to circle back to the several of the acquisitions you did in this first quarter.
Were 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.
Yeah sure. So we did assume to two mortgages, which were part of the attractiveness of the deal actually because they work.
Basically mortgages that are below market today for.
For channel House, the the spread they are both floaters by channel House was.
So for a plus $3 36 and clay.
So from plus $3 50.
Yeah.
And in terms of maturities.
They all have extension options, but really.
Run through about mid 2025, plus extension options.
Okay great.
And and you had obviously a pretty significant change in your diluted share counts are related to the warrants I guess.
How should we think about that going forward is that going to be you know kind of included as part of your diluted share count going forward or is that really kind of price dependent or any color that'd be helpful.
Yeah. It actually is because of the share price not not the world. So the way that like the way. The calculation works is you are you effectively.
You assume that the stock that the shares outstanding preferred shares outstanding will be converted into common and that amount is based on the current stock price. So that it's added to the share count, but it's a little bit of a corky calculation because you know at these price levels of the common stock and we're not interested in convert.
Hey, the preferred into common.
But that's that's why did that calculation runs that way.
And that conversion is at your discretion versus the the holder.
Correct, it's at our discretion.
Got it.
Most of my questions are about sources and uses which you which you covered so that's it for me. Thank you.
The next question comes from John Moran with her body and Cao. Please go ahead.
Yeah, Yeah, Hi, I was wondering if you could elaborate on your liquidity position as of March 31st. So I think you said you had $25 million.
Left on your line, but how much cash do you have on your balance sheet. I guess I was just wanted to tie that in with asking about the repurchase plan.
You know it seems like the stocks.
Trading sloppy its I don't know down 75% since year 2019 restructuring transactions are down 40% from the rights offering.
Just you have the buyback in place.
And I guess, the only reason not to.
Cute on that Ed.
Yes.
These levels would be liquidity. So anyway, just wondering if you could elaborate on liquidity at March 31st in.
What would be.
Am I correct in that that's an issue with respect to the buyback.
Dave do you want to touch on the on the liquidity numbers or Steve If you can talk a little bit more about the buyback in general.
Okay.
I think it's even further cash available I think we're roughly around $15 million today, plus the availability that you mentioned on the line.
Okay.
And I think in terms of the.
Buying back stock again, we'll continue to look at.
And.
Find opportunities, where we think it's a opportunistic for us to repurchase shares and again, we want to balance that with the capital needs and opportunities that we think we're going to see in the market.
And you know we've talked about a number of the things on the development side that we're looking as we want to we want to balance that as well and it's certainly we've been we have been active in the past.
Affiliates were purchasing shares and in 2021 and CMC to repurchase stock in check.
Second and third quarters of last year, So something we'll continue to take a look at.
Yes.
The next question comes from Brendan Mccarty with Sidoti. Please go ahead.
Okay.
Yes. Thank you for taking my question here.
Was wondering if you could shed some light on the reason or I'm, sorry, the <unk> 14, 50 Wilshire transition.
Any government roadblocks or rezoning issues I guess, you know do you have you run into any rezoning issues with that with regards to office and multifamily.
Yeah.
Yes so.
The short answer is no I mean, we did have to get the property re entitled from office to multifamily, but generally what we found for that particular asset was the community was pretty supportive of that because they would generally speaking prefer residential O'brien and office user.
We got we received the entitlements last year and then it was just a matter of getting through the permit permitting.
And then Fortunately we were able to start construction in March. So we're excited for that project should take about 18 months.
Got it thank you.
One more question about the funding profile, yeah, obviously preferreds as a large portion of the funding profile, but I was wondering if you could also shed some light on what you think the funding profile might look like two to four years down the road.
Just in terms of capital structure.
Yes.
Ideally, we would be to a size thats thats larger.
And certainly having more multifamily in the portfolio, which is a.
A more stabilized source of cash flow.
And then potentially we could get to a point, where we're using unsecured financing.
<unk>, which has some advantages certainly additional flexibility for the company, but near term really are we would expect to have the combination of the preferred mortgages in our revolver that we would be utilizing.
Great. Thank you I guess one more quick question just around the you know the mortgage financing aspect of view.
Noticed with your banking relationships or other relationships a significant tightening of lending.
In the recent environment.
Or maybe you could comment on some comment on the recent lending environment.
Yes, certainly it's gotten tighter.
And we felt the impact of that I mean, the rates youre getting higher which means we're seeing higher cap rates higher borrowing costs I mean, I think for us we're.
We.
Alright, good shape in terms of yeah, we just renewed the credit facility at the end of 2022. So that's in.
In it.
Good for three years, plus two one year extensions.
The mortgage we have really the only other significant mortgage we have is on one Kaiser which is C. MBS.
Fixed rate not due until 2026, so from that side of the balance sheet. I think we're certainly the environment has gotten tougher and things have tightened up but we're also a pretty good shape in terms of the portfolio and.
The underlying assets and where we have that again.
Again, particularly having just renewed the credit facility.
Yeah.
Great. Thank you.
The next question is a follow up from Gaurav Mehta with E. F. Hutton. Please go ahead.
Yes. Thanks.
Thank you I wanted to follow up on the acquisition again, and just wanted to clarify the the rate on the mortgage Ted did you guys say, so far blessed to be 36 to $3 50.
That's correct.
And so that that would imply like a mid 7%.
Financing on these acquisitions right.
That is correct as of today, but as you know the forward curve implies the rate coming down pretty meaningfully, but yes, that's correct as of today.
Okay.
What's the what's the dollar amount of these acquisitions I think I saw the dollar amount for two of these acquisitions and you're filing an IND to the dollar for the third one.
Yeah. So 19 O. Two park was about a 22 and a half million dollar deal with C. N C T. It's 50%.
50% interest.
So about.
<unk> equity is half that.
Okay. Okay. Thank you.
Yeah.
Yes, and channel hospitable about around 123 for our portion and clay was about $141 43 for our portion I'm sorry, Jacqueline that square was about 123 tower portion okay.
Okay. Thank you.
The next question is also a follow up from John Moran with everybody and Cao. Please go ahead.
Yeah with respect to the multifamily deals that you did in the first quarter or is there any near term prospect too.
And as this market environment.
Has it been disruptive.
On that into your business I mean do you expect.
Yeah.
Do you expect it to be more difficult to.
To get co investors.
Those are deals, where we could potentially look to co invest.
And part of the reasons that we liked the two Oakland deals was that there was when we saw where the pricing was coming in for a really high quality assets and obviously the bay area has some struggles but that led view pricing being.
At a place that we thought was.
Very attractive to be.
<unk>.
Yes.
As a reminder, in 2019, we sold a large amount of assets in the Bay area.
Most mostly office and parking.
When the market was really a thriving market. So at this point of the cycle. We thought it was attractive to reenter, but now on the multifamily side.
But yes.
To your direct question I think we would over time like to bring in co investors I think the private markets today are.
Acting just like others, just where there is a sense of uncertainty around.
Real estate in general.
So it may not be immediate but over time, we would like to bring in co investors for those assets.
Just do you feel like this is the business plan makes sense.
Without COVID-19 when I say the business plan I mean funding something that your targeted return on cost is.
Six or 7%.
Funding that with essentially preferred stock.
The costs that are more.
I mean does that and I understand that.
You are buying below replacement cost and.
Hopefully a stabilized cap rate or exit.
Price on those properties that would be much higher but without co investors does it make sense as a business plan to fund that.
That type of acquisition with this.
This preferred stock program.
A little bit confusing to me.
I mean, we think it's it certainly makes sense to me when we looked at a deal like the Oakland asset are our view or our expectation of.
The returns or targeted returns are in the in the low teens.
So we certainly think even without co investors that its a return that is very attractive for us and then certainly if you're bringing co investors you could push those returns materially higher through the ease of management fees and potential promote as well, but even without it you know there are two Austin are still attractive deals.
<unk>.
At this time there are no more lines in the queue. This concludes our question and answer session.
Call is now concluded. Thank you for attending today's presentation you may now disconnect.
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