Q2 2023 Creative Media & Community Trust Corporation Earnings Call

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Good day and welcome to the creative Media and community Trust second quarter 2023 earnings Conference call.

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Please note this event is being recorded.

I would now like to turn the conference over to Steve Our Toronto portfolio oversight. Please go ahead.

Hello, everyone and thank you for joining us my name.

Steve at the brand portfolio oversight. The CMC team also on the call today is 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 and our earnings release includes a reconciliation of non-GAAP financial measures discussed during today's call.

During the course of this call we will be making 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.

While 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.

Thanks, Steve and thank you everyone for joining our call today.

In the second quarter, we made good progress improving occupancy at our recently acquired multifamily assets.

Acquisitions are part of our previously defined plan to grow the multifamily side of our portfolio to achieve more balanced between creative office and multifamily assets.

As a reminder, during the first quarter, we completed the acquisition of two multifamily assets in Oakland and one multifamily property in Los Angeles. These newer vintage highly amortize premier multifamily assets in high barrier to entry markets added 696 units to our portfolio.

At the end of the June quarter, our overall multifamily occupancy improved to 83, 9% up 320 basis points from the prior quarter.

Two of the three assets we acquired in the first quarter are still in their initial lease up phase. We believe there is an opportunity to significantly grow net operating income at these properties as we execute on completing the lease up.

During the quarter, we also made significant progress on our development pipeline.

Notably in Austin, where we can now develop multifamily by right at both our Penfield and East Seventh Street properties, Joe will provide more detail on this positive update.

We also took further steps to improve our liquidity and balance sheet during the quarter, we paid down our credit facility by $30 million in the quarter, primarily with proceeds from our series a one preferred stock offering.

Turning to the second quarter financials, we continue to see a strong rebound in our hotel NOI, which increased by 28% from the prior year period.

Our multifamily segment generated just over half a million dollars of NOI in the quarter as I mentioned earlier, we believe there is an opportunity to significantly grow our multifamily NOI as our assets continue to lease up.

Our office NOI declined on a year over year basis, but increased from the first quarter due to higher occupancy.

Our lending NOI decreased your year over year, partially due to the securitization completed in the first quarter, which increased interest expense attributable to that segment.

I would now like to turn the call over to shallow coupon.

Thank you David I will provide some more color on some recent positive update on our development pipeline and then given an update on some of our recent acquisition.

Starting in East Austin.

At our East Seventh Street properties are multifamily entitled event was approved in June , allowing us to build up to a 145 multifamily units.

On two adjacent properties, we spent several years assembling these project debt.

The development will replace the existing single story office building.

Seventh Street corridor is among the most desirable location in Austin with numerous food and dining option within close proximity and providing direct access to both the central business District and east side.

We also received good news at our Penfield campus in July we were successful in changing the zoning so that the entire 16 acre campus seasonality entitled for multifamily. These gives us the ability to add residential alongside our successful creative office building.

We are now in the planning phases of those Austin area development, and we'll have more information in future calls as.

As we have previously discussed in those calls those value creation opportunity.

The result of an extensive review of our portfolio last year.

Turning to our Los Angeles properties.

Work is continuing on our partial office to multifamily conversion at 47 50 Wilshire Boulevard.

We continue to expect the project to start leasing up.

In the fourth quarter of 'twenty 'twenty four.

This will add another 68 residential unit to the portfolio.

We believe this is a very attractive project given the asset location in Hancock Park at some.

Apply constrained neighborhood that is adjacent to a multimillion dollar single family home.

We also now have two ground up development projects that are fully entitled.

Our 40 unit multifamily project in Jefferson Park, and our 36 unit multifamily development in Echo Park.

Which is a joint venture between CMC tea and international institutional Investor.

Currently we're in the process of obtaining building permit and have the option to start construction this year.

Our creative office building at 1910 West Sunset Boulevard is now 94% leased up from 74% a year ago.

I Echo Park is a trendy walkable submarket with numerous dining and entertainment options.

There is a limited office supply in the Submarket and our eight story building.

Is the tallest in the area of providing spectacular view across Los Angeles.

So the balance of our development pipeline, we continue to work to obtain all the necessary approval as well as completing the design work.

Which we believe will increase the value of those holding and allow for future growth.

As we have previously mentioned for a development asset we will look to bring in a co investor to increase our diversification and supplementary return by generating fee income.

When advantageous just like we have done at 47 50 Wilshire Boulevard.

Now for the update on our recent multifamily acquisition.

First in Echo Park analysts Angeles 19 O. Two Park Avenue 75 unit apartment building was acquired in the first quarter. This year and then off market transaction, our bases and 19 O. Two Park Avenue is highly attractive at approximately 300.

<unk> thousand dollars per door.

We have made several small cosmetic changes, including upgrading the landscaping lighting and common amenities to the building.

Which acquired which require limited capex.

We believe this will have an outsized impact on the desirability of the building for residents.

And provide a significant opportunity to increase rents to market rate over time as new tenants move in.

Next an update on to Oakland properties that David discussed as you May recall, we completed those acquisition last quarter the channel House.

333 unit apartment building and 11 50 clay at 288 unit apartment building.

Both assets are Premier class a buildings that were completed in 2021.

We are making some progress improving occupancy at both the assets or client is a market that is so significant supply growth from 2018.

2022.

Our efforts are continuing to generate results, though we also expect it to take some time for the new supply to be fully absorbed.

It is also important to note that the pipeline for new development in Oakland is well below the average for the top 25 U S market. Therefore, local rents would need to increase dramatically before it is economic to see significant multifamily construction to spell it.

Again.

With that I will turn it over to Steve to provide a further update on the portfolio.

Thanks, Shaul I'll provide a quick update on our leasing activity.

Starting with the multifamily portfolio on a consolidated basis at quarter end, our multifamily was 83, 9% occupied compared to 87% at the end of the first quarter the.

The increase was driven by higher occupancy at our recently acquired Oakland assets.

Occupancy at Channel House increased to 81, 4% at the end of the quarter up one five percentage points compared to the end of the first quarter.

Occupancy at 11 50 Clay also increased to 86, 5% at the end of the quarter up six five percentage points from the end of the first quarter.

At 19 O two park in Los Angeles, our in place rents are well below market and we've been executing new leases for new tenants at a substantially higher rate.

Turning to office released approximately 29000 square feet in the second quarter, our occupancy rate at the end of the second quarter was 83% up 170 basis points from the prior quarter, while our lease percentage was 84, 5% up 10 basis points from the prior quarter.

On a year to date basis, our cash leasing spreads are up about 20 basis points, while our GAAP leasing spreads are up about three 3%.

That I will turn it to Barry.

Thank you, Steve moving onto the financial highlights.

Our segment NOI decreased to $12 million for the second quarter of 2023 compared to $12 $8 million in the prior year comparable period.

This decrease in NOI was driven by a $1.2 million decrease in our lending segment NOI as well as a $1 $1 million decrease in our office segment NOI.

This was partly offset by a $900000 increase in our hotel segment as well as $500000 contribution from our newly acquired multifamily segment.

Our lending segment NOI was impacted by the leverage achieved from the securitization in Q1.

Interest relating to the securitization is directly expensed at the lending segment level, which in turn freed up capital to allow us to further our strategic business model, including the multifamily acquisitions.

Our hotel segment NOI continued its positive quarter over quarter trend and increased to $4 1 million from $3 $2 million in the prior year.

This was driven by both improved occupancy for the quarter, which increased to 81% from 78% and improved ADR for the quarter, which increased to $201 per room from $176 per room.

As mentioned, we recorded a half million dollars NOI from the new multifamily segment.

We began reporting multifamily segment NOI in the first quarter of 2023. After we acquired two multifamily properties in Oakland in late January and late March as well as invested in another multifamily property in Los Angeles throw a 50 50 joint venture investment.

Finally, our lending division NOI decreased $524000 from $1 $7 million in the prior year comparable period.

This was primarily due to the increased interest expense related to the issuance of the new SBA <unk> loan back notes in connection with the securitization that closed in March 2023, as well as an increase in allocated payroll costs.

For our non segment expenses, we had two significant events. The largest was an increase of $15 5 million and depreciation and amortization expense.

This noncash expense increase was driven by an increase in acquired in place lease intangible asset amortization at our new multifamily properties located in Oakland.

The remaining asset balance of around $9 $4 million for those assets will be absorbed during the remainder of 2023.

The second item being an increase in non segment allocated interest expense, which increased by around $5 $1 million, primarily due to market interest rate rises and the assumption of two mortgages as well as borrowing on our revolver in connection with the acquisition of our two multifamily properties in Oklahoma during the first quarter of 2023.

Yeah.

Our <unk> was negative <unk> 19 per diluted share compared to a positive 11 cents in the prior year comparable period.

And our core <unk> was negative 17 cents per diluted share compared to a positive 11 per share in the prior year period.

These reductions were primarily driven by the increase in interest expense largely due to our multifamily acquisitions two of which are still in their initial lease up.

As David mentioned, we believe there is an opportunity to significantly grow our multifamily NOI.

Finally, our liquidity was bolstered by raising an additional $27.4 million in net proceeds from the sale of our series a one preferred stock during the quarter at June 30th we had approximately $58 million of additional borrowing capacity.

With that our host can now turn the call over for questions.

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At this time, we will pause momentarily to assemble our roster.

Okay.

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The first question today comes from Brendan Mccarthy with Sidoti. Please go ahead.

Hi, Yes, good afternoon, and thank you for taking my question.

I'm wondering if you can.

I'll provide an update on the Kaiser permanente lease exploration or upcoming lease exploration.

Details are you able to provide.

Hey, Brandon how are you.

So good.

Good good so called Kaiser's lease and so I think you know runs through 2025, and then part of it through 'twenty 'twenty seven.

Yeah, they have been pretty public about their plans to stay in Oakland.

And I think we obviously feel very good about our asset and we view it as the best the Premier building really in Oakland and so we feel good about the outlook for for lung Kaiser and the building, but not much we can report beyond that.

Okay. That's understandable and then lastly, just reading through some of the slide deck information I know you talked about target capital structure.

I'm wondering if you can you expand on the timing outlook on that target capital structure I believe it's you're aiming for.

40% debt, 30% preferred and the rest kollmann.

What's I guess are you able to provide you know what's the outlook like to eventually or what the outlook is like to eventually achieving that target.

Yeah, So that's a target but it basically is is over time.

Today, we're a little bit below that target given the couple of acquisitions that we.

That we completed in the first quarter.

But there's really no there's no hard fast rule in terms of when we get back in line I mean, we would we would expect when you look at our and by the way that that <unk>.

Capital structure is based on the fair value of our assets, which we believe there is some.

Some upside as well so you know we would.

There's no set time period, but over time that as a guideline what we'd like to stick to we thought these were very compelling acquisitions and so we we proceeded with them knowing that we were getting a little bit below the target, but you know we would expect over the next couple of years that we would get back in line with those.

Those targets.

Got it that's helpful and one more.

Still is it still reasonable to expect roughly $30 million of.

One preferred issuance per quarter.

Yeah, that's about where we've been tracking so I think that's a reasonable go forward assumption.

Yeah.

Got it that's all for me Thanks, Steve.

As a reminder, if you would like to ask a question. Please press Star then one to enter the question queue.

The next question comes from.

Craig Kucera with B Riley. Please go ahead.

Hey, good morning, guys I wanted to circle back to the intangible write offs this quarter.

So I know when you acquired the apartment buildings, you did take a pretty substantial.

Intangible as a component of that acquisition and it looks like you wrote off a quite a bit of it. This quarter can you kind of walk us through what was.

The accounting, there and sort of what's going on there.

Yeah. This is David I can take that and.

Craig Thanks for calling in we appreciate it.

The question Yeah. So this is really kind of goes gets into a.

Kind of accounting nuance, a little bit but we're.

We use an independent firm to kind of do the purchase price allocation when we acquire an asset and.

The thing you run into is a bit unusual with respect to multifamily as they.

They put a value on the in place leases and it's not the above market or below market. It's just the fact that you have leases there themselves is generally based on the revenue that those leases generate not not kind of the net income. She ended up with a relatively large amount of value ascribed to this intangible asset that really has.

Think about multifamily properties, you've got leases that are generally one year. So on average it's about a six month life that you have in these leases that are in place.

So they just get written off relatively quickly, but I think the good news is it's it's a noncash item that's going to clear itself off the balance sheet and through our P&L.

Primarily through the end of the third quarter I think it would be a very small piece left in the fourth quarter, but as we noted in the release and you'll see in our documents filed was about $9 $4 million of that intangible remaining relating to those oakland assets that well.

Burnt off in the third quarter, primarily in the third quarter and a little bit into the fourth quarter.

But really just kind of right accounting oddity, if you will.

Right. So just just so I understand so when you acquired those assets. There were carried on your books sort of between what they determined fair market value to be a sort of your investment in it and then sort of be excess that was paid was carried as a as an intangible that youre writing off now.

Well, it's a little more defined than that they actually are required to look at those intangible assets and ascribe value to them. So.

That's just part of their process of like they would value the assets fixed assets themselves. They specifically look at the leases in place and say look you've got a you've got to ascribe some value to this.

So it's really not I mean.

You could say, it's above and beyond the fixed assets, but they really view it as part of what you were paying for from an accounting perspective.

Right I guess I just haven't seen them written off so quickly on the acquisition that multifamily Aspen I. Appreciate the color. Thank you yeah, and again I think it's an oddity that you'll have a multifamily. If you had an office and you had a 10 year lease then you know you you.

You would see it written off on a much longer period of time, but given the short term nature of the leases in multifamily. It does it does hit you a lot more quickly.

This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.

Yeah.

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