Q4 2023 Creative Media & Community Trust Corp Earnings Call
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Operator: BF-WATCH TV 2021 Good day, and welcome to the Creative Media and Community Trust 4th Quarter 2023 Earnings Call. All participants will be in a listen-only mode.
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Yes.
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None: Good day, and welcome to the creative media and community trusts fourth quarter 2023 earnings call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
Operator: Should you need assistance, please signal conference specialists 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 the star key, then one, on your touchtone phone.
None: After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Steve also Brando. Please go ahead Sir.
Operator: And to withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Steve Altebrando. Please go ahead, sir.
Stephen Altebrando: Hello everyone, and thank you for joining us. My name is Stephen Altebrando, 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.
Stephen Altebrando: Hello, everyone and thank you for joining us.
Stephen Altebrando: <unk> got the brand out of the portfolio oversight for <unk>.
Stephen Altebrando: Also on the call today shall Cooper, our Chief Investment Officer, David Thompson, Our Chief Executive Officer, and Barry Berlin, Our Chief Financial Officer.
Stephen Altebrando: 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.
Stephen Altebrando: During 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 other 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.
Stephen Altebrando: During 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 other factors that are beyond our control or ability to predict.
Stephen Altebrando: Although we believe that our assumptions are reasonable they are not guarantees of future performance and some will prove to be incorrect.
Stephen Altebrando: 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.
Stephen Altebrando: 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 A. Thompson: Thanks, Steve. And thank you, everyone, for joining our call today. Despite a challenging year for the real estate market given the sharp rise in interest rates, we believe CMCT is well positioned to benefit from a real estate recovery given our strong asset base in top-tier markets, our differentiated capital structure that can amplify appreciation for common shareholders, and our expectation of savings on interest costs as short-term interest rates come down. Even through a difficult year for the market, CMCT had a number of highlights since Our multifamily occupancy rate improved. Additionally, our development pipeline made additional progress, with construction continuing at our two new multifamily projects. Our office leased percentage has remained stable. We saw continued strength at our hotel asset, and our liquidity remained strong.
David A. Thompson: Thanks, Steve and thank you everyone for joining our call today.
David A. Thompson: Despite a challenging 2023 for the real estate market given the sharp rise in interest rates. We believe C. M. C. T is well positioned to benefit from a real estate recovery, given our strong asset base and top tier markets, our differentiated capital structure that can amplify appreciation for common shareholders and our expectation of savings on interest costs of short term interest.
David A. Thompson: It's come down.
David A. Thompson: Even through a difficult year for the market C. M. C. G had a number of highlights since we last spoke our multifamily occupancy rate improved.
David A. Thompson: Our development pipeline and made additional progress with construction continuing at our two new multifamily projects.
Our office leased percentage has remained stable.
David A. Thompson: We saw continued strength at our hotel asset and our liquidity remains strong.
David A. Thompson: I'd like to first discuss our progress in the multifamily segment of our portfolio.
David A. Thompson: I'd like to first discuss our progress in the multifamily segment of our portfolio. As of the end of February, our multifamily occupancy improved to 84.5%, up 40 basis points from the third quarter. We believe we will make additional progress as we head into the busier spring and summer leasing seasons. Also, we continue to believe that we will see improved net operating income at the three multifamily properties we acquired last year, two in Oakland and one in Los Angeles, totaling 696 units. Two of those three assets are still in the lease-up phase, and the third asset has a significant NOI growth opportunity as the in-place rents are substantially below today's market. As for our development pipeline, we expect to deliver two multi-family assets in Los Angeles, one later this year and one in mid-2025.
David A. Thompson: As of the end of February our multifamily occupancy improved to 84, 5% up 40 basis points from the third quarter.
David A. Thompson: We believe we will make additional progress as we head into the busier spring and summer leasing season.
David A. Thompson: Also we continue to believe that we will see improved net operating income at the three multifamily properties. We acquired last year two in Oakland and one in Los Angeles totaling 696 units.
Two of those three assets are still in the lease up phase and the third asset has significant NOI growth opportunity as the in place rents are substantially below todays market.
David A. Thompson: As for our development pipeline, we expect to deliver two multifamily assets in Los Angeles. One later this year and one in mid 2025 when.
David A. Thompson: When completed, we will have investments in five operating multifamily assets totaling 800 units. Between our required properties and development activity, we have made significant headway on implementing our plan to grow the multifamily side of our portfolio and achieve more balance between creative office and multifamily assets. In our office segment, our leased percentage remained stable in the fourth quarter at 84.4% in a challenging sector. We executed approximately 38,000 square feet of office leases in the quarter and 141,000 square feet for the full year of 2023. Our fourth quarter hotel segment NOI decreased 6% compared to the prior year as we faced a challenging comp.
David A. Thompson: When completed we will have investments in five operating multifamily assets totaling 800 units.
David A. Thompson: Between our required properties and development activity, we have made significant headway on implementing our plan to grow the multifamily side of our portfolio and achieve more balance between creative office and multifamily assets.
David A. Thompson: In our office segment, our lease percentage remains stable in the fourth quarter at 84, 4% and a challenging sector.
David A. Thompson: We executed approximately 38000 square feet of office leases in the quarter and 141000 square feet for the full year of 2023.
David A. Thompson: Our fourth quarter Hotel segment, NOI decreased 6% compared to the prior year as we faced a challenging comp However hotel NOI increased by 18% in 2023 compared to the year earlier period.
David A. Thompson: Our lending NOI decreased year over year, primarily due to the securitization completed a year ago, which increased interest expense attributable to that segment.
Shaul Kuba: However, hotel NOI increased by 18% in 2023 compared to the year earlier period. However, our lending NOI decreased year over year, primarily due to the securitization completed a year ago, which increased interest expense attributable to that segment. As for our liquidity, at the end of the fourth quarter, we had $19 million of cash on hand, $53 million of availability under our revolver, and we continue to raise Series A1 preferred stock. With that, I will turn the call over to Shaul to give an update on our development pipeline. Thank you.
David A. Thompson: As for our liquidity at the end of the fourth quarter, we had $19 million of cash on hand $53 million of availability under our revolver and we continue to raise series a one preferred stock.
Shoal: With that I will turn the call over to show all to give an update on our development pipeline.
Shoal: Thank you as David mentioned, we continue to make progress on our development pipeline.
Shoal: We expect to deliver two multifamily building Asus Angeles within the next year.
Shoal: Partial office to multifamily conversion at 47, 50, wheelchair and our 36 multifamily development in Echo Park.
Shoal: Currency rental rate in Los Angeles, our stable, while supply growth is well below the national average.
Shoal: The new properties will increase our investment in multifamily to 800th unit across five asset <unk>.
Shaul Kuba: As David mentioned, we continue to make progress on our development pipeline. We expect to deliver two multifamily buildings in Los Angeles within the next year, our partial office to multifamily conversion at 4750 Wilshire and our 36-unit multifamily development in Echo Park. Currently, rental rates in Los Angeles are stable, while supply growth is well below the national average.
Shoal: 90% of which were delivered in.
Shoal: In 2021 or later.
Shoal: At 47, 50, Wilshire Boulevard work continue and we expect to start leasing unit in the fourth quarter of 2024th this will add 68 luxury residential units to the portfolio.
Shoal: We believe this is a very attractive project given its location in Hancock Park.
And extremely supply constrained neighborhood that is adjacent to a multi million dollar single family homes.
Shoal: New construction as a percentage of inventory in the mid Wiltshire, Submarket is just 1.5%, which is nearly four times below the national average.
Shaul Kuba: The new properties will increase our investment in multifamily to 800 units across five assets, 90% of which were delivered in 2021 or later. At 4750 Wilshire Boulevard, work continues, and we expect to start leasing units in the fourth quarter of 2024. This will add 68 luxury residential units to the portfolio. We believe this is a very attractive project given its location in Hancock Park, an extremely supply-constrained neighborhood that is adjacent to a multi-million dollar single-family home. New construction as a percentage of inventory in the mid-Wilshire sub-market is just 1.5%, which is nearly four times below the national average.
Shoal: Construction is now underway at the development in Echo Park on our 36 unit apartment building.
Shoal: Which is a joint venture between CMC T and international institutional Investor.
Shoal: The property is on a parcel adjacent to our creative office building at 1910 West Sunset Boulevard.
Shoal: We see a lot of value in Echo Park, a highly sought after trendy walkable submarket.
Shoal: Preferred by young professional who enjoyed numerous dining and entertainment option.
Shoal: In Jefferson Park, we have entitlement to build two multifamily building on southwestern totaling over 150 units.
Shoal: We are in the process of discussing these development opportunity with co investors.
Shoal: For the balance of our development pipeline, we continue to work to obtain all the necessary approval as well as complete design work.
Shoal: We believe making progress on our pipeline increased the value of an asset.
Shoal: Whenever we elect to sell to another developer or <unk> to move forward with development. If it meets our criteria for on road.
Shoal: As we have previously mentioned on those calls we will look to bring in co investors for development asset to increase our diversification and supplement return by generating fee income.
Shaul Kuba: Construction is now underway on our 36-unit apartment building, which is a joint venture between CMCT and International Institutional Investment. The property is on a parcel adjacent to our creative office building at 1910 West Sunset Boulevard. We see a lot of value in Echo Park, a highly sought-after trendy walkable submarket preferred by young professionals who enjoy its numerous dining and entertainment options.
Shoal: When advantageous just like we have done at 47 50 wheelchair with that I will turn over to Steve to provide further update on the portfolio.
Stephen Altebrando: Thanks, you all I would like to provide an update on our operating assets starting with multifamily on a consolidated basis at quarter end. Our multifamily segment was 79, 3% occupied compared to 84, 1% at the end of the third quarter.
Shaul Kuba: In Jefferson Park, we have entitlement to build two multi-family buildings on the southwest, totaling over 150 units. We are in the process of discussing this development opportunity with co-investors. For the balance of our development pipeline, we continue to work to obtain all the necessary approvals, as well as complete design work.
Stephen Altebrando: However, thanks to strong leasing activity in early 2020 for occupancy improved to 84, 5% by the end of February which is a 40 basis point increase from the end of the third quarter.
Stephen Altebrando: As David mentioned, we believe we are well positioned as we head into the busier spring and summer leasing season.
Stephen Altebrando: In the Bay area, our two Premier class a assets that we acquired in early 2023 are still in their initial lease up phase.
Stephen Altebrando: Significant supply growth in the open market from 2018 through last year, which in part allowed us to acquire these assets at a substantial discount to what replacement cost is today.
Stephen Altebrando: We believe making progress on our pipeline increases the value of an asset. Whenever we elect to sell to another developer or elect to move forward with development, if it meets our criteria for our own growth. As we have previously mentioned on those calls, we will look to bring in co-investors for development assets to increase our diversification and supplement return by generating fee income when advantageous, just like we have done at 4750 Wilshire. With that, I will turn over to Steve to provide further updates on the portfolio. Thanks, Shaul.
Stephen Altebrando: The market is in the process of absorbing this excess supply and while we continue to think this will take some time, we believe local rents would need to increase dramatically before is economic to see new multifamily construction.
Stephen Altebrando: Our pipeline for new development in the East Bay as well below the average for the top 25 U S markets.
Stephen Altebrando: So we believe these assets are well positioned for growth both by occupancy gains and rate over time.
Stephen Altebrando: And Echo Park, Los Angeles at our multifamily asset at 19 O. Two park our in place rents are well below market and we've been executing new leases for new tenants at substantially higher rates.
Stephen Altebrando: I would like to provide an update on our operating assets, starting with multifamily. On a consolidated basis at quarter end, our multifamily segment was 79.3% occupied, compared to 84.1% at the end of the third quarter. However, thanks to strong leasing activity in early 2024, occupancy improved to 84.5% by the end of February, which is a 40 basis point increase from the end of the third quarter. As David mentioned, we believe we are well positioned as we head into the busier spring and summer leasing seasons. In the Bay Area, our two premier Class A assets that we acquired in early 2023 are still in their initial lease up. There was significant supply growth in the Oakland market from 2018 through last year, which in part allowed us to acquire these assets at a substantial discount to what replacement cost is today. The market is in the process of absorbing this excess supply.
Stephen Altebrando: Occupancy increased to 89% at the end of February up 150 basis points compared to the end of the first quarter, which is when we acquired the asset.
Stephen Altebrando: We have a waiting list for two bedroom units demonstrating the strength of demand for this asset and we recently increased asking rents for new tenants.
Stephen Altebrando: Turning to our office segment, we leased approximately 38000 square feet in the fourth quarter and 141000 square feet for the full year, our occupancy rate at the end of the fourth quarter was 83, 8% up 120 basis points from the prior quarter and our leasing percentage was 84, 4% up 10 basis points from the prior quarter.
Stephen Altebrando: Our leasing spreads remained stable declining less than 2% for the full year of 2023.
Stephen Altebrando: Leasing spreads reflect the rents we are achieving compared to rates of our expiring leases on the same suite basis.
Stephen Altebrando: With that I'll turn it over to Barry.
Barry Neil Berlin: Thank you, Steve moving onto the financial highlights.
Stephen Altebrando: And while we continue to think this will take some time, we believe local rents would need to increase dramatically before it's economically viable to see new multifamily construction. The pipeline for new development in the East Bay is well below the average for the top 25 U.S. markets. So we believe these assets are well positioned for growth, both by occupancy gains and rates over time. In Echo Park, Los Angeles, at our multifamily asset at 1902 Park, our in-place rents are well below market, and we've been executing new leases for new tenants at substantially higher rates. Occupancy increased to 89% at the end of February, up 150 basis points compared to the end of the first quarter, which is when we acquired the asset.
Barry Neil Berlin: Let's start with our segment NOI, which was $10 $8 million for the fourth quarter of 2023 compared to $11 7 million powers in the prior year comparable period.
Barry Neil Berlin: This decrease in NOI of around $1 million was driven by decreases of $1 $5 million in our office segment $440000 from our lending segment and $170000 from our hotel segment.
Barry Neil Berlin: This was partially offset by an NOI increase of $1 1 million from our multifamily segment, which commenced operations when we acquired assets during the first quarter of 2023.
Barry Neil Berlin: For the office segment, NOI decreased $5 $4 million from $6 $9 million in the prior year comparable period.
Barry Neil Berlin: The decrease of $1.5 million was driven by a loss from our unconsolidated office properties largely due to an unrealized loss at one of our joint venture investments recognized during the quarter as well as a decrease in revenues and an office property in Oakland, California due to the impact of an early lease termination.
Stephen Altebrando: We have a waiting list for two bedroom units demonstrating the strength of demand for this asset, and we recently increased asking rents for new. Turning to our office segment, we leased approximately 38,000 square feet in the fourth quarter and 141,000 square feet for the full year. Our occupancy rate at the end of the fourth quarter was 83.8%, up 120 basis points from the prior quarter, and our leasing percentage was 84.4%, up 10 basis points from the prior quarter. Our leasing spreads remain stable, declining less than 2% for the full year of 2023. Leasing spreads reflect the rents we're achieving compared to the rates of our expiring leases on the same suite basis. With that, I'll turn it over to Barry. Thank you, Steve.
Barry Neil Berlin: These were partially offset by an increase in rental revenues at an office property in Beverly Hills, California, due to an increased occupancy and rental rates.
Barry Neil Berlin: Our fourth quarter Hotel segment, NOI decreased to $2 $9 million from $3 $1 million in the prior period, primarily due to an increase in operating expenses.
Barry Neil Berlin: 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 through a 50 50 joint venture investment.
Barry Neil Berlin: During the fourth quarter, we reported NOI of $1 $1 million from the new multifamily segment.
Barry Neil Berlin: Moving on to financial highlights, let's start with our segment NOI, which was $10.8 million for the fourth quarter of 2023 compared to $11.7 million in the prior year comparable period. This decrease in NOI of around $1 million was driven by decreases of $1.5 million in our office segment, $440,000 in our lending segment, and $170,000 in our hotel segment. This was partially offset by an NOI increase of $1.1 million from our multifamily segment, which commenced operations when we acquired assets during the first quarter of 2020. For the office segment, NOI decreased to $5.4 million from $6.9 million in the prior year comparable period.
Barry Neil Berlin: Lastly, our lending division NOI decreased to $1 $3 million from $1.8 million in the prior year comparable period.
Barry Neil Berlin: This decrease was primarily due to the increased interest expense related to the issuance of debt through a securitization transaction that closed in March 2023.
Barry Neil Berlin: Interest related to the securitization is directly expense at the lending segment level, which in turn freed up capital to allow us to further our strategic business model, including the multifamily acquisitions.
Barry Neil Berlin: For our non segment expenses the largest impact was an increase in non segment allocated interest expense, which increased by around $6 $8 million.
Barry Neil Berlin: The increase was related primarily due to market interest rate rises and the assumption of two mortgages in connection with the acquisition of our two multifamily properties in Oakland during the first quarter of 2023, including borrowing on our revolver in connection with those acquisitions.
Barry Neil Berlin: The decrease of $1.5 million was driven by a loss from our unconsolidated office properties, largely due to an unrealized loss in one of our joint venture investments recognized during the quarter, as well as a decrease in revenues at an office property in Oakland, California, due to the impact of an early lease termination. These were partially offset by an increase in rental revenues at an office property in Beverly Hills, California, due to an increased occupancy and rental rate. Our fourth quarter hotel segment NOI decreased to $2.9 million from $3.1 million in the prior period, primarily due to an increase in operating expenses.
Barry Neil Berlin: Additionally, we saw an increase in depreciation and amortization expense of $1.2 million, primarily due to the incremental increases in our investments in real estate, resulting from the acquisition of our multifamily properties in Oakland during the first quarter of 2023, and an increase in transaction cost related to organizational costs incurred.
Barry Neil Berlin: To assist in future potential real estate acquisitions.
Barry Neil Berlin: Our SSO negative 44 cents per diluted share compared to negative 16 cents in the prior year comparable period, and our core <unk> was negative 37 cents per diluted share compared to a positive 11 cents per share in the prior year period.
Barry Neil Berlin: 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 through a 50-50 joint venture investment. During the fourth quarter, we reported NOI of $1.1 million from the new multifamily segment. Lastly, our lending division NOI decreased to $1.3 million from $1.8 million in the prior year comparable period.
Barry Neil Berlin: These reductions were primarily driven by the increase in interest expense largely due to our multifamily acquisitions for.
Barry Neil Berlin: For the reasons mentioned by David earlier, we believe there is an opportunity to significantly grow our multifamily NOI and remain optimistic that our efforts to properly position our multifamily portfolio for growth will result in the.
The growth in our NOI.
Barry Neil Berlin: Finally, our liquidity was bolstered by raising an additional $26 $8 million in net proceeds from the sale of our series a one preferred stock during the quarter for 2023, we raised a total of $101 7 million in net proceeds.
None: With that our host can now turn the call over for questions.
Barry Neil Berlin: This decrease was primarily due to the increased interest expense related to the issuance of debt through a securitization transaction that closed in March 2023. Interests related to the securitization are 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 acquisition. For our non-segment expenses, the largest impact was an increase in non-segment allocated interest expense, which increased by around $6.8 million.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone 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 and at this time, well pause momentarily to assemble our roster.
Brendan Michael McCarthy: And the first question will come from Brendan Mccarthy with Sidoti. Please go ahead.
Brendan Michael McCarthy: Hey, everybody. Thanks for taking my questions today.
I just wanted to start off in the multifamily development pipeline looking at the Jefferson Park asset or assets I should say.
Brendan Michael McCarthy: Can you talk about the timing of the of the leasing.
Barry Neil Berlin: The increase was related primarily to market interest rate rises and the assumption of two mortgages in connection with the acquisition of our two multifamily properties in Oakland during the first quarter of 2023, including borrowing on our revolver in connection with those acquisitions. Additionally, we saw an increase in depreciation and amortization expense of $1.2 million primarily due to the incremental increases in our investments in real estate resulting from the acquisition of our multifamily properties in Oakland during the first quarter of 2023, and an increase in transaction costs related to organizational costs incurred to assist in future potential real estate acquisitions. Our FFO was negative 44 cents per diluted share compared to negative 16 cents in the prior year comparable period, and our core FFO was negative 37 cents per diluted share compared to positive 11 cents per share in the prior year period.
Brendan Michael McCarthy: Are the lease up phase when can we expect to see those units kind of progressed through leasing activity.
Brendan Michael McCarthy: Sure.
None: Good morning, how are you.
None: So with respect to so we really have two assets that are under development right now $47 50, wheelchair, which is the conversion at the office to multifamily partial conversion.
None: We would expect that to be.
None: Fleet in the fourth quarter and a lease with lease up.
None: Immediately start at that time.
None: It's a fairly small building not only about 68.
None: Luxury unit. So we would expect that hopefully to start making progress right off the bat on the on the lease up but generally speaking it can take a year or more to fully stabilize and asset but these are on the smaller sites and we would hope to make a little bit more.
None: To really accelerate that progress and then the other asset in Echo Park is about 36 unit apartment expected to come online in mid 2025, and again, we would look to be as soon as that comes online just to start the lease up progress process.
Barry Neil Berlin: These reductions were primarily driven by the increase in interest expense largely due to our multifamily acquisition. For the reasons mentioned by David earlier, we believe there is an opportunity to significantly grow our multifamily NOI and remain optimistic that our efforts to properly position our multifamily portfolio for growth will result in growth in our NOI. Finally, our liquidity was bolstered by raising an additional $26.8 million in net proceeds from the sale of our Series A1 preferred stock during the quarter. For 2023, we will raise a total of $101.7 million in net proceeds. With that, our host can now turn the call over to questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone.
And again, it's the smaller building, which we would expect it to stabilize a lot quicker than you would typically see on a much larger unit and then I think you had mentioned that the Jefferson Park assets. So those are those are entitled.
None: Really shovel ready, but we are right now basically marketing those assets to potential co investors.
None: What we would like to do on most of the developments. We proceed with it is bringing additional partners to help fund from the equity.
None: So right now that construction has not.
None: <unk> channel most steel.
None: Got it thanks for the insight.
How has that process been marketing to co investors I know you typically look for international <unk>.
None: Yesterday.
How has the interest been on that front and then.
Operator: If you're using a speaker phone, please pick up your handset before pressing the key. If at any time your question has been addressed, and you would like to withdraw your question, please press the star then 2. And at this time, we'll pause momentarily to assemble our roster. Your first question will come from Brendan McCarthy with Sidoti. Please go ahead. Hey, everybody.
None: As a follow up can investors you know maybe expect a potential sale in the same ballpark of of the 80% interest sold and a 47 50 Wilshire asset.
None: Yeah. So so.
None: So we really have just started that process of speaking to them to investors I mean right now it is.
None: It's a little bit more challenging to make the returns Penn soldiers given the environment, we're in where the development costs are elevated and cap rates are higher.
Brendan Michael McCarthy: Thanks for taking my questions today. I just want to start off by looking at the multifamily development pipeline, looking at the Jefferson Park asset, or assets, I should say. Can you talk about the timing of the leasing or the lease-up phase? When can we expect to see those units kind of progress through leasing activity? Sure. Good morning. How are you.
None: So you are penciling the returns can be it is a little bit tougher than in the in the current environment and those particular two asset we have a pretty small investment in the land basis. So we can really afford to.
None: To wait if need be.
None: But and then with respect to our ownership what we have said in the past is we would be open to.
Stephen Altebrando: So with respect to, we really have two assets that are under development right now: 4750 Wilshire, which is the partial office to multifamily partial conversion. We would expect that to be complete in the fourth quarter and a lease up to immediately start at that time. You know, it's a fairly small building and not only about 68 luxury units.
None: Basically, bringing co investors for up to 80% of the <unk>.
None: Potential offset so that that is where we would like to maintain at least a 20% ownership interest and if we did have co investors come in that would obviously bring our ownership percentage down so I would say it probably our ownership generally would probably be in the 20% to 50% range.
None: Depending on the deal.
None: Got it thanks, Steve that's helpful. And then just wanted to change gears switch gears to the looking at just a line item on the income statement.
Stephen Altebrando: So, you know, we would expect to hopefully start making progress right off the bat on the lease up. But, generally speaking, it can take a year or more to fully stabilize an asset, but, you know, these are on the smaller side. So we would hope to make a little bit more to really accelerate that progress. And then the other asset in Echo Park is about 36 units of apartments expected to come online in mid 2025. And again, we would look to be as soon as that comes online to start the lease up process. And again, a smaller building, which we would expect to stabilize a lot quicker than you would typically see on a much larger unit. And then, I think you had mentioned the Jefferson Park assets.
None: The transaction costs I think it was a little bit above a million dollars for the fourth quarter can you talk about what drove that.
None: Sure Yeah, Hey, Brian This is David I can address that so.
None: <unk>.
David A. Thompson: A lot of that has to do with.
David A. Thompson: Some.
Legal costs that we were spending are incurring relating to an up REIT structure that we're putting in place.
David A. Thompson: It's something that we think will.
David A. Thompson: Potentially allow us to raise capital.
Creative way going forward, but just kind of some of the legwork behind.
David A. Thompson: The up REIT structure that will.
David A. Thompson: Again enable us to do a couple of things potentially one would be more easily issue units to acquire assets extent, we want to do that issue op units or.
David A. Thompson: Maybe potentially further down the right down the line raise capital separately through.
Stephen Altebrando: So those are entitled and really shovel ready, but we are right now basically marketing those assets to potential co-investors because what we would like to do with most of the developments we proceed with is bring additional partners to help fund the equity. So right now, the construction has not commenced yet.
David A. Thompson: That that structure.
None: Great that's helpful. Thanks, David.
None:
And then kind of looking at the debt structure here I know you have some of the proceeds from the series a one preferred were used to pay down the revolver.
None: And then I also noticed there was a I think a refinance of one of the multifamily mortgages.
Brendan Michael McCarthy: Thanks for the insight. How's that process been, you know, marketing to co-investors? I know you typically look for international investors.
None: Can you talk about was that I guess was that would be 11, 50 quay asset and.
None: Maybe talk about the I think there was another multifamily.
Stephen Altebrando: How's the interest been on that front? And then, you know, as a follow-up, can investors maybe expect a potential sale in the same ballpark as the, you know, 80% interest sold in the 4750 Wilshire asset? Yeah.
None: Mortgage coming due in the summer 'twenty five okay.
None: Can you talk about the plan for for that debt.
None: That piece and then also just talk about the the one that was refinanced in the fourth quarter.
Yes sure. So we are we did refinance.
None: 11 50 clay.
None: <unk> put in place a pretty attractive fixed rate of 625% and in today's market and that also.
Stephen Altebrando: So, we really have just started that process of speaking to investors. I mean, right now, it is a little bit more challenging to make the returns pencil just given the environment we're in, where the development costs are elevated and cap rates are higher. So, penciling the returns is a little bit tougher in the current environment. I mean, for those particular two assets, we have a pretty small investment in the land basis.
None: Push the maturity.
None: To mid 2026.
None: And then with the other mortgage is the four channel House, which we do we have an extension option. So the.
None: The maturity is mid 2025.
None: And we're in the process right now.
None: Looking to extend that mortgage as well, whether it's through an extension or a refi.
None: Got it got it thanks, Steve.
Stephen Altebrando: So, we can really afford to wait if need be. And then, with respect to our ownership, what we have said in the past is that we would be open to basically bringing in co-investors for up to 80% of the potential assets. So, that is where we would like to maintain at least a 20% ownership interest. And if we did have co-investors come in, that would obviously bring our ownership percentage down. So, I would say our ownership generally would probably be in the 20% to 50% range, depending on the deal. Got it. Thanks, Steve. That's very helpful. And then just want to change gears, you know, switch gears to looking at just a line item on the income statement, the transaction costs. I think it was a little bit above a million dollars for the fourth quarter. Can you talk about what drove that? Hey Brendan, this is David.
None: Maybe one more for me just kind of looking at the the lease explorations.
None: The office side as a percent of annualized office rent <unk>.
None: 16.3% coming due in 'twenty four can you just kind of talk about the outlook there as far as.
None: Your renewals.
Stephen Altebrando: Yeah. So yeah, so generally speaking.
Stephen Altebrando: We are seeing north of about 50% renewal rate.
None: Yeah, we have.
None: The one particular tenant that is.
None: That is giving back some space.
None: That we mentioned in the.
None: In the Investor presentation.
None: But for the most part we are seeing pretty pretty high renewal rates across the board.
None: Got it got it and I know you mentioned you have spreads I think you mentioned in the introduction spreads are positive there on the office side.
None: Or are they still you know can you maybe go into detail just on lease spreads.
David A. Thompson: I can address that. A lot of that has to do with some legal costs that we were spending or incurring relating to an up-read structure that we're putting in place, and it's something that we think will potentially allow us to raise capital in an accretive way going forward, but just kind of some of the legwork behind the up-read structure that will, again, enable us to do a couple of things. One would be able to more easily issue units to acquire assets, to the extent we want to do that, or maybe, potentially, further down the line, raise capital separately through that structure.
None: Sure. So yeah Chetan, yes, generally what we have seen although mark office market has been.
None: Well publicized a little challenging, but we generally are seeing rate hold up for the most part.
None: So what we so we mentioned that spreads were.
None: Down just 2%.
None: We're pleased with that given the environment, but we are generally seeing rate hold up particularly in Austin and I would say also that is the case in west L. A where the bay area has been a little bit softer on rate.
None: Got it thanks, Steve Thanks, and one more question if I may just kind of looking at multifamily NOI.
None: Obviously really strong in the fourth quarter of 'twenty three.
David A. Thompson: Great, that's helpful. Thanks, David. And then kind of looking at the debt structure here, I know some of the proceeds from the Series A-1 preferred were used to pay down the revolver, and then I also noticed there was a, I think, refinance of one of the multifamily mortgages. Can you talk about, I guess, was that the 1150 Clay asset? And maybe talk about the other multifamily. I think there was another one.
None: After a negative quarter in the third quarter 'twenty. Three can you just kind of talk about the outlook. There is that gonna be lumpy going forward is that and does that would that differentiation just from kind of the lease up phase.
None: Yeah, I mean, there's a lot of opportunity for for us to pick up ground on.
None: With respect to NOI in the multifamily segment.
None:
None: Generally youre costs are very highly fixed in multifamily. So when we have a building. That's just one channel I was just 80% leased or about 80% leased as you get towards stabilize mid ninety's figure a lot of the incremental revenue should flow to the bottom line.
Stephen Altebrando: Mortgage coming due in the summer of 25. Can you talk about the plan for that piece and then also just talk about the one that was refinanced in the fourth quarter? Yeah, sure. So we did refinance 1150 Clay and put in place a pretty attractive fixed rate of 6.25% in today's market. And that also pushed the maturity date into mid-2026. And then, with the other mortgage, Channel House, which we do, we have an extension option. So really, the maturity date is mid-2025, and we're in the process right now of looking to extend that mortgage as well, whether it's through an extension or a refund. Got it, got it.
None: So we should we would expect to see continued pickup.
None: Specifically in the back half of the year, because as we start seeing leasing activity pickup into the spring and summer that will benefit our NOI later in the year. So I think throughout the year, we should see it really progressively improving although I would point out we did have a little bit of a onetime benefit in the fourth quarter from a.
None: From a real estate tax adjustment, but outside of that we would expect NOI to really continue to be trending higher.
None: Really over the next eight quarters.
None: Got it thanks, Steve Thanks, everybody that's all from me.
None: This will conclude our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.
Brendan Michael McCarthy: Thanks, Steve. Maybe one more for me, just kind of looking at the lease expirations on the office side as a percent of annualized office rent. 16.3% coming due in 24.
None: Yeah.
None: Yes.
None: Yeah.
None: [music].
Brendan Michael McCarthy: Can you just kind of talk about the outlook there as far as your renewals are concerned? Yeah, so, generally speaking, we are seeing north of a 50% renewal rate. You know, we have, you know, one particular tenant that is, that is giving back some space that we mentioned in the investor presentation. But, you know, for the most part, we are seeing pretty, pretty high renewal rates across the board. Got it, got it. I know you mentioned that spreads. I think you mentioned...
Brendan Michael McCarthy: In the introduction, spreads are positive on the office side. Are they still, you know? Can you maybe go into detail just on the lease spread? Sure.
Stephen Altebrando: So generally, what we have seen, although the office market has been well-publicized, is a little bit challenging, but we generally are seeing rates hold up for the most part. We mentioned that spreads were down just 2%. We're pleased with that given the environment, but we are generally seeing rates hold up, particularly in Austin, and I would also say that's the case in West L.A., where the Bay Area has been a little bit softer on rates. Thanks, Steve. Thanks.
None: Yeah.
None: [music].
Brendan Michael McCarthy: One more question, if I may, just kind of looking at multifamily NOI. Yeah, obviously really strong in the fourth quarter of 23 after a negative quarter in the third quarter of 23. Can you just kind of talk about the outlook there? Is that going to be lumpy going forward?
Brendan Michael McCarthy: Is that, and does that, was that, you know, differentiation just from, you know, kind of the lease up phase? Yeah, I mean, there's a lot of opportunity for us to pick up ground with respect to NOI in the multifamily segment. You know, generally, your costs are very highly fixed in multifamily.
Stephen Altebrando: So, when we have a building that's just one of the channel houses 80% leased or some other 80% leased, as you get towards the stabilized mid-90s figure, a lot of the incremental revenue should flow to the bottom line. So, we would expect to see continued pickup, you know, specifically in the back half of the year because as we start seeing leasing activity pick up in the spring and summer, that will benefit our NOI later in the year. So, I think throughout the year, we should see it really progressively improving. Although I would point out, we did have a little bit of a one-time benefit in the quarter from a real estate tax adjustment. But outside of that, we would expect NOI to really continue to be trending higher, you know, really over the next eight quarters.
Stephen Altebrando: God, thanks Eve, thanks everybody, that's all from me. This will conclude our question-and-answer session, as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect. ?? ?? ?? ?? © BF-WATCH TV 2021 ?? ?? ?? ?? ?? ?? [inaudible] ? ? ? ? ? ? ? ? ? ? ? ? ? ? © BF-WATCH TV 2021