Q1 2024 Creative Media & Community Trust Corp Earnings Call
Operator: Good day, and welcome to the Creative Media and Community Trust Corporation's first quarter 2024 earnings conference call. All participants will be in listen-only mode.
Good day and welcome to the creative media and Unity dress Corporation first quarter 'twenty 'twenty four earnings conference call.
Speaker Change: All participants will be in listen only mode should you need assistance. Please signal with specialists by pressing the star key followed by zero.
Operator: Should you need assistance, please signal a call to a specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on a touchtone phone. If you need to withdraw your question, please press star, then 2. Please note this event is being recorded. Now, I would like to turn the conference over to Stephen Altebrando. Please go ahead.
After todays presentation, there will be an opportunity to ask question to.
Speaker Change: To ask a question you May press Star then one on the Dutch don't stop.
Speaker Change: If you need to withdraw your question. Please press Star then two.
Speaker Change: Please note this event is being recorded.
Steve: And now I would like to turn the conference over to Steve Okay. Brenda.
Brenda: Please go ahead.
Stephen Altebrando: Hello, everyone, and thank you for joining us. My name is Stephen Altebrando, Portfolio Oversight Manager for CMC. Also on the call today are 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. Our earnings release includes a reconciliation of non-GAAP financial measures discussed during today's call.
Steve Ulta: Hello, everyone and thank you for joining US my name is Steve Ulta brand out of the portfolio oversight our CMC team.
Steve Ulta: Also on the call today are David Thompson, our Chief Executive Officer, and Barry <unk>, Our Chief Financial Officer.
Speaker Change: 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 our beliefs, 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. 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.
Speaker Change: During this call we will make forward looking statements. These forward looking statements are based on our beliefs and assumptions made by and information currently available to us our actual results will be affected by known and unknown risks trends uncertainties and other factors that are beyond our control or ability to predict.
Speaker Change: Although we believe that our assumptions are reasonable they are not guarantees of future performance and some will prove to be incorrect. Therefore actual future results can be expected to differ from our expectations and those differences may be material or.
Speaker Change: 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. Following our last call seven weeks ago, where we gave some insights into our intra-quarter occupancy and development activity, we're pleased to report our first quarter 2024 results. Overall, we saw improvement from the fourth quarter of 2023, which was primarily due to higher net operating income in our office and hotel segments, the latter of which was largely due to seasonality. Even with the improvement from last quarter, our cash flow continues to be impacted by elevated short-term interest rates.
David A. Thompson: Thanks, Steve and thank you everyone for joining our call today.
David A. Thompson: Following our last call seven weeks ago, where we give some insights into our intra quarter occupancy in development activity. We're pleased to report our first quarter 2024 results.
David A. Thompson: Overall, we saw improvement from the fourth quarter of 2023, which was primarily due to higher net operating income in our office and hotel segments, the latter of which was largely due to seasonality.
Speaker Change: Even with the improvement from last quarter, our cash flow continues to be impacted by elevated short term interest rates, we are evaluating ways to strengthen our balance sheet and improve our cash flow, including potentially selling assets and reducing our debt.
David A. Thompson: We are evaluating ways to strengthen our balance sheet and improve our cash flow, including potentially selling assets and reducing our debt. In addition, we expect to eventually benefit from lower SOFR on our floating rate debt and lower preferred dividends as the Fed funds rate is expected to come down over time. As a reminder, our Series A1 Preferred Dividend is a greater 6% or Fed Funds Plus 2.5%.
Speaker Change: In addition, we expect to eventually benefit from lower silver on our floating rate debt and lower preferred dividends as the fed funds rate is expected to come down overtime as.
Speaker Change: As a reminder, our series a one preferred dividend as a greater or 6% or fed funds plus two 5%.
David A. Thompson: As for our results in the quarter, our same-store office NOI increased 9% year-over-year to $7.4 million, primarily due to improved NOI at our Beverly Hills property driven by the commencement of our 20-year lease with the Rolls-Royce dealership. We're working on the build-out for the lease and anticipate the grand opening toward the end of this year or early next. Overall, our office lease percentage remained stable in the quarter at 84%, and we executed approximately 37,000 square feet of office leases in the quarter.
Speaker Change: As for our results in the quarter.
Speaker Change: Our same store office, NOI increased 9% year over year to $7 $4 million, primarily due to improved NOI at our Beverly Hills property driven by the commissioning of our 20 year lease with a rolls Royce dealership.
Speaker Change: We're working on the build out for the lease and anticipate the grand opening towards the end of this year or early next overall, our office lease percentage remains stable in the quarter at 84% and we executed approximately 37000 square feet of office leases in the quarter.
David A. Thompson: While our fourth quarter hotel segment NOI increased quarter over quarter, largely as a result of seasonality, it was a consistent $4.1 million for both Q1 2024 and Q1 2023. Hotel trends are still strong, and we anticipate starting our long-planned renovation on our hotel asset in the second half of this year. We believe this renovation will significantly benefit the asset as it is one of two hotels located directly across the street from Sacramento's Convention Center, which itself underwent a major renovation and expansion in 2021.
Speaker Change: While our fourth quarter Hotel segment NOI increased quarter over quarter, largely a result of seasonality. It was a consistent $4 1 billion for both Q1 2024 in Q1 2023.
Speaker Change: Hotels trends are still strong and we anticipate starting our long planned renovation of our hotel asset in the second half of this year.
Speaker Change: We believe this renovation will significantly benefit the asset is a hotel as one or two hotels located directly across the street from Sacramento As Convention center, which itself underwent a major renovation and expansion in 2021.
David A. Thompson: Our lending segment NOI decreased year over year, primarily due to what we have previously described on these calls, the impact of the securitization completed a year ago, which increased interest expense attributable to that segment but also generated significant proceeds for CMCT. Our multifamily segment generated $900,000 of NOI in the quarter. Our occupancy improved significantly to 86.2% at the end of the first quarter from 79.3% at the end of 2023, although the rental rate at our two largest properties, Channel House and 1150 Clay, located in Oakland, has been below our expectations.
Speaker Change: Our lending segment NOI decrease year over year, primarily due to what we have previously described on these calls the impact of the securitization completed a year ago, which increased interest expense attributable to that segment, but also generated significant proceeds for C. M. C T.
Speaker Change: Our multifamily segment generated $900000 of NOI in the quarter, our occupancy improved significantly to 86, 2% at the end of the first quarter from 79, 3% at the end of 2023, although the rental rates are two largest properties channel House and 11 50 clay located in Oakland has been below our expectations.
David A. Thompson: According to our development pipeline, we don't have much new to report since we just recently spoke. However, we do continue to be on track to deliver two new multifamily assets in Los Angeles. One later this year at 4750 Wilshire and one in mid-2025 at 1915 Park Avenue. Between our required properties and development activity, we are trying to grow the multifamily side of our portfolio and achieve more balance between creative office and multifamily assets. With that, I will turn it over to Steve to provide a further update on the portfolio.
Speaker Change: Turning to our development pipeline, we don't have much new to report since we just recently spoke however, we do continue to be on track to deliver two new multifamily assets in Los Angeles. One later this year at 47, 50, <unk> and one in mid 2025 at $19 15 Park Avenue.
Speaker Change: Between our acquired properties and development activity, we're trying to grow the multifamily side of our portfolio and achieve more balance between creative office and multifamily assets.
Speaker Change: With that I will turn it over to Steve to provide a further update on the portfolio.
Stephen Altebrando: David, I would like to provide an update on our operating assets, starting with multifamily. As David mentioned, on a consolidated basis at quarter end, our multifamily segment was 86.2% occupied compared to 79.3% at the end of the fourth quarter. In Echo Park, Los Angeles, at our multifamily asset at 1902 Park, occupancy increased to 90.7% at the end of the quarter, up 140 basis points from the 2023 year. We have been executing new leases for new tenants at substantially higher rates than are in place. The monthly rent per occupied unit was about $1,800 as of the end of the first quarter.
Steve: Thanks, David.
Speaker Change: I'd like to provide an update on our operating assets starting with multifamily.
Steve: As David mentioned on a consolidated basis at quarter end, our multifamily segment was 86, 2% occupied compared to 79, 3% at the end of the fourth quarter.
Steve: And Echo Park, Los Angeles at our multifamily asset at 19 O. Two park occupancy increased to 97% at the end of the quarter up 140 basis points from the 2023 year end.
Speaker Change: We have been executing new leases for new tenants at substantially higher rates than our in place rents bump.
Speaker Change: Monthly rent per occupied unit was about $800 as at the end of the first quarter. This represents a 29% increase from a year ago and our rate for new tenants generally exceeds $2200 per month more than a 20% increase from our in place rents.
Stephen Altebrando: This represents a 29% increase from a year ago, and our rate for new tenants generally exceeds $2,200 per month, more than a 20% increase from our in place. In Oakland, we continue to make significant progress in improving occupancy. But, as David referenced, our rental rates at Channel House and 1150 Clay have been below expectation. As we have previously discussed, there was significant supply growth in the Oakland market from 2018 through 2022.
Speaker Change: In Oakland, and we continue to make significant progress in improving occupancy, but as David referenced our rental rate at channel House, and 11 50 clay have been below expectations. As we have previously discussed there was significant supply growth in the open market from 2018 through 2022.
Stephen Altebrando: The market continues to absorb this excess supply, and we're encouraged by our ability to secure visas for these properties. However, it's important to note that we believe local rents would need to increase dramatically before it is economical to see new multifamily construction. So we expect minimal new supply for the foreseeable future. The pipeline for development in East Bay is well below the average for the top 25 U.S. markets. Turning to our office segment, we leased approximately 37,000 square feet in the first quarter.
Speaker Change: Market continues to absorb this excess supply and we are encouraged by our ability to secure leases at these properties. It's important to note that we believe local rents would need to increase dramatically before it is economical machine new multifamily construction. So we expect minimal new supply for the foreseeable future.
Speaker Change: Our pipeline for development in East Bay is well below the average for the top 25 U S markets.
Speaker Change: Turning to our office segment, we leased approximately 37000 square feet in the first quarter, our occupancy rate at the end of the first quarter was 83, 4% compared to 83, 8% at the end of 2023, and our lease percentage was 84% down about 40 basis points from the end of 2023 with that.
Stephen Altebrando: Our occupancy rate at the end of the first quarter was 83.4% compared to 83.8% at the end of 2023, and our lease percentage was 84%, down about 40 basis points from the end of 2023. With that, I'll turn it over to Barry.
Speaker Change: I'll turn it over to Mary.
Barry Neil Berlin: Moving on to financial highlights, let's start with our segment NOI, which was $13.6 million for the first quarter of 2024, compared to $13 million in the prior year comparable period. This increase in NOI of around $600,000 was driven by increases of $1.1 million in our office segment and $240,000 in our multifamily segment, which were partially offset by a decrease of $570,000 from our lending segment. Our office segment NOI increased to $7.9 million from $6.8 million in the prior year comparable period.
Mary: Moving on to financial highlights, let's start with our segment NOI, which was $13 $6 million for the first quarter of 2024.
Mary: Compared to $13 million in the prior year comparable period.
Mary: This increase in NOI of around $600000 was driven by increases of $1 $1 million in our office segment and $240000 in our multifamily segment, which were partially offset by a decrease of 570000 from our lending segment.
Mary: Our office segment, NOI increased to $7 $9 million from $6 $8 million in the prior year comparable period.
Barry Neil Berlin: The decrease of $1.1 million was primarily driven by higher rental revenues at an office property in Beverly Hills, California, and an office property in Los Angeles, California, due to increased occupancy, in addition to higher income from an unconsolidated office entity in Echo Park, Los Angeles, during the quarter. Our hotel segment NOI remained consistent at $4.1 million for the first quarter of 2024 and 2020.
Speaker Change: The decrease of $1 $1 million was primarily driven by higher rental revenues and an office property in Beverly Hills, California, and an office property in Los Angeles, California due to increased occupancy. In addition to higher income from an unconsolidated office entity in Echo Park, Los Angeles during the quarter.
Speaker Change: Our hotel segment NOI remained consistent at $4 $1 million for the first quarter of 2024 and 2023.
Barry Neil Berlin: For our lending division, NOI decreased to $800,000 from $1.4 million in the prior year conflict period, primarily due to the increased interest expense. We issued that throwaway securitization transaction last year in March with the interest relating to the securitization being directly expensed at the lending segment level. Lastly, we began reporting multifamily segment NOI in the first quarter of 2023.
Speaker Change: For our lending division NOI decreased to $800000 from $1 $4 million in the prior year comparable period, primarily due to the increased interest expense.
Speaker Change: We issued debt through securitization transaction last year in March with the interest relating to the securitization being directly expensed at the lending segment level.
Barry Neil Berlin: 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 first quarter of 2024, we reported a multifamily segment NOI of approximately $900,000 compared to approximately $680,000 for the prior year comparable period. The operations of the Oakland properties provided around $1.4 million of NOI compared to breakeven during the first quarter of 2023, largely due to the multifamily segment not having an entire quarter of operations during the first quarter of 2023 due to the acquisition of the properties occurring during the quarter.
Speaker Change: Lastly, we began reporting multifamily segment NOI in the first quarter of 2023. After we acquired two multifamily properties and opened in late January and late March as well as investments in another multifamily property in Los Angeles through a 50 50 joint venture investment.
Barry Neil Berlin: This net increase in NOI was partially offset by a $1.3 million swing in equity pickup from our investment in the JV, from NOI of approximately $800,000 during the first quarter of 2023 to a loss of $400,000 during the first quarter of 2024. For our non-segment expenses, we had a decrease in depreciation and amortization expense of $3 million, which was primarily due to a decrease in acquired in-place lease and tangible asset amortization for our multifamily properties in Oakland, which had been fully amortized prior to the first quarter of 2024.
Speaker Change: During the first quarter of 2024, we reported multifamily segment NOI of approximately $900000 compared to approximately $680000 for the prior year comparable period.
Speaker Change: The operations of the Oakland properties provided around $1 4 billion of NOI compared to breakeven during the first quarter of 2023, largely due to multifamily segment not having an entire quarter of operations. During the first quarter of 2023 due to the acquisition of the properties occurring during the quarter.
This net increase in NOI was partially offset by a $1 3 million or swing in equity pickup from our investment in the JV from NOI of approximately $800000. During the first quarter of 2023 to a loss of $400000. During the first quarter of 2024.
Speaker Change: For our non segment expenses, we had a decrease in depreciation and amortization expense of $3 million, which was primarily due to a decrease in acquired in place lease intangible assets amortization for our multifamily properties in Oakland, which had been fully amortized prior to the first quarter of 2024, we also had a decrease.
Barry Neil Berlin: We also had a decrease in transaction-related costs of around $2.7 million, which had been elevated in the first quarter of 2023 as a result of the Oakland multifamily property acquisitions during that period. Partially offsetting these non-segment expense decreases was an increase in non-segment allocated interest expense, which increased by around $2.1 million. The increase was primarily due to market interest rate rises and the assumption of mortgages in connection with the acquisition of our two multifamily properties in Oakland and borrowing on our revolver in connection with the acquisition.
Speaker Change: Transaction related costs of around $2 $7 million, which had been elevated in the first quarter of 2023 as a result of the Oakland multifamily property acquisitions during that period.
Speaker Change: Partially offsetting these non segment expense decreases was an increase in non segment allocated interest expense.
Speaker Change: Which increased by around $2 $1 million.
The increase was primarily due to market interest rate rises and the assumption of mortgages in connection with the acquisition of our two multifamily properties in Oakland and borrowing on our revolver in connection with the acquisitions.
Barry Neil Berlin: Our FFO was negative 26 cents per diluted share compared to negative 21 cents in the prior year conference period. And our core FFO was negative 19 cents per diluted share compared to a positive 6 cents per share in the prior year period. These reductions were primarily driven by an increase in interest expense, as well as an increase in our redeemable preferred stock dividends of approximately $2.4 million. Finally, regarding liquidity during the quarter, we raised an additional $19.1 million in net proceeds from the sale of our Series A1 preferred stock.
Speaker Change: Our S F O was negative 26.
Speaker Change: Per diluted share compared to negative 21 cents in the prior year comparable period.
Speaker Change: And our core <unk> was negative <unk> 19 per diluted share compared to a positive <unk> <unk> per share in the prior year period.
Speaker Change: These reductions were primarily driven by the increase in interest expense as well as an increase in a redeemable preferred stock dividends of approximately $2 $4 million.
Speaker Change: Finally regarding liquidity during the quarter, we raised an additional $19 $1 million in net proceeds from the sale of our series a one preferred stock.
Barry Neil Berlin: As David mentioned, although our core FFO improved from last quarter, our cash flow continues to be impacted by elevated short-term interest rates. It is important to note that we are evaluating ways to strengthen our balance sheet and improve our cash flow, including potentially selling assets and reducing our debt. With that, our host can now turn the call over to questions.
David A. Thompson: As David mentioned, although our core SSO improved from last quarter, our cash flow continues to be impacted by elevated short term interest rates.
Speaker Change: It is important to note.
David A. Thompson: That we are evaluating ways to strengthen our balance sheet and improve our cash flow, including potentially selling assets and reducing our debt.
Speaker Change: With that our host can now turn the call over for questions.
David A. Thompson: Yeah.
Operator: Thank you, and we will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up the handset before pressing the button. And if at any time your question has been answered and you would like to withdraw your question, please press star then two, and we'll start with a question from Brendan McCarthy from Sidoti. Brendan, you may proceed.
Speaker Change: Thank you and we will now begin the question and answer session.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If youre using a speakerphone please pick up the handset before pressing the key.
Speaker Change: And if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: And we'll start with a question from Brandon Macquarie from Sidoti.
Brandon Macquarie: Brandon you May proceed.
Stephane Guilliam: Hi, good afternoon. This is Stephane Guilliam on behalf of Brendan McCarthy. How are you guys doing?
<unk>: Alright. Good afternoon. This is <unk>.
Speaker Change: I'm on for Brendan coffee is doing.
Shaul Kuba: Good, good. Thanks, Shaul.
Speaker Change: Good good thanks, how are you.
David A. Thompson: The first question I have is regarding potential asset sales; how would you describe the deal flow now, and are any sales dependent on a lower rate environment?
Speaker Change: Good.
Brendan: First question I ask is on regarding potential assets. How would you describe your deal flow now and any sales dependent on lower rate environment.
David A. Thompson: Yeah, let me take that. I think when you look at our portfolio of assets, and we view that we've got a pretty desirable portfolio on the assets that we have, we think we'll still trade them at pretty low cap rates. But obviously, we're living in an environment today with higher short-term interest rates, so, you know, asset sales are accretive to our cash flow, and that's really our goal here is to improve the cash flow that will allow us to be in a better position to participate in what we expect to be a real estate recovery and potential opportunities that we'll see down the road.
Speaker Change: Yeah, Let me, let me take that I think when you look at our portfolio of assets.
Speaker Change: We view that we've got a pretty desirable portfolio a lot of the assets that we have we think will still trade at pretty low cap rates, but obviously were.
Speaker Change: Living in an environment today with higher short term interest rates, so asset sales are accretive to our cash flow.
And that's really our goal here is to improve the cash flow that will allow us to be in a better position to participate in what we expect to be a real estate recovery and potential opportunities that we'll see.
David A. Thompson: In terms of what assets we would potentially sell, we're really in the process of evaluating that right now. And our overall goal here is to sell or refinance enough assets so that we can significantly pay down our credit facility. That's kind of broadly the way that we're thinking about it.
Speaker Change: Down the road in terms of what assets moving.
Speaker Change: We would potentially sell and we're really in the process of evaluating that right now.
Speaker Change: And our overall goal here is to sell a refi enough assets. So that we can significantly pay down our credit facility, that's kind of broadly the way that we're that we're thinking about it.
Speaker Change: Alright, thank you for the broker.
Speaker Change: Can you also talk about rent spread between your office portfolio and how renewables.
David A. Thompson: All right, thank you for the quote there. Can you also talk about rent spread in the office portfolio and how renewables have progressed?
Speaker Change: Progress.
David A. Thompson: Yeah, sure, I can take that. So I think they were about unchanged for the first quarter; we did about 33,000 square feet of leasing, which is, you know, not a large sample size. But yeah, nothing unusual on the spread.
Speaker Change: Yeah sure I can take that so I think they were there or thereabout.
Unchanged for the first quarter, we did about 33000 square feet of leasing which is.
Speaker Change: Not a large sample size.
Speaker Change: Nothing unusual on the sprint side.
David A. Thompson: I guess the last one for me, with recent occupancy gains in the office portfolio, is it fair to say office net operating income has a positive outlook now?
Speaker Change: I guess the last one for me reform recent occupancy gains in our office portfolio is it fair to say like office.
Speaker Change: Operating income as deposit positive outlook now.
David A. Thompson: I think we'll see. I mean, we did see Office NOI pick up quite a bit this quarter. Compared to the fourth quarter, it was an easier comp. But, you know, we still do have some expirations coming our way. So, yeah, I think we still have some wood to chop in terms of renewals. All right, thank you.
Speaker Change: I think we're.
Speaker Change: I think we will see I mean, we did see office NOI pick up quite a bit this this quarter.
Speaker Change: The fourth quarter was is an easier comp.
Speaker Change: But we still do have some explorations coming our way so.
Speaker Change: Yes, I think we still have some some wood to chop in terms of.
Speaker Change: In terms of renewals.
Stephane Guilliam: All right, thank you so much for taking my questions.
Speaker Change: Alright. Thank you so much for taking my questions.
Speaker Change: Thank you.
Operator: And our next question comes from John Matsouka from B. Reilly. John, please go ahead.
Speaker Change: And our next question comes from John Let's look up from B Riley.
Speaker Change: John Please go ahead.
John James Massocca: Good morning out there. Morning. So maybe going back to dispositions, I mean, are there any specific property types or maybe strategic elements to the disposition activity you might be considering?
John Let's: Hi, good morning out there.
John Let's: Good morning.
John Let's: So maybe going back to the dispositions I mean is there any specific property types or maybe strategic elements to the disposition activity you might be considering.
David A. Thompson: Again, I think we're really in the process of evaluating that right now. I mean, obviously, the... If you look at our portfolio, the largest... Part of it would still remain the office product that we have, so that's probably, you know, likely to be a key place that we start and look at. And, you know, we've talked about, and I'm historically trying to get this, and I mentioned on the call as well, getting more balance between the multifamily and the creative office going forward. So I think that it's going to be a logical place for us to start.
John Let's: Again, I think we're really in the process of evaluating that right now I mean, obviously, the if you look at our portfolio the largest.
Speaker Change: Part of it still would remain the office product that we have so that's probably likely to be a.
Speaker Change: A key place it will start and look at and we've talked about.
Speaker Change: Historically trying to get this as I mentioned on the call as well getting more balanced between the multifamily and the creative office going forward. So I think.
Speaker Change: That's going to be a logical place for us to start.
David A. Thompson: Okay. And then maybe what are the outlooks for some of the returns on some of these development projects, especially the ones that are more kind of near term in the pipeline?
Speaker Change: Okay.
Speaker Change: And then.
Speaker Change: Maybe what are the outlooks for some of the returns on some of these development projects, particularly the ones that are more kind of near term in the pipeline.
David A. Thompson: Yes. I mean, we generally target a 75 basis points to 100 basis points spread in terms of our return on cost versus the current market cap rate. And I think we're on track. We have the two assets underway, which we think is achievable. I think, candidly, it's tougher to develop in the market today given where cap rates are and where construction costs are. So, we have a much more significant development pipeline, but we haven't really been rushing to start it just because the return hurdles are not necessarily meeting our expectations. So, we're doing all the pre-development work but waiting for a little bit better environment.
Speaker Change: Yes, I mean, we generally target 75 basis points to 100 basis points spread in terms of or a return on cost versus the current market cap rate.
Speaker Change: I think we're on track that we have.
Speaker Change: The two assets underway, which we think are.
Speaker Change: That is achievable I think candidly, it's tougher to develop in the market today, given where cap rates are and where construction costs are so we have a much more significant development pipeline, but we haven't really been rushing to start that just because.
Speaker Change: The return hurdles are not necessarily meeting our expectations and work.
Speaker Change: All the pre development work, but waiting for a little bit better environment.
David A. Thompson: Okay. And then in terms of just the multifamily environment, I mean, how big is the divergence between what you're seeing in terms of operating fundamentals in Oakland versus Los Angeles, just given where some of your new product will be coming online in Los Angeles, it sounds like?
Speaker Change: Okay.
And then in terms of just the multifamily environment I mean, how big is the divergence between what you're seeing in terms of operating fundamentals in Oakland versus Los Angeles, just given where some of that some of your new product will be coming online in Los Angeles It sounds like.
David A. Thompson: Yeah, yeah, well, I mean, LA is definitely a better market at the moment, where we're seeing trends that are pretty strong, whereas, you know, whereas Oakland is, it's just a more challenging submarket because there was just a large amount of supply really hit all at once. And that was really a result of developers wanting to start projects before an affordable housing mandate was coming into place. And as a result, a lot of development started all at once.
Speaker Change: Yeah, Yeah, well I mean.
Definitely a better market at the moment, where we're seeing trends that are pretty strong.
Speaker Change: Whereas whereas Oakland is it's just a more challenging submarket because there was just a large amount of supply really hit all at once and that was really result of developers wanting to start projects before and affordable power.
Housing mandate was coming into place and as a result, a lot of development started all at once so that's it's just unusual market how much supply hit at once.
David A. Thompson: So that's, it's just an unusual market, how much supply hit at once. Now, it just, it's just going to take some time to work that off. And we've seen a lot of that excess supply being absorbed. I think at one point, the market was, you know, 20%. There's 20% vacancy, but now it's less than 10. So, you know, there's definitely been an improvement in the occupancy rate, but it's just going to take, it's just going to take some time.
Speaker Change: It's just going to take some time to work that off and we've seen a lot of that excess supply being absorbed I think at one point the market was 20% there's.
Speaker Change: 20% vacancy now it's less than 10.
Speaker Change: There's definitely been an improvement there.
Speaker Change: On the on the occupancy, but it's just going to take is just going to take some time.
David A. Thompson: Okay, and then with the Sacramento Hotel asset, I mean, what's the potential impact broadly to the revenue contribution from that property while it's undergoing some redevelopment activity?
Speaker Change: Okay, and then with the Sacramento Hotel asset I mean.
Speaker Change: Whats the potential impacts broadly.
Speaker Change: The revenue contribution from that property.
Speaker Change: It's undergoing.
Speaker Change:
Speaker Change: The redevelopment activity.
David A. Thompson: Yeah, so we're expecting some disruption, but it'll be limited because of the way we're looking to manage this. So, effectively, we'll be doing a few floors at once. So we're going to go basically floor by floor and make sure there's a buffer, the floor up, the floor down, just so other guests are not impacted. So we're really hoping to complete this renovation without a really large impact on NOI. But certainly, we will have some rooms at all times, really, for about a nine-month period that will be offline. So yeah, there'll be some disruption, but we're expecting that it will not be a major fall off.
Speaker Change: Yeah. So so we are expecting some disruption but not.
Speaker Change: Youre not it'll be limited, but the way we're looking to manage this so effectively we will be doing a few floors at one so we're going to be basically floor by by floor and making sure theres a buffer the floor optimal floor down too. So that other guests are not impacted so we are we're really hoping to complete.
Speaker Change: This renovation without.
Speaker Change: I'm really large impact to NOI, but certainly we will have some rooms at all at all times really for about nine months period that will be offline. So yeah, we'll it'll be there'll be some disruption, but it's not we're expecting that it would not be.
Speaker Change: Major falloff in NOI.
John James Massocca: Okay, and then maybe last one for me, just bigger picture. I mean, you talked about... (inaudible) Equity in the common stock or just overall size of the common stock to make it slightly more institutionally relevant. I'm just trying to think if there are other big picture ideas that are kind of being bounced around beyond the kind of selling of assets and deleveraging.
Speaker Change: Okay, and then maybe last one from me just bigger picture I mean.
Speaker Change: You talked about.
The potential levers you can pull maybe to reduce leverage.
Speaker Change: The other side of that too I mean is there anything you can think of strategically navy to increase liquidity.
Speaker Change: Liquidity in the common stock or.
Speaker Change:
Speaker Change: Just overall size of the common stock to make it slightly more institutionally relevant I'm just trying to think if there's no other big picture ideas there can be bouncing around.
Speaker Change: Yeah.
On the selling of assets and deleveraging.
David A. Thompson: Well, I think one thing the way we really set up our balance sheet does give us quite a bit of flexibility. You know, we have non-recourse mortgages. We have preferred stock outstanding, which obviously can be converted to common.
Speaker Change: Well I think one.
Speaker Change: The way, we really set up our balance sheet does give us quite a bit of flexibility.
Speaker Change: We have we.
Speaker Change: We have non recourse mortgages, we have the preferred stock outstanding which is which obviously can be converted to common.
David A. Thompson: And then we have our senior secured credit facility, which is a borrowing-based facility that's encumbered by five or six assets within the portfolio. So we really did set the balance sheet up for a tougher environment, like I think we're seeing today. And I think clearly the way that our balance sheet is set up does give us a lot of flexibility and potential levers to pull to improve cash flow and improve the leverage for the company over time. So without getting into more detail than that, but I do think we have quite a bit of flexibility based on the way we set up the balance sheet. Okay.
Speaker Change: And then we have our senior secured credit facility, which has a borrowing base facility thats encumbered by five or six.
Speaker Change: Assets within the portfolio. So we really did set the balance sheet up for a tougher environment like I think what we're seeing today and I think clearly.
Speaker Change: The way that our balance sheet is set up it does give us a lot of flexibility in potential.
Speaker Change: Levers to pull to.
Prove the cash flow and improve the leverage for the company over time.
Yeah without getting into more detail than that but I do think we have.
Speaker Change: Quite a bit of flexibility based on the way, we set up the balance sheet.
John James Massocca: Okay, that's it for me. Thank you very much.
Speaker Change: Okay.
Speaker Change: That's it for me thank you very much.
Operator: And this concludes the question and answer session, as well as the conference. Thank you so much for attending today's presentation. You may now disconnect.
Speaker Change: And this concludes the question and answer session.
Speaker Change: Well as the conference.
Thank you so much for attending today's presentation. You may now disconnect have a great day.