Creative Media & Community Trust Corporation (NASDAQ:CMCT) Q4 2021 Earnings Conference Call March 16, 2022 1:00 PM ET
Steve Altebrando - Shareholder Relations
Nathan DeBacker - CFO
David Thompson - CEO
Shaul Kuba - Co-Founder, CIM Group
Conference Call Participants
Craig Kucera - B. Riley Securities
John Moran - Robotti & Company
Good day and welcome to the Creative Media & Community Trust Corporation Fourth Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Steve Altebrando, Portfolio Oversight. Please go ahead.
Hello everyone and thank you for joining us. My name is Steve Altebrando, The Portfolio Oversight for CMCT. Also on the call today is David Thompson, our Chief Executive Officer; Shaul Kuba, Co-Founder of CIM Group and CMCT Board member; and Nate DeBacker, 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 latest investor presentation. Our earnings release includes reconciliations of non-GAAP financial measures discussed during today's call.
During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs 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.
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 more detailed description of potential risks, please refer to our SEC filings which can be found in the Investor Relations section of our website.
We'll start the call off today with David who will discuss any exciting developments with our business and our 2022 strategy. Then Shaul will outline our vision for the future of the office and multi-family market, and I will discuss some updates to our portfolio, and then Nate will finish up with our fourth quarter results. Then we'll be happy to take your questions. David?
Thanks Steve and thank you for joining our call today. This morning we announced our fourth quarter 2021 earnings which were marked by strong results in our lending segment and improving performance at our one hotel asset.
Our office net operating income declined year-over-year, but we continue to see a significant increase in leasing activity and we're making progress on our value-add assets.
In early January CIM Group, the manager of CMCT, agreed to a reduction in the management fee that amounts to approximately $0.21 per share in annual cost savings. This reduced fee started January 1, 2022 and we will start seeing the benefit in the first quarter of 2022.
We'll get into more detail on our performance in the quarter later in the call, but first I wanted to take some time to speak about some exciting updates for our business and our go-forward strategy.
And as you know we're seeing a shift in the live work lifestyle with many high growth companies and employees embracing hybrid in-person and work-from-home structures and committing to locations and vibrant culture-oriented, walkable communities. We believe that many of these underlying trends are secular.
To reflect this belief, last week we changed our name to Creative Media & Community Trust. This change was made to highlight and sharpen our focus on investing in and developing premier multi-family and creative office properties that cater to fast growing industries like tech, media, and entertainment.
We distinguish creative office from traditional office as bright, open, thoughtfully designed, and comfortable spaces that encourage creativity, flexibility, and collaboration.
I'd like to turn it over to Shaul Kuba to discuss this strategy in further detail.
Thanks David. There has been a considerable change in the office and multi-family landscape. Years before the pandemic, we were already seeing the trend towards hybrid work lifestyle. As David described, CIM was an early institutional participant in creative office and modern multi-family, especially in Los Angeles.
The pandemic accelerated the trend nationally. In response, we have positioned the company to capitalize on what we think is a very significant opportunity over the long-term.
Going forward, CMCT will primarily focus on two things. First, we will be a leader in investing in and developing creative office asset in vibrant market, catering to fast-growing industry like technology, media, and entertainment.
Tenant from a range of industries are demanding office space that is comfortable and moderate. If you have a great product, great market, there is a very strong tenant demand.
Second, we will invest in and develop multi-family in those same market that benefit from those changes business dynamic. Since professionals are spending more time working from home, there is a great demand for premium amenities as well as proximity to entertainment, dining, and culture.
Back to the office market, we have seen significant bifurcation based on product and location. Traditional office can be challenging asset class. It is competitive and capital intensive, but we continue to see strong demand for creative office, which only makes up about 5% of the U.S. office market.
Listing for creative office is nearly back to a pre-pandemic level and it is commanded a 40% plus rate premium. Potential tenant for creative office space are prime-earned focused on product and location, while pricing is secondary.
They want to be in a space that have modern, comfortable, and a cool aesthetic that inspire employees. The creative office space is used as a tool to retain and attract top talent and motivate professionals to want to come back to the office.
We will invest in markets where those dynamic exist. We will look to grow markets where we already in Austin, Los Angeles, and the Bay Area. And we are open to investing in other major market where we see those dynamic.
And as a long standing owner and developer across the U.S., CIM Group has resources, market knowledge, relationship and boots on the ground. With this new real estate dynamic in place, we've been working hard to assemble attractive pipeline of opportunity. We are looking at core assets, value-add and development opportunities.
Our recent acquisition in Echo Park is a great example of our new business focus. Last month CMCT acquired 1910 W. Sunset Boulevard, a 99,000 square feet office property in the Echo Park neighborhood in LA. The property is located in an emerging trendy sub-market in a walkable area that also has dozen of dining and entertainment option.
An eight story tall with a floor to ceiling window, it is the tallest building in Echo Park with views in all directions. We plan to reposition the property into creative office space that will appeal to tenants in fashion and entertainment sector already in the area. We also plan to develop approximately 50 multi-family units on a surface parking lot in the back.
Also in February, we closed on a development site in Jefferson Park sub-market of Los Angeles and we have second site under contract. We intend to develop a total of about 200 units. For certain development and value-add opportunities, we will look to bring co-investor at the asset level.
We did this with the Echo Park acquisition for which we partner with a sovereign wealth fund. We believe those type of co-investment gave CMCT significant advantage as we get the benefit of the value creation as well as diversification, and in some instances, fee income. We expect to be able to share more details on additional deals in the pipeline on future call.
I'll turn the call back to David
Thanks Shaul. As we shipped our business to division Shaul described, we're focused on a few strategic goals this year. First, we will continue to seek to divest non-core assets over time; assets that are not premier multi-family or creative office. We plan to redeploy the proceeds in the type of asset Shaul described.
As you may recall, we sold approximately $1 billion dollars' worth of traditional office assets in 2019, which was a big first step in sharpening our focus toward creative office and premier multi-family.
Second, we're working to create greater financial flexibility and are actively monitoring the debt and preferred financial markets.
Third, we continue to focus on reducing our cost structure. As I mentioned earlier, our manager, CIM Group, agreed to a reduction in our management fee that amounts to approximately $0.21 per share in annual cost savings, which we're starting to see the benefits of in the first quarter of 2022. We also believe there's an opportunity to further reduce G&A costs.
And fourth, we continue to make progress on the value-add assets in our portfolio.
For an update, I will turn it back to Steve.
Thanks David. We continue to make progress on our value-add portfolio. Starting with 4750 Wilshire in Los Angeles, we're continuing to actively market the space for an office user, while simultaneously pursuing entitlements to convert the unleased space to luxury for rent multi-family. The return profile on the conversion has been improving as multi-family market rents increase.
In February, we received design review approval, which was the most significant step required for approval. We anticipate having the option to start the conversion in the second half of 2022 with an anticipated construction timeline of about 18 months.
At 9460 Wilshire Boulevard in Beverly Hills, our lease percentage increase to approximately 73% at year end from 65% at the end of the first quarter of 2021. The remaining vacancy is primarily the retail.
9460 Wilshire located in one of the most prominent locations in LA in the prestigious Golden Triangle of Beverly Hills. The buildings located immediately next to the Four Seasons, Beverly Wilshire and it's just one block from Rodeo Drive.
Given the prime location of the retail and the extended term tenants are seeking, we were patient in backfilling leases that expired over the last two years. We are pleased that we are seeing an uptick in interest in the space and proven rates.
One update on our stabilized portfolio at our Penn Field creative office campus in Austin, we signed an approximately 20,000 square foot lease with Google Fiber in the fourth quarter, taking our lease percentage at Penn Field to about 97%. Earlier this year, Google Fiber exercised an option to take another 5,000 square feet. We expect to start seeing the benefit of these leases in the second quarter of 2022.
With that, I'll turn it over to Nate for an update on the financials.
Thank you, Steve. For quarter core FFO was $0.03 per diluted share compared to a loss of $0.21 in the prior year period. Our total segment net operating income increased to $12.1 million from $7.4 million in the prior year period. The increase was primarily driven by an increase in the lending and hotel segment. Hotel segment NOI increased to $1.8 million from a loss of $393,000. Occupancy improved to 69.9% in the quarter, up from 26.8%, while the ADR improved $153.77 from $120.86.
Lending division segment NOI increased to $3.6 million from $787,000. During 2021, the lending segment benefited from a temporary increase in the maximum SBA guarantee support on loans from 75% to 90% prolonged. This allowed to increase the volume of loans originated leading to an increase in premium income from the sale the guaranteed portion of our SBA 7(a) loans. The guaranteed portion has now reverted back to 75%.
Our office segment NOI declined to $6.6 million from $7 million, primarily due to lower revenues at office properties in Beverly Hills, Brentwood, and Oakland, all due to decreases in occupancy as compared to the prior year. This was partially offset by an increase in revenues at an office property in Austin, due to an increase in occupancy.
However, as Steve and David mentioned, we're seeing leasing activity pick up. We signed approximately 57,000 square feet of leases in the fourth quarter and the first two months of 2022, including a 20,000 square foot lease with Google Fiber at our Austin property.
Our asset management fee and expense reimbursements were $3.4 million in the fourth quarter. Starting in the first quarter, we expect the management fee to decrease over 50% from the fourth quarter due to the new fee structure that went into effect January 1st, 2022.
Turning to our liquidity, we had approximately $60 million drawn on our revolver at the end of the year. We estimate we have approximately $117.6 million of availability as of December 31, 2021. Our revolver matures later this year, but as a reminder, we have a one year extension option which would extend the maturity to October 31st, 2023.
With that, I will now turn the call over to David for some closing remarks.
Thanks Nate. To wrap-up, we're excited about the opportunity ahead of us as we sharpen our focus on creative office and multi-family. We have great assets in highly desirable sub-markets such as Beverly Hills, Culver City, Hollywood, and Austin.
We're encouraged by the pickup in our leasing activity. We have a very attractive growth pipeline and look forward to sharing more details on future calls. For value-add and development assets, we will at times look to co-invest to increase our diversification and supplement returns by generating fee income. And finally, we have significantly reduced our cost structure.
Operator, you may now open the call for questions.
We will now begin the question-and-answer session. [Operator Instructions]
The first question comes from Eric Sloane [ph] with First Foundation. Please go ahead.
Hi guys. Thanks for taking the question. Appreciate you having this call, especially given you have the Board on -- Steve, I appreciate that and David. So thanks for the attendance as well. My question I think is best for Mr. Kuba, but David or Steve, if you want to weigh in, please.
So, we applaud you guys sharper focus on evolving your asset base. We think that's smart. My question is if your existing assets that you have that are outside of your sharpen focus R&D monetizes, you speculate in the press release, or at least open-up the idea that they could be. With the shares trading at such a material discount to the net asset value, isn't -- is the Board considering the shares as a deserving a material portion of the reinvested capital in a tender? So, that's something the Board would consider, especially given the four business trajectory, which looks good given the updates, Steve provided and given kind of the nature of carving where's the Board's head at on capital reinvestment?
Yes, I'm happy to address the question. This is David Thompson and Shaul can jump in if he wants to add any color. But I guess first, Eric, appreciate the comments. appreciate the question.
Now, with respect to a stock buyback with proceeds from the asset sales, I'm going to think it's something that we will always evaluate and is one of the tools that we have in our toolkit. We certainly agreed that the shares are trading well below intrinsic value today.
In fact, it's probably now we were -- had affiliates in the market that were purchasing shares in late 2021. But really, right now, I mean, our focus is on creating more financial flexibility, reinvesting in our assets to improve the cash flow and continue to selectively grow the portfolio. So, that's the primary focus.
That being said, it's something we will always evaluate when we have proceeds and are looking to deploy and again, always going to be one of the tools in the toolkit.
Yes, Eric, this is Shaul Kuba. So, yes, I'm just going to echo what David Thompson said. And obviously, we are looking right now very, very hard on every aspect of the business, including buying back share, whether it's a small amount or large amount, but it's -- everything is on the table for us as we are divesting some of the assets.
Thanks, guys. Yes, I think the -- to us the value-add and the development stuff makes sense. But you hearing -- investing in core real estate, I mean for us, given what you guys are -- been able to do, especially, if something comes up in Sacramento or Oakland, it would be our point of view that we'd like to see some of that returned especially, while the shares are -- have been kicked out of the rustle and at levels that would be so accretive to owners and I love that you guys have been buying and I hope that you do it on the company's behalf as well, because I think you got an exciting future and I'd love to see us own more and with increasing participation, that a buyback or a tender would involve.
And I don't need it to be -- for the smaller assets, but if something were to happen in Oakland or Sacramento, that would be something where we would have our hand up and say, we think would be a great outcome.
Great. Thanks Eric. We appreciate the comments.
The next question comes from Craig Kucera with B. Riley Securities. Please go ahead.
Yes, hey, good morning, guys. Congrats on leasing you achieved this quarter and here in the first quarter as well. Appreciate the color on the Google Fiber leases. But can you give us a sense of when the other tenants that that signed leases are typically going to take economic occupancy, is that also maybe second quarter? Or is that maybe further along in the year?
Hey, Craig, this is Steve, I can take that one. It is primarily the second and third quarter.
Okay, great. And I think about 13% of your office leases are scheduled to expire this year. Can you give us a sense of what your renewal expectations are? And are you aware of any moveouts at this point?
Sure. So, our expectation would be that we would renew at least 50% of those expiring. A good number of them are of the expirations or back-waited in the year. So, it's a little bit early.
And one thing -- one other thing I would point out one, one of the explorations is in our Penn Field property in Austin, and that particular lease is really substantially below market. The market is -- we're generally doing leases north of 50. In place rent on average at that property are around 44, but that particular lease is even below the average.
Okay, great. Kind of changing gears, not too much commentary on the hotel, I think you guys were about 70% occupied here in the fourth quarter. Has that asset come back enough from an operations perspective? And frankly, has the market come back enough for that to potentially be a disposition candidate here in 2022?
So, we are seeing the asset rebound quite a bit. I think probably like most January was a little soft with the spike of Omicron. But after that, we're continuing to see the asset rebound pretty nicely. And generally speaking, the capital markets for hotels is pretty robust right now.
I would add to that even before the property had come back to the levels that is at now and it's achieving now, it was certainly a candidate for disposition.
Got it. And when you think about some of these larger assets that are stabilized and throwing off cash flow, and thinking about recycling capital, are you tilting -- increasingly, it sounds like based on the company's sort of new strategy to development? Or are you thinking from the standpoint of a kind of current cash flow as well as relates to your dividend and your earnings run rate?
Yes, well, I think it's really a combination of both right and we've got a strong stabilized portfolio, we've got a portion of the portfolio that's value-add and really where we want to grow the company is going to be in the premier multi-family, and in a creative office and that's where you're going to see more of the development. So, I think the benefit we have is -- as we're structured today, we can have the benefit of those stabilized assets again.
And as we complete the work on some of the value-add assets to get them in a position to reposition the portfolio, you've got that income while we move toward kind of the new paradigm and again, much more focused on multi-family, the creative office, and the development associated with that.
Got it. And based on your commentary at 4750, I know that's been an asset for a while that you sort of have been working through approvals but also trying to lease it. Is it fair to say that you're pretty much at the point where you're more likely than not to move forward with a conversion? Or are you still kind of holding out the potential for office? Or do you just see more value in ultimately multi-family regardless?
Yes, I think we're still keeping both options open. I think ideally, for us, if we could get at least up in the near-term, while we move through -- some of the specialty stuff in the move term -- in the near-term, as we move through the process of getting the approvals for the multi-family option, that would be ideal.
And again, kind of back to your first point of keeping some cash flow going while we move forward to the -- where we think more value can be created over the long-term would be where we'd like to take it.
Okay, great. And just when we think about -- you've got 1910 W. Sunset, which you entered into the joint venture here this quarter two acquire, can you talk about what you're expecting your total budget to be there? I think the initial investment was about $51 million, you got 44% of that, but kind of what you're expecting there? And how we should think about some of these other land parcels that you purchased or have under contract from a budgeting perspective as we think about 2022 and 2023?
It's Steve, I could take this one. So, with respect to the land parcels, we haven't disclosed the figures yet, but they're fairly small dollars. I mean, the two Western parcels total would be less than $10 million. And I think Shaul also mentioned in his script that we -- these are developments that -- on the development side, we would look to bring on co-investors and seek to also generate a fee off the development.
With respect to W. Sunset, it's on the office redevelopment, it's fairly small dollars as well. We also have not provided that that figure, but you're basically talking about adding some amenity space, potentially redoing the lobby, but that particular asset -- the in place rents are really pretty substantially below what market is.
So, it's not really heavy redevelopment, it's more of a value-add better -- newer lobby, a little bit more amenities, potentially a roof deck, those sorts of things.
Got it. And I want to say at the time of the rights offering and sort of thinking back to this fall, I think we were expecting that you guys might be doing a little bit more on the on the core plus side, maybe buying some assets that are currently cash flowing. Is that still the expectation for this year? Or do you anticipate any capital -- or the vast majority of capital that you have and availability on your line to go into more of these developments possibly structured as joint ventures?
Really both. I mean, we're really looking at both core as well as value-add and development.
Got it. But you don't currently have any acquisitions -- core acquisitions under contract or moving names? Do you have any sense of a pipeline there or is that still TBD?
TBD. Nothing is imminent, but we're continuing to look.
Okay. All right. Thanks. I appreciate your time.
Thanks Craig. Appreciate it.
Just one moment. And we have a question from John Moran with Robotti & Company. Please go ahead.
Yes. Hi, Steve. I had two questions. One is you guys normally would have your NAV published by now in some form or another either in your slide deck or an 8-K filing, is that something you're going to do this year? And when might we see that?
And then for Shaul my question, is this -- is there an asset management business that's going to be embedded in CMCT going forward? Or is this just a feature on a couple of deals? And what are the terms -- can you just sort of, for illustrative purposes, just what are the terms of that -- of those deals look like in terms of participation, fees, et cetera. If you can, please.
I -- go ahead Shaul.
Go ahead Steve. Go ahead, I'll add to it.
Okay. Yes. So, on the NAV question. So, you may recall the reason we had published the NAV was because of the preferred stock offering had some warrants that were priced based off and that pricing was struck off the NAV. We no longer have that component. So, we have not -- we're not planning to publicly update the NAV. We obviously, as David mentioned, believe the stock is trading well below the intrinsic value, but we're not planning to continue to publish the net asset value.
And then with respect to the co-investments, it really varies in terms of the pricing, I'll let Shaul answer the strategic question, but it's generally in the context of 1% of commitments plus a promoter is generally the structure that we see on co-investments.
Yes, I think they the idea of bringing in co-investors to asset and going through our channel of distribution to co-investors, is to create a small little competition among our co-investors and basically pick up the best deal and promote for CMCT, all the fees and the promoter all going to be flowing to CMCT.
So, I think it's going to be asset-by-asset. We're going to negotiate really hard for CMCT, on behalf of CMCT. Multi-family sites, probably going to demand and generate higher promote and higher fee for CMCT than the creative office space.
Now, if we can generate a deal that has -- we can line up a tenant that has a good credit, we're probably going to generate a very nice see and promote for that asset. So, we're just in the beginning stages of creating that opportunity and we'll see, I mean, we need to build up the pipeline, we're looking for very attractive assets, so they can actually want to participate and compete on the co-invest opportunity.
But do those deals look like your one-off joint ventures that you do at CIM? And I guess a follow-up is just is a promote -- what is a promote? In other words, is there something where there's a preferred return and you're splitting the upper side--?
The Promote can go from 20% promote to 50% promote. Again, it's all depend on the asset and asset class. So, I'm not going to have -- we're not going to have a very standard co-invest memo, I think it's going to be more tailored to each asset. So, in some cases that promote might be -- we may be demanding 50% of the promote, in some cases, it might be just 20%.
John, you are thinking about it, right. I mean, generally there's a base fee and then there is -- secondly an incentive fee if you've achieved some predetermined hurdle.
Okay, yes. I was just trying to -- I don’t know if there's anything you say about what the structure of these things look like. So, both of those projects at Echo Park in La Brea not only looks like pretty large projects, they're certainly large based on your current liquidity position. So, I mean, can you say what -- how those might be capitalized? What that would look like? How much debt do you put in the joint ventures? What's the debt look like? And are capital contributions from a partner -- hypothetical partner? Does that make sense? It looks like both those -- each of those projects would be -- I don't know, $100 billion plus projects?
Well, with respect to the La Brea, I mean, we haven't closed on that yet. So, it's a little bit too early. But I mean, generally, the way we are thinking about this is with CMCT having a minority investment in some of these deals, call it 20% or so and then you co-invest the other 80% and you're supplementing your return with fee income.
Sunset as you mentioned, yes, that's -- we talked about a little bit earlier on the call, that's much smaller project.
Okay, thank you.
This concludes our question-and-answer session and the Creative Media & Community Trust Corporation fourth quarter 2021 earnings call. Thank you for attending today's presentation. You may now disconnect.