Creative Media & Community Trust Corporation (NASDAQ:CMCT) Q3 2022 Earnings Conference Call November 15, 2022 12:00 PM ET
Stephen Altebrando - VP, Equity Capital Markets
David Thompson - CEO
Shaul Kuba - Director
Barry Berlin - CFO
Conference Call Participants
Gaurav Mehta - EF Hutton
Eric Speron - First Foundation Advisors
Hello, and welcome to the Creative Media & Community Trust Third Quarter 2022 Earnings Conference Call. [Operator Instructions].
Good morning, everyone, and thank you for joining us. My name is Steve Altebrando, the portfolio oversight for CMCT. Also on today is David Thompson, our Chief Executive Officer; Shaul Kuba, CIM Co-Founder and CMCT Board member; 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 and latest investor presentation. Our earnings release also 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 a more detailed description of potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website.
With that, I'll turn the call over to David Thompson.
Thanks, Steve, and thank you, everyone, for joining our call today. Yesterday, we announced our third quarter 2022 earnings. Some highlights from the quarter: First, we had continued strong leasing activity, which is positioning us well for next year; second, we made significant progress on our value-add and development pipeline; third, we took steps to improve our liquidity and balance sheet, and this is extremely important in the current rising interest rate environment where we expect future acquisition opportunities; and fourth, we accretively deployed capital through both common and preferred share repurchases.
Our core FFO per share was negative $0.07 in the third quarter. While we completed a significant amount of new leases this year, and have a strong lease pipeline, we will not see the full benefit until next year. Most notably, this includes our lease signed in August with the Rolls-Royce dealership at our Beverly Hills property, which will start generating revenue in 2023. Trends at our One Hotel continued to improve on a year-over-year basis, and the outlook for 2023 looks strong based on the pickup in group bookings. The third quarter is typically a seasonally slower quarter for the hotel. And in our lending business, we had a slowdown in originations in the quarter due to, among other things, the reduced volume of commercial real estate transactions market-wide.
We also had some onetime costs in our JV property in Echo Park, in addition to some nonrecurring items in our G&A. Finally, the amount of our preferred dividend payment is increasing as a result of the significant amount of preferred stock we raised in the third quarter. Our third quarter FFO picks up dividends we declared in the fourth quarter, even though we did not have the benefit of the capital for the full quarter, and Barry will provide some more detail on these items.
As we've discussed on previous calls, we are committed to balancing our portfolio between both creative office and multifamily assets. Right now, we're focused on growing the multifamily side of our portfolio in order to achieve that balance. We have a significant pipeline of multifamily development opportunities on land but they are already owned. As we have previously mentioned, for value-add and development assets, we'll look to co-invest to increase our diversification and supplement returns by generating fee income or advantageous. We have a lot of work to do in front of us, but we believe we have an opportunity to create significant value for our shareholders by using our resources and access to capital.
I would now like to turn the call over to Shaul Kuba.
Thank you. I wanted to highlight 2 significant updates in the quarter. First, we leased approximately 59,000 square feet in the third quarter. This was an increase from about 39,000 square feet in the second quarter. Our most notable lease being at our Beverly Hills building, 9460 Wilshire Boulevard. We signed a 20-year lease with Rolls-Royce dealership for approximately 18,000 square feet of the remaining retail. We expect to start to recognize revenue on this lease in 2023.
Second, we did an extensive review of the portfolio to evaluate where we can create additional value. Based on this review, we believe we can develop over 1,500 multifamily units based on land we already own. This is an exciting update for CMCT, and each shareholder.
In Austin, we are evaluating adding 1 or more multifamily building to our 16-acre Penn Field Creative office campus. In June, the City Council approved zoning changes that allow us to add more density on this property, which is located just south of the CBD. We are excited about this potential opportunity at this tremendous campus, which was transformative to this section of Austin. In East Austin, we are working towards multifamily development of 2 adjacent property at 1007 and 1021 East Seventh Street. We submitted our entitlement application in this third quarter. Those properties are very well located with numerous dining and entertainment option within walking distance and within close proximity to Austin CBD, Central Business District.
We are also working on predevelopment work for potential multifamily development in Oakland and Sacramento. We recently submitted a request to entitle our Oakland development asset for multifamily as it is currently entitled for office. We believe entitling this asset will create incremental value for the land, near term. And in Sacramento, we are evaluating build time multifamily over a large parking garage we already own. Those exciting opportunity are result of the extensive review of this portfolio.
Now for a quick update on some of the value-add and development opportunity we have been working on. At 4750 Wilshire in Los Angeles, we expect to start construction on the conversion of the unleased portion of the building into luxury multifamily rental in early 2023. We anticipate a construction timeline of about 18 months. The total cost of the conversion is expected to be approximately $33 million. We are in active discussion with several institutional coinvestors, and seek to close transaction over the next several months. Since we are expecting to bring co-investor and take a construction loan, we expect CMCT to generate meaningful proceeds from this transaction. CMCT will also earn a management fee on committed equity, and have an opportunity to earn a promote.
As we discussed on our last call, we expect to break ground in 2023 on our 36-unit multifamily property in Echo Park, neighborhood of Los Angeles, at 1910 West Sunset Boulevard, which we acquired with a joint venture partner earlier this year. The asset is located in the middle of a trendy submarket, and part of workable area that also has a dozen of dining and entertainment options. In the Jefferson Park section of Los Angeles, we have made progress on the development of our 2 multifamily property there, where we plan to develop about 150 units across both sides. We are working towards receiving the necessary approval and still expect to break ground on the first site in 2023 and the second site in 2024. We are excited about those developments as they are strategically located in the path of growth in close proximity to Culver City, and just 1.5 miles from the University of Southern California.
Right now, we are working hard to go vertical on those projects by getting all the necessary approval as well as completing the design work. Obviously, we will continue to monitor the construction cost as we move forward. Given increased borrowing costs, the lower availability of credit and widening cap rate, we expect that overall development will slow. And as a result, development costs may potentially come down.
With that, I will turn the call over to Steve for more detail on the portfolio and recent capital market activity.
Thanks, Shaul. Starting off with the portfolio, our stabilized portfolio was 86.5% leased at the end of the third quarter. As Shaul mentioned, we leased approximately 59,000 square feet in the third quarter and at least about 120,000 square feet year-to-date. And as David touched on, we will begin to generate revenue on several of these leases and the leases in our pipeline starting next year. Our cash lease spreads for all recurring leases decreased slightly to negative 1.2% through the first 9 months of 2022. This lease spread excludes our recent retail lease at our Beverly Hills property since the space was vacant for more than 12 months.
We continue to have a strong pipeline of leasing activity. We have about 50,000 square feet of leases that are either signed in Q4 in LOI or legal, or represent in-place tenants that we expect to renew. We entered this year with nearly 15% of our leases expiring in 2022, which was about 151,000 square feet of expirations. In total, our leases executed in LOI or legal or expected to renew now exceed this amount. Our lease expirations will decline to just 11.9% in 2023, at 6.6% in 2024.
Turning to our capital markets activity. We announced a $10 million common share repurchase program in the second quarter of 2022. We have repurchased $4.7 million of common stock, including $4.4 million in the third quarter at an average price of $7.10 per share. Also, in the third quarter, we repurchased approximately $67 million of Series L preferred stock at a 3.4% discount stated value. We believe these 2 transactions are highly accretive for our common shareholders.
With that, I'll turn it over to Barry.
Thanks, Steve. First, I'd like to take a moment to thank Nate DeBacker for guiding us the past few years as our CFO and for assisting me through the transition to be your CFO. Nate and I worked closely together, and I will continue to work closely with Nate upon CMCT.
Moving on to financial highlights. Our high-level third quarter results are as follows. During the third quarter, our core FFO reduced to a negative $0.07 per diluted share compared to a positive $0.08 in the prior year comparable period. This change was primarily driven by a reduction in segment NOI, and the distributions for our preferred stock issuances. Our segment operations NOI was reduced to $10.1 million compared to $13.3 million in the prior year comparable period. This quarter-over-quarter change is broken out as a $3.7 million reduction in our lending segment NOI, $1 million reduction in our office segment NOI, being partially offset by the positive trend in our hotel segment NOI by $1.5 million.
Drilling deeper into our business segments. First, our lending division NOI decreased by around $3.7 million to a more normalized $1.2 million in Q3 2022. It's important to note that in 2021, we had a significant bump in loan originations and loan sales which had significant market premiums. This was due to COVID-driven additional government support of our SBA 7(a) loan product that drove NOI up to $4.9 million last year for the 3 months ended September 30, 2021. That increased government support did end in 2021.
Second, our office segment NOI decreased to $6.5 million from $7.5 million in the prior year period. While the NOI in our same-store office properties remain relatively constant at $6.7 million compared to $6.8 million in the prior year quarterly period, the NOI attributable to our non-same-store properties had a reduction of around $900,000. Also of note is that the office segment reduction included a loss from our JV investment acquired in February this year of around $200,000 for the third quarter of 2022. The JV loss did include a onetime upfront cost related to the JV's mortgage debt origination. Our office segment to continue to see improved activity, and we signed approximately 59,000 square feet of leases during the quarter.
Third, our hotel segment NOI increased to $2.4 million from around $900,000 in the prior year comparable period. This was driven by improved occupancy, which went up to 74% from 67%, and we saw improved ADR, which increased to around $164 from $137. For our overhead, the largest impact is the reduction in asset management fees, which was reduced to below $900,000 from $2.3 million in the prior year comparable period due to the fee waiver that went into effect January 1, 2022. As a result, our net loss income for the company before preferred equity activity was a loss of $45,000 in Q3 of '22 versus profit of $2.570 million in Q3 of 2021.
Below the company net loss income line, we record our preferred stock activity. In September 2022, we repurchased a portion of our L shares and had $4.8 million in deemed dividends impacting our bottom line due to the expensing of upfront costs from when we issued those securities. We also had declared or accumulated preferred stock dividends of approximately $6.6 million in the quarter compared to $4.7 million in the prior year comparable period. This increase is relating to the new issuances of Series A and Series A1 preferred securities. This includes the impact of forward dividends declared for the fourth quarter of around $1.3 million relating to our preferred issuance during the third quarter of 2022.
As David noted, our preferred cash dividends paid were approximately $5.3 million, were also about $1.3 billion less than what runs through our net income available for our common shareholders.
Turning to our liquidity. We had approximately $85 million strong on our revolver at the end of the quarter with an estimated $120 million of availability as of September 30. Our credit facility has extended matures in late 2023. We expect to close on a recast of the facility shortly, which should extend the facility another 3 years, plus we'll have the option for 2 1-year extension options. Finally, we generated around $57 million of cash proceeds from preferred stock issued in the third quarter, which is the largest quarterly amount since the Series A prefers have been offered, and momentum continuing into the fourth quarter with proceeds of $38 million in October, giving us additional financial flexibility.
With that, I will now turn the call over to David for some closing remarks.
Thanks, Barry. In closing, I'd like to reiterate our key strategic goals. First, continue to make tangible progress on our stabilized and value-add assets as well as our development pipeline. We believe our asset-light approach will enable us to generate strong returns on invested capital. Second, we are focused on creating greater financial flexibility. As Barry mentioned, we are working to recast our credit facility, which matures in late 2023, and expect to close a new facility in the fourth quarter.
We raised approximately $46.5 million in net proceeds from our Series A1 preferred stock so far in the fourth quarter, further enhancing our flexibility. This allows us to take advantage of potential acquisition opportunities or opportunities in the capital markets like we have seen of late.
Third, we're working to keep our cost structure in check, including the continued benefits of our reduced management fee announced earlier this year. That reduction amounts to approximately $0.21 per share in annual cost savings. We are also focused on keeping our recurring G&A expenses down.
Fourth, we're shifting the balance of the portfolio more towards multifamily and creative office over time. Taken together, we believe these priorities combined into a compelling business model for CMCT, which will provide strong returns on capital and a model where CIM Group's distribution and development capabilities provide a significant competitive advantage. CIM has more than 180 global institutional investors. It has developed over $11 billion of assets across the United States, and has more than 100 professionals in our development group with expertise in urban planning, construction, design, architecture, engineering and project management.
To wrap up, we have great assets in highly desirable submarkets such as Beverly Hills, Culver City, Hollywood and Austin. We are encouraged by the pickup in our leasing activity and declines in expirations as we head into 2023 and 2024.
We have a very attractive growth pipeline where we are making tangible progress in development and construction activities. We look forward to sharing more updates on future calls. For value-add and development assets, we will see co-investors 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 to questions.
[Operator Instructions]. Today's first question comes from Gaurav Mehta with EF Hunton.
I wanted to ask you about your development pipeline and your comments on the capital is expanding for multifamily. Can you maybe help us understand how you're viewing acquisition opportunities given that CapEx are expanding? And how does that compare to the yields that you're getting on your development pipeline?
Yes, sure. This is Steve. So I think with respect to the development pipeline and the yields that we're looking to build to -- given the move that we've seen in cap rates, clearly, that hurdle has increased, but you're also seeing in the market continued rent growth and our expectations that development cost could come down as well.
So generally speaking, for multifamily, and it depends a little bit on the market but we're generally trying to get to about a 6% return on cost with -- and given the increase in market cap rates, that's still a wide enough spread that you're still creating pretty meaningful value through development. But at the same time, we're continuing to also look for not only in development but given the moving cap rates, we're looking for stabilized and multifamily -- I'm sorry, stabilized and some value-add multifamily deals as well, whereas a year ago, those deals were just very difficult to find, given where cap rates are. And now we think we're going to see a little bit more opportunities on the more stabilized side.
Okay. On your preferred stock capital raising, can you maybe talk about the uses of the cash that you're generating in 4Q? I think as earnings release, you guys said $46 million of preferred stock raise in 4Q. How do you plan to use that? You plan to carry that cash on the balance sheet or deploy that towards acquisitions?
Yes, I can talk about that a little bit. So I mean the -- we have some amounts outstanding under our revolving credit facility. So we can immediately use the cash to pay that down. As you know, we've got our Series L preferred which can be redeemed late in the fourth quarter. That's about roughly $80 million of use to the extent we decided to use cash for that. As you know, we have the option to redeem that in shares given where the share is trading today that would be highly unlikely. So we will -- again, we'll have a use for some of that cash to help us, again, pay down the revolver and then also to the extent we decided to use cash for the redemption of the Series L preferred later this quarter.
And again, as we spoke to, there's a number of other opportunities where we think we can continue to generate cash and strengthen our liquidity. We expect the preferred volume is going to continue to be strong as it has been far in the fourth quarter. Again, we're renegotiating our facility, expect to have the new facility in place this quarter. The co-invest that Shaul spoke about. And again, I think all that helps position us for taking advantage of some of the growth that we've got built into our pipeline and again, looking at other opportunities.
The next question comes from Eric Speron with First Foundation.
Guys, can you hear manufacturer?
Great. So my question is on multifamily, specifically Oakland. There's the things that you filed, they're pretty exciting, 46 storey, 600 units. So it's a huge chunk of your multifamily opportunity, something like 40%. So the question is, can you just give us a little bit more color? I see it's near some opportunity zones. I don't know if it's in one. I don't -- maybe talk about what amount of capital is the right amount of capital for you guys to contribute. And what would you target bringing it from outside, but maybe just address Oakland multifamily.
Yes. Let me answer. This is Shaul. The land that we own in Oakland is prime for entitlement for multifamily. The office market in Oakland is pretty, I would say, at the moment, saturated with vacancy. So we decided to take advantage of the existing entitlement that we have converting them to multifamily. We're probably going to be done with that process in about 18 months to 24 months. And at that point, we're going to evaluate how much co-invest to raise for that project. We own the land free and clear, so we don't have any debt. Our [indiscernible] is very low, and the intent is to raise co-invest for it when we're ready to present it.
And just quick clarification. Is it in the opportunity zone there? Or is it a fallout side? It's hard to see on the maps.
I don't think it's an opportunity zone. But I don't know for a fact. Maybe, Steve, you know? I don't know.
Yes. Some is [indiscernible] but I can see the cross.
Yes, I don't believe it's in, but either way, would not have much of a benefit for us.
This concludes our question-and-answer session as well as our conference. Thank you for attending today's presentation. You may now disconnect.