Hello, and welcome to the Creative Media & Community Trust Q4 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Steve Altebrando, Portfolio Oversight for CMCT. Please go ahead.

Good morning, everyone, and thank you for joining us. My name is Steve Altebrando, the 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. 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. This morning, we announced our fourth quarter 2022 earnings. We're pleased to report that CMCT generated core FFO of $0.11. We continue to see a strong rebound in our hotel asset, and we also saw an improvement in our office NOI from the prior quarter. In addition, our office lease percentage increased in 2022, despite headwinds nationally for the office sector and the high number of lease expirations we had coming into the year. We believe this speaks to the quality of our portfolio and leasing team. We have quality assets in highly desirable markets and submarkets such as Beverly Hills, Culver City, Hollywood, and Austin. Our office assets generally fall into the following categories: Ultra-prime location, like 9460 Wilshire Boulevard and Beverly Hills; best-in-class, like one Kaiser in Oakland or Penfield in Austin; or specialty office that we believe is more immune from work-from-home trends, like the medical office concentration we had in Los Angeles at 11600 and 11620 Wilshire, buildings that are located just minutes from the West L.A. VA Medical Center and UCLA Medical Center. As we continue into 2023, I would like to highlight a few key points about our strategy. First, we are executing on our previously announced plan to grow the multifamily side of our portfolio to achieve more balance between creative office and multifamily. We are seeking newer vintage, highly amenitized, premier multifamily assets in high barrier to entry markets. For example, in the first quarter of this year, we acquired two multifamily assets in the Bay Area and one in Los Angeles, totaling 696 units. Shaul will give more color on these exciting investments. Second, we made progress on our value-add and development pipeline. Most notably, we announced earlier this month that we closed a co-investment and construction loan at our 4750 Wilshire property in Los Angeles. The unleased portion of the building is now being converted to luxury residential apartments. We have a significant pipeline of multifamily development opportunities on land we already own. As we have previously mentioned, for value-add and development assets, we will look to co-invest to increase our diversification and supplement returns by generating fee income when advantageous. Third, we reduced our corporate overhead by 28% in 2022. This was driven by the permanent reduction in our management team. And fourth, we took steps to improve our liquidity and balance sheet. This is extremely important in the current environment where capital is becoming more scarce and expensive and as we consider future opportunities. I would now like to turn the call over to Shaul Kuba.

Thank you, David. I'd like to take the time to highlight some of our exciting reset acquisitions and provide an update on the status of our development pipeline. As we discussed last quarter, we are focused on growing the multifamily side of our portfolio. As David described, we have focused our acquisition targets on new vintage, highly amenitized premier assets in high barrier to entry markets. First, in Echo Park in Los Angeles, we acquired 1902 Park Avenue, a 75-unit apartment building in an off-market transaction. The building is adjacent to 1910 West Sunset, a creative office building we acquired last year from the same seller. We are excited to grow our footprint in Echo Park, a thriving walkable submarket with a dozen of building and entertainment options. Our basis in 1902 Park Avenue is highly attractive at approximately $300,000 per door, which we believe is substantially below replacement cost for a building that was constructed in 2012. Next, in Oakland, we acquired the Channel House, a 333-unit, 8-story apartment building, and 1150 Clay, a 288-unit 16-story apartment building. Both assets are premier Class A buildings that were completed in 2021. The assets are currently in lease-up, and we expect net operating income to significantly increase. At the end of 2022, the Channel House was 76% occupied and 1150 Clay was 77% occupied. Oakland is a submarket that saw significant supply growth from 2018 through 2022. However, going forward, the pipeline for new development is significantly below the average for the top 25 U.S. markets. And given cost inflation, we estimate our basis is significantly below replacement costs. The Channel House is in the heart of Jack London Square, a waterfront community with dining, retail, views of San Francisco, and easy access to both Downtown San Francisco and Oakland. 1150 Clay is an easy walk to Downtown Oakland and is located one block from the BART station, offering direct access to San Francisco. We believe we have a very attractive basis of approximately $415,000 per door for the Channel House and $535 per door for 1150 Clay. Turning to our development pipeline, as we previously mentioned, we did an extensive review of our portfolio last year to evaluate where we can create additional value. Based on the review, we believe we can develop more than 1,500 multifamily units on land we already own, in Austin, Los Angeles, the Bay Area, and Sacramento. We will have the option to start construction on two ground-up opportunities in Los Angeles in 2023. First, in Echo Park, we have been working on plans for a 36-unit multifamily property. This building will be on an adjacent land parcel to the office asset we own at 1910 West Sunset Boulevard and also adjacent to the recently acquired apartment building at 1902 Park Avenue. Next, in Jefferson Park section of Los Angeles, we have made progress on the development of our two multifamily properties there, where we plan to develop about 150 units across both sites. We are working towards receiving the necessary approvals and will have the option to break ground on the first site in 2023 for a total of 40 units. 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. For the balance of our pipeline, we are in the process of obtaining all the necessary approvals as well as completing design work, which we believe will increase the value of those holdings and allow for future growth. With that, I will turn it over to Steve to provide an update on the portfolio.

Thanks, Shaul. I'll provide an update on our recently announced co-investment and our leasing activity. As David mentioned, in the first quarter, we closed on a co-investment with three international institutional investors for the conversion of 4750 Wilshire Boulevard in Los Angeles from an office building to a mix of ground-level office space that is 100% leased today and 68 new luxury multifamily apartments. We also closed on a construction loan in the quarter, fully funding the project. The conversion of the unleased portion of the building into multifamily rentals began in March, and we expect the conversion to take about 18 months. We believe this is a highly attractive project as 4750 Wilshire is located in Hancock Park, an affluent residential submarket in L.A., where housing is supply constrained. The co-investment on 4750 Wilshire will ultimately reduce our ownership to 20%. We expect to benefit from the expected value creation of the asset and we'll also earn a management fee, as well as an opportunity to earn a promote. Turning to leasing. We leased approximately 38,000 square feet in the fourth quarter and another 31,000 square feet through the first two months of 2023. For the full year of 2022, we leased approximately 157,000 square feet and increased our lease percentage to 84.5% from 80.5% a year earlier. We had approximately 40,000 square feet of signed leases that have not yet commenced at year-end. We entered 2022 with nearly 15% of our leases expiring in 2022, and this year, it is a much more manageable 11%. And in total, we estimate we will renew over 70% of these leases. We have only one tenant expiration over the size of 10,000 square feet in 2023. With that, I'll turn it over to Barry.

Thank you, Steve. Moving on to financial highlights. Our segment net operating income was reduced by $400,000 to $11.7 million compared to $12.1 million in the prior year comparable period. By business segment, this change is broken out as a $1.9 million reduction in our Lending segment NOI, partially offset by an increase in our Hotel segment NOI of $1.3 million and around a $300,000 increase in our Office segment NOI. Drilling deeper into our business segments, first, our Office segment NOI increased to $6.9 million from $6.6 million in the prior year comparable period, driven by an increase in the NOI for our same-store office properties, primarily due to a decrease in real estate tax expenses at an office property in Austin, Texas, partially offset by a decrease in rental revenues at an office property in San Francisco, California, due to a decrease in occupancy. Our Office segment did continue to see improved activity and we signed approximately 38,000 square feet of leases during the quarter. Second, our Hotel segment NOI increased to $3.1 million from $1.8 million in the prior year comparable period. This was driven by improved occupancy, which went up to 72% from 70% and we saw improved ADR, which increased to $179 per room from around $154 per room. Third, our Lending division NOI decreased by around $1.9 million to a more normalized $1.8 million in the fourth quarter of 2022. It is important to note that in each of the quarters of 2021, due to COVID-driven additional government support of our SBA 7(a) loan product, we had a significant bump in loan origination and loan sales, which had significant market premiums. This drove NOI up to $3.6 million last year for the three months ended December 31, 2021; that increased government support did indeed end at the end of 2021. For our overhead, the largest is the reduction in asset management fees, which was reduced by around $1.4 million to just over $800,000 from $2.2 million in the prior year comparable period due to the fee waiver that went into effect January 1, 2022. This decrease was partially offset by an increase in corporate-level interest expense by around $650,000, and an increase in general and administrative expenses of around $300,000. Below the Company net income line, we recorded a preferred stock activity. As announced in December 2022, we repurchased the remaining portion of our Series L preferred stock and recognized $7.9 million in preferred stock redemption loss due to the expensing of upfront costs associated with the issuance of those securities. We also had declared or accumulated preferred stock dividends of approximately $1.8 million in the fourth quarter compared to $5 million in the prior year comparable period. This decrease was related to a change in the timing of our declaration of the dividends on our Series A1, A and D preferred stock as compared to the fourth quarter of 2021. Therefore, our net loss attributable to our common stockholders was $8.9 million in the fourth quarter of 2022 compared to a $4.3 million loss in the fourth quarter of 2021. Primarily as a result of the consumable preferred stock redemption costs of $7.9 million, our FFO was reduced to a negative $0.61 per diluted share compared to a positive $0.038 in the prior year comparable period. We are pleased to report that we closed on a recast of our revolving credit facility in December 2022, giving us total borrowing capacity of $206.2 million and extended the facility another three years with the option for two one-year extensions. As of the end of December, we had $56.2 million outstanding on our credit facility with $150 million available for future borrowings. Due to the robust acquisition activities mentioned earlier, as of the date of this call, we had $178 million outstanding on our facilities with approximately $28 million available for future borrowings. Another positive during the fourth quarter was an increase in the issuance of our Series A1 preferred where we generated around $69 million of cash proceeds during the fourth quarter. With that, our hosts can now turn the call over for questions.

Today's first question comes from Gaurav Mehta with E.F. Hutton.

First question I wanted to ask you was on your acquisitions. I was wondering if you could provide some color on the cap rate on these acquisitions? And are these fully stabilized on one of the assets you said, but is there any value-add opportunities in these acquisitions?

If you examine our three multifamily acquisitions, you'll see that at least two of the Oakland properties are currently in the process of leasing up, making the in-place cap rate less significant for now. Our goal for deals of this nature is to achieve around a 6% return on cost in the medium term, increasing to about 7% over a longer duration. At the time of acquisition, both of these buildings were approximately 75% occupied when they opened in 2021. The Echo Park property, on the other hand, is stabilized in terms of occupancy, but the rents are considerably below market levels in a housing-constrained area. Thus, we also aim for a 6% return on cost for this asset over the medium term.

Okay. Second question on the balance sheet. Can you provide some color on the demand for your preferred stock? Should we expect similar demand that you saw last year? Are you seeing any changes?

We generally have been seeing a normalized month, roughly $10 million of inflows. So I think that's the best way to project going forward.

The next question comes from Craig Kucera with B. Riley Securities.

I want to circle back to the several of the acquisitions you did in this first quarter where you assumed debt. Can you give us some color on what the coupons are on those and maybe the terms or anything else in that regard?

Yes, we did assume two mortgages as part of the appeal of the deal because they are below the current market rates. For Channel House, the spread is SOFR plus 336, and for Clay, it is SOFR plus 350. They all have extension options and generally run through about mid-2025, including those options.

Okay. Great. And you had obviously a pretty significant change in the diluted share count related to the warrants. I guess, how should we think about that going forward? Is that going to be kind of included as part of your diluted share count going forward? Or is that really kind of price dependent? Or any color there would be helpful.

Yes, it is actually due to the share price rather than the warrants. The calculation assumes that the preferred shares will be converted into common stocks, which is based on the current stock price. This increases the share count, but it is a peculiar calculation because at these price levels of the common stock, we are not looking to convert any preferred shares into common. That explains the way the calculation is performed.

And that conversion is at your discretion versus the holder?

Correct. It's at our discretion.

Got it. And most of my questions were about sources and uses, which you covered. So that's it for me.

The next question comes from John Moran with Robotti & Co.

I would like to know more about your liquidity position as of March 31. You mentioned having $25 million available on your line, but how much cash do you currently have on your balance sheet? I also want to connect this with your repurchase plan, as it appears the stock is underperforming, having dropped 75% since your 2019 restructuring and 40% since the rights offering. You have the buyback plan in place, and I assume the only reason for not moving forward with that at these prices would be related to liquidity. Could you provide clarification on liquidity as of March 31 and confirm if this is a concern regarding the buyback?

Barry, do you want to touch on the liquidity numbers, or Steve, then we can talk a little bit more about the buyback in general.

I think for the cash available, I think we're roughly around $15 million today plus the availability that you mentioned on the line.

And I think in terms of buying back stock, again, we'll continue to look at and find opportunities where we think it's opportunistic for us to repurchase shares. Again, we want to balance that with the capital needs and opportunities that we think we're going to see in the market. And we've talked about a number of the things on the development side that we're looking at. So we want to balance that as well. And certainly, we have been active in the past. Affiliates were purchasing shares in 2021, and CMCT repurchased stock in the second and third quarters of last year. So it's something we'll continue to take a look at.

The next question comes from Brendan McCarthy with Sidoti.

Yes. I was wondering if you could shed some light on the 1450 Wilshire transition on any government roadblocks or rezoning issues? I guess, do you have you run into any rezoning issues with that regarding office to multifamily?

Yes. So the short answer is no. I mean, we did have to get the property re-entitled from office to multifamily, but generally, what we found for that particular asset was the community was pretty supportive of that because they would, generally speaking, prefer residential over an office user. So then we received the entitlements last year, and then it was just a matter of getting through the permitting. And then fortunately, we were able to start construction in March. So we're excited for that project; it should take about 18 months.

Got it. And one more question about the funding profile. Obviously, preferred is a large portion of the funding profile, but I was wondering if you could also shed some light on what you think the funding profile might look like two to four years down the road just in terms of capital structure?

Yes. Ideally, we would be to a size that's larger and certainly having more multifamily in the portfolio, which is a more stabilized source of cash flow. And then potentially, we could get to a point where we're using unsecured financing, which has some advantages, certainly additional flexibility for the Company. But near term, really, we would expect to have this combination of the preferred mortgages and our revolver that we would be utilizing.

Great. I guess one more quick question just around the mortgage financing aspect. Have you noticed with your banking relationships or other relationships a significant tightening of lending in the recent environment? Or maybe you could comment on the recent lending environment?

Yes, it's definitely become tighter, and we've experienced that firsthand. Interest rates are rising, leading to higher cap rates and borrowing costs. However, we are in a solid position since we renewed our credit facility at the end of 2022, which is secure for three years with the option for two one-year extensions. The only major mortgage we have is on one property, which is a CMBS fixed-rate loan that isn't due until 2026. Overall, while the environment has become more challenging and lending has tightened, we are still in a strong position regarding our portfolio and underlying assets, especially with the recent renewal of our credit facility.

Next question is a follow-up from Gaurav Mehta with E.F. Hutton.

Wanted to follow up on the acquisition again and I just wanted to clarify, the rate on the mortgage debt, did you guys say SOFR plus 336 to 350?

That's correct.

And so that would imply like a mid-7% financing on these acquisitions, right?

That is correct as of today, but as you know, the forward curve implies the rate coming down pretty meaningfully, but yes, that's correct as of today.

Okay. And what's the dollar amount of these acquisitions? I think I saw the dollar amount for two of these acquisitions in your filing and didn't see the dollar for the third one?

Yes. So 1902 Park was about a $22.5 million deal, with CMCT having a 50% interest. So about CMCT equity is half of that. Yes, and Channel House is around $123 million for our portion, and Clay was about $143 million for our portion. Sorry, Jack London Square was about $123 million for our portion.

The next question is also a follow-up from John Moran with Robotti & Co.

Yes, regarding the multifamily deals you completed in the first quarter, are there any immediate opportunities to involve co-investors? Also, has this market environment disrupted your business? Do you think it will be more challenging to secure co-investors?

We are considering co-investment opportunities in certain deals. One reason for our interest in the two Oakland deals is the attractive pricing we observed for high-quality assets, despite the Bay Area facing some challenges. In 2019, we sold a significant portfolio in the Bay Area, primarily consisting of office and parking properties, when the market was flourishing. Given the current cycle, we find it appealing to re-enter the market, but this time focusing on multifamily properties. In response to your question, we do aim to attract co-investors over time. The private markets are currently experiencing a level of uncertainty regarding commercial real estate, which may delay our ability to bring in co-investors, but it remains our goal for those assets in the long run.

Do you think the business plan is viable, particularly when it involves funding a targeted return on cost of 6% or 7% with preferred stock that costs that much or more? I understand you're acquiring below replacement cost, and ideally, a stabilized cap rate or exit price for those properties would be significantly higher, but does it make sense to finance that type of acquisition using this preferred stock program without co-investors? This aspect is somewhat unclear to me.

I mean, we think it certainly makes sense. I mean, when we look at deals like the Oakland assets, our view or our expectation of returns or target returns are in the low teens. So we certainly think, even without co-investors, it's a return that is very attractive for us. And then certainly, if you bring in co-investors, you push those returns materially higher through the management fees and potential promote as well. But even without it, they’re still attractive deals.

At this time there are no more lines in the queue. This concludes our question-and-answer session. The call has now concluded. Thank you for attending today's presentation. You may now disconnect.