Good day, and welcome to the Creative Media & Community Trust Second Quarter 2023 Earnings Conference Call. 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 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 be making 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. In the second quarter, we made good progress improving occupancy at our recently acquired multifamily assets. These acquisitions are part of our previously defined plan to grow the multifamily side of our portfolio to achieve more balance between creative office and multifamily assets. As a reminder, during the first quarter, we completed the acquisition of two multifamily assets in Oakland and one multifamily property in Los Angeles. These newer vintage, highly amenitized premier multifamily assets in high barrier-to-entry markets added 696 units to our portfolio. At the end of the June quarter, our overall multifamily occupancy improved to 83.9%, up 320 basis points from the prior quarter. Two of the three assets we acquired in the first quarter are still in their initial lease-up phase. We believe there's an opportunity to significantly grow net operating income at these properties as we execute on completing the lease-up. During the quarter, we also made significant progress on our development pipeline, most notably in Austin, where we can now develop multifamily by-right at both our Penn Field and East 7th Street properties. Shaul will provide more detail on this positive update. We also took further steps to improve our liquidity and balance sheet during the quarter. We paid down our credit facility by $30 million in the quarter, primarily with proceeds from our Series A1 Preferred Stock offering. Turning to the second quarter financials. We continue to see a strong rebound in our hotel NOI, which increased by 28% from the prior year period. Our multifamily segment generated just over $0.5 million in NOI in the quarter. As I mentioned earlier, we believe there's an opportunity to significantly grow our multifamily NOI as our assets continue to lease up. Our office NOI declined on a year-over-year basis but increased from the first quarter due to higher occupancy. Our lending NOI decreased year-over-year, partially due to the securitization completed in the first quarter, which increased interest expense attributable to that segment. I would now like to turn the call over to Shaul Kuba.

Thank you, David. I will provide some more color on some recent positive updates on our development pipeline and then give an update on some of our recent acquisitions. Starting in East Austin, at our East 7th Street properties, a multifamily entitlement was approved in June, allowing us to build up to 145 multifamily units on two adjacent properties. We spent several years assembling this project. The development will replace the existing single-story office building. The East 7th Street corridor is among the most desirable locations in Austin, with numerous food and dining options within close proximity, providing direct access to both the central business district and the east side. We also received good news at our Penn Field campus in July. We were successful in changing the zoning so that the entire 16-acre campus is now entitled for multifamily. This gives us the ability to add residential alongside our successful creative office building. We are now in the planning phases of those Austin area developments and will have more information in future calls. As we have previously discussed in those calls, those value creation opportunities are the result of an extensive review of our portfolio last year. Turning to our Los Angeles properties, work is continuing on our partial office to multifamily conversion at 4750 Wilshire Boulevard. We continue to expect the project to start leasing up in the fourth quarter of 2024. This will add another 68 residential units to the portfolio. We believe this is a very attractive project, given the asset's location in Hancock Park, a supply-constrained neighborhood that is adjacent to a multimillion-dollar single-family home. We also now have two ground-up development projects that are fully entitled: our 40-unit multifamily project in Jefferson Park and our 36-unit multifamily development in Echo Park, which is a joint venture between CMCT and an international institutional investor. Currently, we are in the process of obtaining building permits and have the option to start construction this year. Our creative office building at 1910 W. Sunset Blvd is now 94% leased, up from 74% a year ago. Echo Park is a trendy walkable submarket with numerous dining and entertainment options. There is a limited office supply in this submarket, and our eight-story building is the tallest in the area, providing spectacular views across Los Angeles. For the balance of our development pipeline, we continue to work to obtain all the necessary approvals as well as completing the design work, which we believe will increase the value of those holdings and allow for future growth. As we have previously mentioned, for development assets, we will look to bring in a co-investor to increase our diversification and supplement returns by generating fee income when advantageous, just like we have done at 4750 Wilshire Boulevard. Now for the update on our recent multifamily acquisition. First, in Echo Park in Los Angeles, 1902 Park Avenue, a 75-unit apartment building was acquired in the first quarter this year in an off-market transaction. Our basis in 1902 Park Avenue is highly attractive at approximately $300,000 per door. We have made several small cosmetic changes, including upgrading landscaping, lighting, and common amenities to the building, which require limited CapEx. We believe this will have an outsized impact on the desirability of the building for residents and provide a significant opportunity to increase rent to market rate over time as new tenants move in. Next, an update on the two Oakland properties that David discussed. As you may recall, we completed those acquisitions last quarter: the Channel House, a 333-unit apartment building, and 1150 Clay, a 288-unit apartment building. Both assets are premier Class A buildings that were completed in 2021. We are making some progress improving occupancy at both assets. Oakland is a market that saw significant supply growth from 2018 through 2022. Our efforts are continuing to generate results, though we also expect it to take some time for the new supply to be fully absorbed. It is also important to note that the pipeline for new development in Oakland is well below the average for the top 25 U.S. markets. Therefore, local rents would need to increase dramatically before significant multifamily construction can start again. With that, I will turn it over to Steve to provide a further update on the portfolio.

Thanks, Shaul. I'll provide a quick update on our leasing activity. Starting with the multifamily portfolio, on a consolidated basis at quarter end, our multifamily was 83.9% occupied compared to 80.7% at the end of the first quarter. The increase was driven by higher occupancy in our recently acquired Oakland assets. Occupancy at Channel House increased to 81.4% at the end of the quarter, up 1.5 percentage points compared to the end of the first quarter. And occupancy at 1150 Clay also increased to 86.5% at the end of the quarter, up 6.5 percentage points from the end of the first quarter. At 1902 Park in Los Angeles, our in-place rents are well below market, and we have been executing new leases for new tenants at a substantially higher rate. Turning to office, we leased approximately 29,000 square feet in the second quarter. Our occupancy rate at the end of the second quarter was 83%, up 170 basis points from the prior quarter, while our lease percentage was 84.5%, up 10 basis points from the prior quarter. On a year-to-date basis, our cash leasing spreads are up about 20 basis points, while our GAAP leasing spreads are up about 3.3%. With that, I'll turn it to Barry.

Thank you, Steve. Moving on to financial highlights. Our segment NOI decreased to $12 million for the second quarter of 2023 compared to $12.8 million in the prior year comparable period. This decrease in NOI was driven by a $1.2 million decrease in our lending segment NOI as well as a $1.1 million decrease in our office segment NOI. This was partly offset by a $900,000 increase in our hotel segment, as well as a $500,000 contribution from our newly-acquired multifamily segment. Our lending segment NOI was impacted by the leverage achieved from the securitization in Q1. Interest relating to the securitization is directly expensed at the lending segment level, which in turn freed up capital to allow us to further our strategic business model, including the multifamily acquisitions. Our hotel segment NOI continued its positive quarter-over-quarter trend and increased to $4.1 million from $3.2 million in the prior year. This was driven by both improved occupancy for the quarter, which increased to 81% from 78% and improved average daily rate for the quarter, which increased to $201 per room from $176 per room. As mentioned, we recorded a $0.5 million NOI from the new multifamily segment. We began reporting multifamily segment NOI in the first quarter of 2023 after we acquired two multifamily properties in Oakland in late January and late March, as well as invested in another multifamily property in Los Angeles through a 50-50 joint venture investment. Finally, our lending division NOI decreased to $524,000 from $1.7 million in the prior year comparable period. This was primarily due to the increased interest expense related to the issuance of the new SBA 7(a) loan-backed notes in connection with the securitization that closed in March 2023, as well as an increase in allocated payroll costs. For our non-segment expenses, we had two significant events. The largest was an increase of $15.5 million in depreciation and amortization expense. This noncash expense increase was driven by an increase in acquired in-place lease intangible asset amortization at our new multifamily properties located in Oakland. The remaining asset balance of around $9.4 million for those assets will be absorbed during the remainder of 2023. The second item is an increase in non-segment allocated interest expense, which increased by around $5.1 million, primarily due to market interest rate rises and the assumption of two mortgages, as well as borrowing on a revolver in connection with the acquisition of our two multifamily properties in Oakland during the first quarter of 2023. Our funds from operations were negative $0.19 per diluted share compared to positive $0.11 in the prior year comparable period. And our core funds from operations were negative $0.17 per diluted share compared to a positive $0.11 per share in the prior year period. These reductions were primarily driven by the increase in interest expense, largely due to our multifamily acquisitions, two of which are still in their initial lease-up. As David mentioned, we believe there is an opportunity to significantly grow our multifamily NOI. Finally, our liquidity was bolstered by raising an additional $27.4 million in net proceeds from the sale of our Series A1 Preferred Stock during the quarter. At June 30, we had approximately $58 million of additional borrowing capacity. With that, our host can now turn the call over for questions.

The first question today comes from Brendan McCarthy with Sidoti.

I'm wondering if you can provide an update on the Kaiser Permanente lease expiration or upcoming lease expiration. Any details that you're able to provide?

Kaiser's lease is set to continue until 2025, with a portion extending through 2027. They have publicly shared their intention to remain in Oakland. We are confident in our asset, which we consider the premier building in Oakland. We are optimistic about the prospects for 1 Kaiser and the building, but there isn't much additional information to share at this time.

Okay, that's understandable. Lastly, while reviewing the slide deck, I noticed the mention of a target capital structure. Could you provide more details about the timeline for reaching that target capital structure? I understand you are aiming for 40% debt, 30% preferred equity, and the remainder in common equity. Can you share what the expectations are for eventually achieving that target?

Yes, that target is something we aim for over time. Currently, we are slightly below that target due to the acquisitions we completed in the first quarter. There isn't a specific timeline for when we expect to align with it again. We anticipate seeing improvements in the fair value of our assets, which could contribute positively. While there isn't a defined period, this guideline is something we hope to adhere to. We believed these acquisitions were very beneficial, so we moved forward with them even knowing we would temporarily fall short of our target. However, we expect to realign with those targets over the next couple of years.

Got it. That's helpful. And one more. Is it still reasonable to expect roughly $30 million of A1 Preferred issuance per quarter?

Yes. That's about where we've been tracking, so I think that's a reasonable go-forward assumption.

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

I wanted to circle back to the intangible write-off this quarter. So I know when you acquired the apartment buildings, you did take a pretty substantial intangible as a component of that acquisition. And it looks like you wrote off quite a bit of it this quarter. Can you kind of walk us through what was kind of the accounting there and sort of what's going on there?

Yes, this is David. I can take that. Craig, thanks for your call. We appreciate it and the question. This really touches on some accounting details. We use an independent firm for purchase price allocation when acquiring an asset. What’s unusual in multifamily is that they assign a value to the in-place leases. This doesn’t refer to above-market or below-market but rather to the existence of the leases themselves. The valuation is typically based on the revenue generated by those leases, not the net income. Consequently, a significant amount of value is attributed to this intangible asset, which, in the case of multifamily properties, usually has a lease term of about one year. On average, these leases last around six months, and thus, they get written off fairly quickly. The silver lining is that this is a non-cash item and will eventually clear from our balance sheet and P&L. By the end of the third quarter, it will represent a relatively small amount, less than what we expect for the fourth quarter. As mentioned in our release and within our filed documents, around $9.4 million of that intangible related to our Oakland assets will be cleared primarily in the third quarter, with a bit extending into the fourth quarter. It’s really just an accounting peculiarity.

Right. So just so I understand, so when you acquired those assets, they were carried on your book sort of between what they determined fair market value to be as sort of your investment in it, and then sort of the excess that was paid was carried as an intangible that you're writing off now?

It's a bit more specific than that. They are actually obligated to evaluate those intangible assets and assign value to them. This is just part of their process, similar to how they would assess the fixed assets themselves. They particularly examine the existing leases and determine that they need to attribute some value to them. While you could argue that it's in addition to the fixed assets, they actually consider it part of what you are paying for from an accounting standpoint.

Right. I guess I just haven't seen them written off so quickly on the acquisition of multifamily in the past, but appreciate the color.

Yes. And again, I think it's an oddity you'll have in multifamily. If you had an office and you had a 10-year lease, then you would see it written off on a much longer period of time. But given the short-term nature of the leases in multifamily, it does hit you a lot more quickly.

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.