Earnings Call Transcript - CMCT Q1 2022

Operator, Operator

Good day and welcome to the Creative Media & Community Trust Corporation First Quarter 2022 Earnings Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Steve Altebrando, Portfolio Oversight. Please go ahead.

Steve Altebrando, Portfolio Oversight

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 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 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 will turn the call over to David.

David Thompson, CEO

Thanks, Steve and thank you for joining our call today. This morning we announced our first quarter 2022 earnings. Our core FFO per share of $0.10 in the first quarter compared to a loss of $0.21 in the prior year period. The significant improvement was primarily driven by improving results at our hotel asset, as well as a significant reduction in our cost structure. Our total segment net operating income increased by approximately 34% from the prior year. This is despite disruption early in the quarter from the Omicron variant that particularly impacted our hotel. Occupancy at that hotel was 57% in January, which increased to 67% in February and then 83% in March. Occupancy remains strong and stable into April at 82% last month. On the cost side, our corporate overhead, which includes asset management fees, G&A, and expense reimbursements, declined by 49% from the prior year period. This was partly driven by the reduction in the management fees that we announced earlier this year. We believe that there is an opportunity to continue to grow our FFO per share. We continue to see an increase in leasing activity and encouraging hotel trends, and we’re making progress on our value-add assets. In addition, we have a very attractive growth pipeline. We increased our dividend by 13% in the first quarter. As we noted when we announced the reduction in our management fee, management has recommended to the board that CMCT over time use substantially all of the cost savings achieved by the lower management fee to reward common stockholders through dividend increases. I’d now like to turn the call over to Shaul Kuba to provide more detail on our strategy and growth opportunities.

Shaul Kuba, Co-Founder

Thanks, David. I’d like to take a few moments to reiterate our strategy. CMCT is primarily focused on two things. First, being a leader in investing and developing creative office assets in vibrant markets catering to fast-growing industries like technology, media, and entertainment. We are committed to the creative office market for two reasons. One, tenants are demanding a new style of office space that is comfortable and modern. They’re seeking bright, open, thoughtfully designed spaces that encourage creativity, flexibility, and collaboration. Two, the creative office market is less competitive than traditional offices and less capital-intensive. If you have a great product in a great market, there is very strong tenant demand. Next, we are focused on investing and developing multifamily in those same markets, which are attracting fast-growing industries and where there is an influx of employees working in those creative office locations. Since professionals in general are spending more time working from home, there is also a greater demand for premium amenities as well as proximity to entertainment, dining, and culture. With this new real estate dynamic in place, we have been working hard to assemble an attractive pipeline that includes core assets, value-add, and development opportunities. For certain development and value-add opportunities, we will look to joint venture of bringing core investors at an asset level. On straight joint ventures, CMCT gets the benefit of the value creation as well as diversification. In instances where we bring a core investor, CMCT may supplement its return through either fee income or promoting some cases. We believe this is a very compelling business model for CMCT, a model where CIM Group distribution and development capability 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 over 100 professionals in our development group with experience in urban planning, construction, design, architecture, engineering, and project management. I want to highlight a few of our development opportunities. On our last call, I described the closing of the development site in Jefferson Park, a submarket of Los Angeles. We have a second site under contract there that is expected to close later this month. We intend to develop a total of about 150 units across both sites. The Jefferson Park area is strategically located in the path of growth, as Los Angeles expands south of the 10 freeway. It is also near several new Culver City developments. In just one and a half miles from the University of Southern California, our land base on this development is very attractive at less than $55,000 per door. We expect to break ground on the first site in 2023. I also described the closing of 1910 West Sunset Boulevard, which was completed in the first quarter. CMCT partnered with an institutional investor to acquire the 99,000 square foot office property in Echo Park, a neighborhood in Los Angeles, an emerging trendy submarket in a walkable area that also has dozens of dining and entertainment options. The in-place rent was $30.28 per square foot at the end of the quarter. We believe there is an opportunity to significantly grow rent as we reposition the property into a creative office space that will appeal to tenants in the fashion and entertainment sectors already in the area. Additionally, we are pursuing entitlement to develop approximately 36 multifamily units on a surface parking lot in the back of the property. We also expect to break ground on this in 2023. In addition, we are exploring opportunities to develop assets that today are fully leased. There is a significant opportunity to create value in our own existing portfolio. In Culver City, our assets on Lindblade and Washington are centrally located in the market where there is a very strong demand for technology and entertainment companies. Neighboring tenants include HBO, Sony, Amazon, Apple, and Microsoft. We are exploring alternatives to redevelop those assets, which currently have about 32,000 square feet of rentable space. We are just starting to market the project as a build-to-suit. In East Austin, Texas, we control a very attractive creative office development located under one of the most desirable corridors in Austin. We believe that corridor is among the most desirable locations in Austin, given its numerous dining options and proximity to the CBD. We will share more details on those projects as we get closer to construction. We also have additional deals in the pipeline that we look forward to discussing once they are closer to fruition. For an update on our stabilized portfolio and value-add opportunities, I’ll turn the call to Steve.

Steve Altebrando, Portfolio Oversight

Thanks, Shaul. We released approximately 21,000 square feet in the first quarter and our stabilized portfolio was 88% leased. As we noted last quarter at our Penn Field creative office campus in Austin, we signed an approximately 20,000 square foot lease with Google Fiber in late 2021. During the second quarter, Google Fiber exercised an option to take another 5,000 square feet, pushing our lease percentage up to 99% today at Penn Field. We expect to start recognizing revenue in the second quarter. We also continue to make progress on our value-add portfolio. At 4750 Wilshire in Los Angeles, we’re planning to convert the unleased portion of the building to luxury for-rent multifamily. The return profile on the conversion has been improving as multifamily market rents increase in LA. We noted on our call a few weeks ago that we received design review approval in February, which was the most significant step required for approval. We are now working on obtaining all necessary permits and expect to be able to start the conversion later this year. We anticipate a construction timeline of about 18 months, and we will provide more information on the budget capitalization and timeline of the conversion as we get closer to starting. At 9460 Wilshire Boulevard in Beverly Hills, our lease percentage increased to approximately 73% at the end of the quarter from 65% a year ago. The remaining vacancy is primarily retail. We continue to actively market this space for lease. The building is located in the prestigious Golden Triangle of Beverly Hills, immediately next to the Four Seasons, Beverly Wilshire, and just one block from Rodeo Drive. It is one of the most prominent retail locations in all of Los Angeles. With that, I’ll turn the call over to Nate.

Nathan DeBacker, CFO

Thank you, Steve. First quarter core FFO was $0.10 per diluted share compared to a loss of $0.21 in the prior year period. Our total segment net operating income increased to $12.2 million from $9.1 million in the prior year period. The increase is primarily driven by an increase in the hotel segment. Hotel segment NOI increased to $2.4 million from a loss of $807,000. Occupancy improved to 69.2% in the quarter, up from 29.8%, while the ADR improved to $173.14 from $116.21. Our lending division segment NOI decreased to $1.7 million from $2.1 million. During 2021, the lending segment benefited from a temporary increase in the maximum SBA guarantee support on loans from 75% to 90% per loan. The guaranteed portion has now reverted back to 75%, which has led to a decrease in premium income due to lower loan origination and sales volume as compared to the first quarter of 2021. Our office segment NOI increased by $200,000 to $8 million. The increase was primarily due to incremental income from our new office property in Echo Park purchased in February 2022 through a joint venture in which we have an approximately 44% ownership interest. Our asset management fee and corporate expense reimbursements were $1.3 million in the first quarter of 2022, compared to $2.9 million in the first quarter of 2021. The decrease was primarily due to a $1.3 million reduction in asset management fees as a result of the fee waiver agreement, effective January 1, 2022, which changed the asset management fee calculation to a quarterly fee of 0.25% of net asset value. Turning to our liquidity, we had $90 million drawn in our revolver at the end of the quarter. We estimate we have approximately $106 million of availability as of March 31, 2022. Our revolver matures later this year, but as a reminder, we have a one-year extension option, which would extend that maturity to October 31, 2023.

David Thompson, CEO

Thanks, Nate. We continue to focus on a few strategic goals that we first described on our call in mid-March. First, we will continue to evaluate divesting non-core assets over time; assets that are not premier or multifamily or creative office. We plan to redeploy the proceeds in the type of creative office and multifamily assets in strong high-growth markets we described earlier in the call. We will be very prudent in this approach and look to sell only at values that we believe are attractive for CMCT shareholders. For instance, while we don’t view our hotel as a core asset, profitability at the asset is rapidly improving. Our number one priority is maximizing value for CMCT, and that’s what will drive the timing. Second, we’re working to create greater financial flexibility. As Nate mentioned, our credit facility matures in late 2023 when accounting for our extension option. We intend to refinance the facility on a long-term basis. Third, we continue to focus on reducing our cost structure. Earlier this year, CIM Group agreed to a reduction in our management fee that amounts to approximately $0.21 per share in annual cost savings, which we started to see the benefits of in the first quarter of 2022. We believe that there is an opportunity to further reduce G&A costs. And fourth, we continue to make progress on our value-add assets and growing our development pipeline. To wrap up, we’re excited about the opportunity ahead of us, as we continue to sharpen our focus on creative office and multifamily. We have great assets in highly desirable submarkets such as Beverly Hills, Culver City, Hollywood, and Austin. We are encouraged by the pickup in leasing activity. We have a very attractive growth pipeline, and we look forward to sharing more details on future calls. For value-added and development assets, we will at times look to co-invest to increase our diversification and supplemental returns but generating fee income. And, finally, we have significantly reduced our cost structure.

Operator, Operator

You may now open the call to questions.

Craig Kucera, Analyst

Yeah. Hey, good morning, everyone. When discussing your office leasing,

David Thompson, CEO

Good morning.

Craig Kucera, Analyst

It looks like there was a bit of a pullback as far as what was executed quarter-to-quarter but I’d be curious to get your thoughts on sort of leasing traffic in the first quarter, maybe any trends in April and give us a sense maybe of your outlook.

Steve Altebrando, Portfolio Oversight

Sure. This is Steve. We're observing consistent improvement in traffic, which seems to be largely influenced by market conditions. For instance, in our Austin properties, nearly all of the spaces are leased, and we are experiencing interest in filling any upcoming vacancies even before they become available. This activity is particularly strong in our creative office campus, which aligns with the type of properties we are focusing on. In contrast, the Bay Area remains somewhat sluggish, with limited available space; we only have one small asset in San Francisco and overall activity has been slower in that region. On the other hand, Los Angeles is showing steady improvement across various locations, including Beverly Hills and our Brentwood properties, where leasing activity and traffic are on the rise.

Craig Kucera, Analyst

Great. And can you comment on any trends you’re seeing in regard to physical occupancy? We’ve been hearing this earnings season of certainly somewhat of a recovery still not to pre-pandemic levels, but any thoughts would be appreciated.

Steve Altebrando, Portfolio Oversight

I find it interesting because it aligns with my previous answer. In Austin, we have seen tenants returning for a while, while the Bay Area has been slower in this regard. However, we have noticed an increase in activity in LA, particularly in our office and medical-focused buildings, which have already seen some return. Overall, while it's hard to track exactly, we are hearing anecdotally that more people are starting to come back to LA.

Craig Kucera, Analyst

Okay, great. David, you kind of touched on this in your closing comments regarding potentially selling some non-core assets. But, you know, with the hotel NOI kind of getting back to where it was prior to the pandemic, are you currently marketing that or is that still TBD?

David Thompson, CEO

Yeah, I mean, as we said, I think we will continue to look to exit non-core assets opportunistically and look to reinvest that in the premier, multifamily, and creative office, and certainly the hotel fits that bucket. I would say, to your point, our number one priority is maximizing the value for the shareholders. And as you noted, performance is improving and we believe that the outlook is very strong for the asset will likely continue to improve throughout the year. So, I mean, it’s a great property, extremely well located, across the street from the newly renovated convention center. It is just a few blocks from the capital. So, it is something that we will continue to monitor. Given the improving performance, it would really take the right price for us to sell that and we’ll continue to monitor that and see where it goes. I think certainly probably more so than we were when we spoke last or three months ago, given the improved performance. Again, we’re probably more inclined to hang on to that in the near term and make sure that we’re achieving the right value for shareholders when we eventually exit.

Craig Kucera, Analyst

Got it. And you did comment, again, this quarter on, maybe being able to reduce G&A a little bit further. Can you elaborate a little bit more on that front?

David Thompson, CEO

Yeah, obviously, the biggest piece is relating to the management fee reduction, and the fee waiver that was put in place in the first quarter. And it’s just something we continue to keep our eye on and look at for every opportunity to reduce costs and to be more efficient. Probably the largest part of our cost structure is allocated payroll and costs and so we’re looking to do things where we can more efficiently really across the board, both internally and where we’re working with external service providers. So really just kind of taking a look at everything and trying to see where we can continue to reduce those costs to help improve margins as the revenue side of the business improves.

Craig Kucera, Analyst

Okay, and just one more for me. I know you’ve pivoted into developing through joint ventures, but are you currently evaluating any acquisitions you would wholly own?

Steve Altebrando, Portfolio Oversight

We are. I think as Shaul mentioned in the script that we have a pretty active pipeline and we would expect to be able to share more details on future calls. But yes, we do have deals that are in the pipeline currently.

Craig Kucera, Analyst

Okay, thanks.

David Thompson, CEO

I think I would just add, the JV structure is still going to continue to be something that’s attractive to us, given our limited capital and allows us to do more in diversification of the portfolio and, again, in certain instances where it will give us the opportunity to generate fee income as well. That’s going to be something we continue to look at.

Operator, Operator

This concludes our question and answer session as well as our conference call for today. Thank you for attending today’s presentation. You may now disconnect.

David Thompson, CEO

Thank you, everyone.