CaliberCos Inc. Q1 FY2024 Earnings Call

Thank you for waiting. My name is Jay, and I will be your conference operator today. I would like to welcome everyone to the Caliber First Quarter 2024 Earnings Call. All lines are muted to avoid background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the conference over to Lisa Fortuna of Investor Relations. You may begin.

Good afternoon, everyone. Welcome to Caliber's first quarter 2024 financial results conference call. With me today are Chris Loeffler, Chief Executive Officer and Co-Founder; and Jade Leung, Chief Financial Officer of Caliber. Please note that we have a quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on the Investor Relations section of our website. After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect, and anticipate refer to our best estimates as of this call, and there can be no assurances that these will actually take place. Therefore, our actual figures could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports filed with the Securities and Exchange Commission. It is now my pleasure to turn the call over to Chris. Please go ahead.

Thank you, Lisa, and thank you to everyone joining on the call today. Since we just reported our fourth quarter and full year results from 2023 a few weeks ago, I thought I would keep my prepared remarks as brief as possible, providing an update on fundraising and transaction activity, our first quarter 2024 performance, the deconsolidation of six of our hotel assets, as well as our cost reduction initiatives that we spoke about in mid-April. The goal, of course, being to bring Caliber to profitability as soon as possible. Let me begin with some observations about the current fundraising environment. As I mentioned in our last call, we are stepping up our activities in fundraising, and despite the ongoing muted conditions in the market, we are focusing on things within our control to enhance our fundraising capabilities and move into new target areas. These include building products that are attractive to registered investment advisers and institutions, supporting our wholesale platform to raise capital through registered investment advisers and broker-dealers, engaging with family office investors to grow our family office direct channel, issuing institutional equity offerings for the Caliber Hospitality Trust or CHT in both the equity and debt markets, directly engaging with new high net worth individuals and ultra-high net worth individuals, and transforming our digital marketing platform with new talent and strategies to reduce marketing costs while increasing lead generation. We're confident that a more diversified fundraising infrastructure will support our long-term goals. Additionally, we are now gaining improved visibility to increasing fundraising activity and pipeline levels. For example, we have signed 26 selling agreements with regional broker-dealers and registered investment advisers for investments in company-sponsored products. In total, these partners have approximately 380 representatives, representing $3.4 billion of accessible AUM. It generally takes three to six months to build momentum in this channel once the selling agreement has been executed, and we are now starting to see the initial dollars coming in. We expect progress in the channel to accelerate this year as it has driven much of the recent growth of our fundraising pipeline. Additionally, in our family office direct channel, we recently doubled the committed capital to CHT via a $10 million equity commitment from qualified investors. This capital continues the momentum for CHT, which we expect will allow us to close our pipeline of contributed assets while recovering some of the capital that Caliber had invested in the CHT to launch the investment strategy in 2023. We have also made meaningful progress in the past few months on our assets. On April 29, 2024, we announced the sale of Areas B and C of the Ridge development in Colorado, each approximately 20-acre parcels of land in Johnstown for an aggregate of about $12.3 million. Earlier this week, we announced the sale of approximately 50 acres of land in Johnstown for another $7.7 million, which was purchased in 2021 by a Caliber-sponsored single-asset syndication, the Encore Funko LLC. This latest transaction was the fourth asset sale in Northern Colorado by Caliber-sponsored entities since the end of 2023, bringing the total acreage sold to approximately 170 acres for total proceeds of nearly $28 million. Given the current industry conditions and low transaction volume, these profitable transactions serve as further proof that Caliber is investing in the right markets, allowing us to help investors make money across all market cycles. Additionally, the impact of some of these sales includes potential performance fees for Caliber as the sales are captured within the underlying partnerships that Caliber manages. In some cases, the performance fees will not be realized by Caliber until the partnerships complete a full sale of all the underlying land. The funding of Phase 1 of our SP10 project, which is the conversion of an existing Phoenix-based hotel to apartments, initiates the turnaround of an asset that was negatively affected by the COVID pandemic. By capitalizing a new construction loan, Caliber paid off an existing $11 million loan that was past its original maturity and combined with new investor equity has fully capitalized the conversion of the hotel to apartments. This demonstrates our unwavering dedication to finding a path forward for each of our assets and to protect our investors' capital to the best of our ability. I look forward to seeing this plan fully executed over the coming three to five years, including the SP 10 project and Caliber's track record as a successful turnaround story. Turning to the deconsolidation, Caliber has been working diligently with our internal team and our auditors at Deloitte to evaluate our financial information. At the end of 2023, we changed our reporting segments to reflect a single segment presentation, which we believe matches our current view of the business and simplifies our financial reporting. As of March 7, 2024, after completing the seventh hotel contribution to CHT, we concluded that Caliber is no longer required to consolidate six hotels we had consolidated in 2023. It's important to note that this change excludes hotel results from our Q1 2024 financial information, which was a primary driver of the year-over-year decline in our revenues. For those of you who may not enjoy technical accounting, I'll share that the consolidation of an asset is typically done when an asset management business like Caliber controls an asset, has a sizable economic interest in that asset and may provide some form of loan guarantees. The effect of that consolidation is that we bring the financial results of the asset itself into Caliber's financial results, including the debt on that asset's balance sheet, and we often eliminate other financial results, such as the fees that we earn managing that asset from the presentation of Caliber's results. This influences our income statement and our balance sheet, and it may make it appear, for example, that Caliber has debt that it is not actually the borrower for. I want to stress the importance of this topic because it's a change in the current period that creates a lack of comparability to the prior period. Going forward, this change will continue to affect period-over-period comparability, and Caliber will seek to provide investors with an understanding of what our prior history would look like on a comparison basis, excluding the deconsolidated assets. Importantly, we expect this deconsolidation to help investors better understand our balance sheet. As an example, the change was a primary contributor to the $98 million reduction of our assets from $299 million in Q1 2023 to $201 million in Q1 2024, as well as the reduction in our liabilities by $118 million from $233 million in Q1 2023 to $115 million in Q1 2024. Caliber will continue to take a critical eye to the structure of each of its investments in funds and will continue to evaluate opportunities to enhance transparency in our financial presentation. Turning to our Q1 2024 results. I'm sure you all had a moment to read our earnings release, and Jade will go through the quarter in detail. Having said that, I wanted to highlight a few notable things. First, Caliber continues to see positive year-over-year improvement in asset management revenues, which is a key focus of the management team and an important source of stable recurring revenue. Second, our platform results and net loss attributable to Caliber primarily reflect the increase in our year-over-year expenses that we've discussed, and the strong performance allocations of $2.5 million that we earned in Q1 2023, which did not repeat in Q1 2024. As we mentioned in our year-end call three weeks ago, we initiated a review of our cost structure to evaluate potential reductions that would better reflect current market dynamics. The entire Caliber management team is focused on a single objective: consistent profitable growth. We intend to achieve profitability as soon as possible. With this objective in mind, we have identified expense savings of approximately $6 million on an annualized basis, which puts us on a path to return to annual operating costs of approximately $15 million. We have already started to implement these measures, beginning with significant reductions in non-payroll operating costs, where we expect to achieve an annualized savings of approximately $2.5 million compared to 2023. We expect to realize $1.5 million in this fiscal 2024 and the remainder in 2025. In addition, we have reduced payroll expenses by $4 million on an annualized basis through a combination of attrition and a reduction in force, which will partially offset the significant increase we experienced in 2023. We expect to achieve $2 million in annualized savings in 2024 with the full $4 million to be realized in 2025. These actions have been difficult, and we do not take these decisions lightly; however, we believe they are necessary to return Caliber to profitability and ensure that our business has a strong foundation for future growth and success. We remain confident in Caliber's medium and long-term growth prospects and are acting to ensure that we can achieve our stated goals. I'll now turn the call over to Jade, who will take you through our financials in greater detail.

Thank you, Chris. Good afternoon, everyone. We appreciate you joining us today. As we mentioned on our last call, with the culmination of our work on CHT and the contribution of the first third-party hotel to the portfolio, we reassessed our consolidation conclusions and determined that we are no longer required to consolidate Caliber Hospitality LP and the underlying hotels beginning this quarter. We believe this simplifies our financial statements by removing most of the hotel performance that has historically been included in our consolidated results in accordance with GAAP. It will, however, make our comparative financial information less meaningful since the prior year results will still continue to include the historical performance of these hotel assets. So with that background, let's go through our results for the first quarter 2024. Total consolidated revenue was $23 million, a decrease of 22.3% versus the same period a year ago, primarily due to a decrease in consolidated fund revenues, which was primarily due to the deconsolidation of Caliber Hospitality and a decrease in performance allocation revenue, which was earned related to the contribution of the hospitality assets to Caliber Hospitality in March 2023. Consolidated expenses for the first quarter declined by 5.9% to $27.3 million due to a decrease in consolidated fund expenses, primarily driven by the deconsolidation of Caliber Hospitality again. Platform revenue decreased 25.6% to $4.7 million due to lower performance allocations. Breaking down our platform revenue a bit further, fund management fees increased by 11% to $2.6 million and were related to the change in fee structure effective upon the contribution of the hospitality assets to Caliber Hospitality LP in March 2023. Fund management fees were based on 1% to 1.5% of the unreturned capital contributions in each hospitality fund. During the three months ended March 31, 2024, the company earned a fund management fee of 0.7% of the Caliber Hospitality Trust's enterprise value. Financing fees decreased from $30,000 to $100,000 due to loan placement fees earned for executing two loans on behalf of our funds during the first quarter of 2023, whereas we did not earn such fees this quarter. Development and construction fees increased by 73% and were primarily due to fees earned from completing predevelopment work for three projects during the quarter. Performance allocations of $200,000 were related to the sale of land located in Johnstown, Colorado. In the same period last year, performance allocations were $2.4 million, which represented the carried interest earned related to the contribution of the hospitality assets to Caliber Hospitality. Total expenses in Q1 were $7.7 million, an increase of 19.7% compared to Q1 last year, primarily due to an increase in operating costs from additional payroll associated with increased headcount and human capital driven by our growth initiatives. We also recorded an increase in depreciation and amortization expenses, primarily due to the acquisition of our headquarters and our office building during the quarter. Total managed capital increased from $438 million to $454 million from December 31, 2023, to March 31, 2024. And as a reminder, managed capital is defined as the total capital raised from investors in our company or our funds at any point in time, excluding common stock in CWD. We use this information to monitor the amount of preferred return that would be paid at the time of a distribution and the potential to earn a performance fee over and above the preferred return at the time of the distribution. For the first quarter of 2024, the net loss attributed to Caliber, which excludes net loss attributable to non-controlling interest, was $3.8 million or $0.18 per diluted share. This compares to a net loss attributed to Caliber of $1.2 million or $0.07 per diluted share in the same period a year ago. Caliber adjusted EBITDA loss for the first quarter was $1.7 million compared to adjusted EBITDA of $1 million during the same period a year ago, primarily due to the decrease in total revenue of $1.6 million and an increase in operating costs of $1 million related to the increase in payroll. Interest expense in the first quarter was $1.3 million compared to $800,000 in the year ago period. The increase was primarily due to the increase in corporate notes outstanding during the three months ended March 31, 2024, compared to the same period in 2023. Before turning the call back to Chris for his closing comments, I wanted to reiterate our three-year growth objectives. First, we expect to expand our fundraising activity, bringing in $750 million from 2024 through 2026. We expect the investments we made in our private client and wholesale distribution platforms to be the primary contributors to achieving our fundraising target, which will enable Caliber to accelerate growth in our AUM. Second, we expect to grow AUM to $3 billion, driven primarily by expanding our product offerings and growing the number of assets in the Caliber Hospitality Trust, which we anticipate reaching $1 billion in AUM. Third, we are committed to driving profitable growth by achieving $50 million in annualized total platform revenues by the end of 2026. Caliber's unique business model provides opportunities across different markets and resiliency in challenging times. Our proprietary middle-market real estate funds enable us to generate multiple revenue streams from various investments, and we are well positioned for future growth as we continue to seize new opportunities and investments, particularly those that arise in market dislocation and disruption. I'll now turn it back to Chris for his final remarks before we take your questions.

Thank you, Jade. Thank you all as well to the call participants. I appreciate you joining these calls and continuing to engage with Caliber. I have had a chance to reflect on our first year as a public company, which is coming up here in a few days. I decided to distribute a shareholder letter that you can expect to see twice per year. Personally, I love to write, and my goal in producing this letter is to help you follow our story and go a few layers deeper on some of the key topics that may not necessarily come up in an earnings call or in a short form presentation on Caliber. You can expect my first letter before the end of June, and I hope that you find the information impactful. In closing, I'd like to thank our employees for their dedication and commitment to the changes we have recently implemented and our investors and partners for your continued interest and investment with Caliber. Thank you all again for your time today. We look forward to speaking and meeting with many of you in the near future. If you have any questions, we encourage you to reach out to our Investor Relations team. And with that, I think we can turn to questions.

Thank you. The floor is now open for questions. Your first question comes from Brendan McCarthy of Sidoti. Your line is open.

Good afternoon, everyone. I appreciate you taking my questions today. I wanted to begin by discussing the wholesale broker-dealer distribution agreements. You mentioned that there are 26 selling agreements with broker-dealers, which is a significant increase from just one at the end of the fourth quarter of 2023. What kind of pace can investors anticipate for additional agreements moving forward?

It's challenging to predict the pace a little bit. We spent most of the first quarter securing these selling agreements. Now, our team is focusing on engaging with each firm that has agreed to distribute or showcase our products, dedicating time to work with their representatives. For instance, if we sign a selling agreement with a firm that has 40 representatives, the next step involves training all those representatives and spending time individually or in small groups to ensure they understand the products, funds, and opportunities. I expect to see these agreements continue to grow throughout the year.

Got it. Thanks, Chris. That's helpful. As a follow-up question, I know historically, our fundraising has been weighted towards Q4. I think Q4 is typically the best quarter for fundraising. Considering new selling agreements as well as the growth of the wholesale channel, do you think that seasonality will shift at all or change?

Yeah. I think we've been focused a lot on fundraising seasonality because opportunities to invest the capital are available throughout the year. Making sure that we have stable and growing fundraising results is very important to Caliber. I think what we will see is some of the seasonality in our retail channel will continue because individual investors tend to make decisions after tax time and then again for some reason after Thanksgiving. However, on the wholesale side, these advisers are consistently engaged with their clients. We expect to see more normalized fundraising throughout the year.

Got it. And I appreciate the insight on the cost reduction initiatives. Just to clarify, were those figures regarding the unconsolidated cost structure or the consolidated expense structure?

Yeah, that would have all been related to the platform cost structure or the unconsolidated cost structure, to use the accounting term.

Got you. And then turning to the acquisition environment, I know last earnings call, you've talked in detail about distressed opportunities coming more into light. Are you still seeing a similar environment? Or has anything changed from the last discussion?

Yeah, it's only been a couple of weeks, so not much has changed.

Yeah, we're still seeing the same thing; real opportunities that we're underwriting at this point in time. Jade and I have recently met with banks and financial institutions and are trying to address their issues as well. I see the volume going up, and our primary focus is to ensure that the funds we have recently opened have capital available for these opportunities.

Got it. And then last question for me. Just looking at the balance sheet, Caliber's balance sheet. Wondering if you could speak to the debt maturity profile and how you plan to address upcoming maturities?

Sure. Jade, do you want to go through that, and I'll add anything if I can.

Sure. We are in a constant state of monitoring our debt, both for our corporate debt and the debt sitting at our various assets. We start working on those six to nine months out to identify whether there is a path to renew and extend or if we need to completely refinance.

I'll just add that the debt for the corporate company is roughly $50 million to $55 million, about $20 million of that relates to the debt from the acquisition of our headquarters, which is a combination of some unsecured notes and a CMBS loan we assumed when acquiring the building. The remainder of the debt is primarily unsecured debt from individual investors, and we are using that capital to grow our funds. Our goal is to reduce that debt over time and potentially refinance with institutional credit providers.

Got it. That's very helpful. Thanks, Chris. Thanks, Jade. That's all for me.

Sure.

With no further questions, that concludes our Q&A session. I'll now turn the conference back over to CEO, Chris Loeffler, for closing remarks.

I just wanted to reiterate the fact that you should keep an eye out for the shareholder letter that will come out, and stay engaged with us. We've had quite a few people reach out to us when they come to our area to meet in person. Thank you very much.

This concludes today's conference call. You may now disconnect.