CaliberCos Inc. Q2 FY2024 Earnings Call

Ladies and gentlemen, welcome to Caliber's Second Quarter 2024 Earnings Call. As a reminder, today's call is being recorded for replay purposes. At this time, all participants are now in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. I would now like to turn the conference call over to Lisa Fortuna, Investor Relations for Caliber. Please go ahead.

Good afternoon, everyone. Welcome to Caliber's second 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. 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 us on the call today. I'd like to begin our discussion by first thanking our employees, vendors, and partners for their dedication to Caliber. In May, Caliber initiated some cost reduction measures that are a key component of our plan to return our business to operating profitably. These measures have required many members of our team, vendors, and partners to take on additional responsibilities, sometimes with fewer resources. The entire team has risen to the challenge and I'm grateful for their tremendous efforts. Their dedication has helped us adjust our cost basis to a level that, combined with our planned revenue growth, we expect will return Caliber to positive EBITDA in Q4 of 2024 and positive net operating income in 2025. As we continue to sharpen our focus on increasing revenue, Caliber has set three priorities for revenue growth. The first priority is to acquire more income-generating real estate investments. The real estate market has seen a significant drop in value from its most recent valuation peak and we believe now is the time to acquire attractively priced assets. We intend to close on our first billion of assets in our planned roll-up of the Caliber Hospitality Trust, or CHT. So far, we have seven hotels in CHT with a total estimated AUM of $234 million. We expect to close the next eight hotels by the end of 2024, bringing the AUM of CHT to $410 million. We are pleased to announce that we have signed a definitive term sheet with an institutional investor that we expect will bring $35 million to $65 million of preferred equity to CHT, which will provide the funds necessary to acquire these eight assets. The agreement is subject to customary closing conditions and diligence requirements, and we look forward to updating you on our progress. The roll-up of CHT will mark a significant change in the composition of Caliber's AUM with a sizable portion of the portfolio being income-producing hotels. To further bolster our income-generating AUM, Caliber has taken action on a program to provide an elevated experience for 1,031 exchange investors seeking quality income-generating assets. We believe Caliber provides a solution for a persistent challenge for investors seeking a quality partner to complete their exchange, and we look forward to sharing more as this program develops. Our second priority to accelerate revenue growth is to provide more single asset investment offerings. We believe we will be able to attract more investment capital in this format, and we have a series of projects ready to present to investors seeking to build their wealth with real estate. Additionally, our discretionary multi-asset funds can act as a lead investor in the single asset offerings, providing the multi-asset funds with a first look at each Caliber project invested in. After seeding our new funds with more assets, we expect the multi-asset funds will be better positioned to attract capital from our wholesale channel. Our third priority is what we call 'build what we own'; while this priority may sound obvious for a real estate investment company, it is not always the case. Caliber, along with most companies investing in land and development, was impacted by a very disruptive cycle of events between COVID, inflation, ongoing challenges in the banking system, and the rapid rise in interest rates. With this drastic change in market conditions, we took a hard look at our projects to reevaluate whether any changes to our plans were warranted, a step we believe is prudent for all real estate investors. In completing our review, we found the path that we expect will lead to the most potential value creation for our clients and for Caliber to be that of a continued course to complete our developments according to our revised plans and build what we currently own. An important consideration in our analysis is that many of these development projects sit with little to no secured debt, making traditional financing the best potential path to capitalize their completion. In many cases, all or most of the equity required for the projects has already been raised. Our developments are also located in strong markets with resilient demand, giving us confidence in our leasing. Financing is critical to achieve Caliber's revenue-generating priorities, and because of that, I would like to make some observations about the current financing environment. As a real estate asset manager, financing comes to Caliber in several forms. The first form of financing is what we call fundraising, which is equity capital, preferred equity, and convertible debt raised from Caliber's clients and partners for our funds and for our real estate projects. Today, the ongoing market conditions around fundraising remain challenging. We are focusing on things within our control to enhance our fundraising capabilities and expand into new target areas despite these conditions. Caliber's target market for fundraising includes over $13 million in capital. Chief Operating Officer, responsible for leading all operational aspects of Caliber, including people, operations, project management, information technology and security, regulatory compliance, legal customer service, and fundraising operations. He is taking a leadership role in many strategic projects within the company, including Caliber's focus on cost reduction. In addition, last month we announced that Steve Drew joined Caliber as a Senior Vice President of Marketing Strategy and Technology. Since joining, Steve has immediately identified actionable steps to optimize our go-to-market strategy and technology platform. With these appointments, we are confident that Caliber has assembled the right team and capabilities to take informational technologies like AI and utilize them to achieve our goal of consistent profitable growth. Turning to a few high-level comments about the quarter: In Q2 2024, we continue to see positive year-over-year improvement in asset management revenues, a key focus of our team; this is an important source of stable recurring revenues. With our singular focus on achieving consistent profitable growth, we implemented necessary expense-saving actions during the quarter and since executing these actions in mid-May, we are on track to see the initial $6.5 million of annualized savings starting in the second half of 2024, and we expect to generate positive adjusted EBITDA in Q4 2024 with a full realization of cost improvements anticipated in 2025. Moreover, we remain confident in Caliber's medium and long-term growth prospects and are acting to ensure we can achieve our previously announced three-year goals. Before I turn over the call to Jade, I want to provide an update on our corporate debt. As I discussed in the prior call, we are seeking to refinance our unsecured debt. Through the end of the second quarter, we've paid off approximately $4.2 million in debt and have extended approximately $27.4 million in debt at various future maturities, with the overarching objective of improving our balance sheet over time. We continue to make progress and we will keep you apprised of our progress as it occurs. I will now turn over the call to Jade, who will take you through our second quarter financials in greater detail.

Thank you, Chris. Good afternoon, everyone. We appreciate you joining us today. As we previously discussed, beginning in Q1, we are no longer required to consolidate Caliber Hospitality LP and the underlying six Caliber hotels. Additionally, as of Q2 2024, we are no longer required to consolidate the assets associated with our Elliot 10 partnership, further advancing our goal to consolidate all assets managed by Caliber. In simple terms, when we consolidate an asset, we manage all of the corresponding fees and revenues we earn, which then get removed from our results. We then have to replace those fees with the revenues and expenses of that consolidated asset, the majority of which do not benefit Caliber or its shareholders. As a simple example, if we earn, say, $10 of asset management fees and $6 of that fee is generated from one of our consolidated assets that itself generated, say, $50 of hotel revenue, we would reflect $54 of total consolidated revenue, $50 of which is largely not a benefit of Caliber, the public company. We believe these changes simplify our financial statements by removing most of the asset performance that has historically been included in our consolidated results. As a result, our comparative financial information is less meaningful since the prior year's results continue to include the historical performance of these assets. For these reasons, we continue to include unconsolidated platform performance information in these updates to provide a clearer understanding of the performance and growth of the company. With that background, I'll now turn to our results for the second quarter of 2024. Second quarter total consolidated revenue was $8.2 million, a decrease of 60% versus the same period a year ago due to a decrease in consolidated fund revenues, which was primarily due to the deconsolidation of Caliber Hospitality, LP and Elliot 10 and the underlying assets, partially offset by a corresponding 70.3% increase in consolidated asset management revenues. Consolidated expenses for the first quarter declined by 59.7% to $12.7 million, also due to the deconsolidation previously mentioned. For the second quarter of 2024, the net loss attributed to Caliber, which excludes the net loss attributable to non-controlling interest, was $4.7 million or $0.22 per diluted share. This compares to a net loss attributed to Caliber of $5.7 million or $0.29 per diluted share in the same period a year ago. Caliber adjusted EBITDA loss for the second quarter was $2.4 million compared to an adjusted EBITDA loss of $2.3 million during the same period a year ago, due to an increase in G&A expenses largely related to professional services offset by an increase in total revenue of about $800,000. Total unconsolidated or platform revenue increased 24.9% to $4.2 million, mainly due to higher asset management revenue. Breaking down our platform revenue a bit further, fund set up fees increased to $665,000 from $9,000 in the prior year due to the recognition of revenue earned related to two new fund offerings open during the quarter. Fund management fees increased by 12.5% to $2.7 million due to an increase in managed capital and fees earned from the Caliber Hospitality Trust, which added one third-party hotel property in Q1. During the three months ended June 30, 2024, the company earned a fund management fee of 0.7% of the Caliber Hospitality Trust's enterprise value. Development and construction fees decreased by 50.1% due to higher activities in each of Mesa Commons, Jordan Loss, and Ridge 2 in Colorado in the prior year, offset by an increase in construction activities related to J25 in the current year. Performance allocations during the quarter were nominal. Total unconsolidated or platform expenses in Q2 were $8.2 million, a decrease of 4.1% compared to Q2 last year, primarily due to a decrease in operating costs stemming from a decrease in stock compensation expense and a decrease in accrued bonuses. This was partially offset by an increase in general and administrative expenses associated with increased legal and accounting fees. Interest expense in the second quarter was $1.3 million, essentially flat compared to the year ago. Total managed capital increased by $32.2 million or 7.4% from $438 million to $470 million from December 31, 2023, to June 30, 2024.

Thank you, Jade. Before turning to the Q&A session, I just want to reiterate our commitment to delivering consistent, profitable growth to our shareholders. Caliber has been working to both adjust our cost basis and grow our revenues, and we see significant opportunities in our business to continue to improve and capture a large market opportunity today. Thank you to all the call participants. I appreciate you joining today and engaging with Caliber and look forward to any questions.

Your first question comes from the line of Brendan McCarthy from Sidoti.

Chris, I just wanted to start off with fundraising. I know you mentioned the environment remains challenging. I'm just wondering if you can discuss how fundraising trended in the second quarter across the three different distribution channels.

Sure. Thank you. In our first quarter, we raised a little less than $10 million. In our second quarter, we raised approximately $20 million, so we saw it double, primarily driven by our fundraising in CHT and our retail group. We actually saw our first checks come in from wholesale. While it was not a meaningful amount of money, it was the first investment starting to come in from the wholesale channel. So that continues to be an area of focus as well, building into the selling agreements we've already signed and continuing to grow that base. So that's the progress we've made so far. And then the announcement we made today at the top of the earnings call would be incremental in new capital compared to the numbers I just quoted you. So the $35 million to $65 million of institutional capital for CHT is additional capital we expect to close.

Then on the flip side, I know it seems like redemptions have trended somewhat favorably over the past couple of quarters. Can you talk about any trends you're seeing at the redemption level? They seem pretty low relative to some of the industry pressure that's making headlines.

We certainly see similar kinds of redemption activity and requests from our clientele. I think a lot of investors have positions that have been in real estate funds that are illiquid. Our funds are illiquid as well, but unlike some of the funds that have liquidity gates where we're forced to liquidate assets, typically at the wrong time, Caliber is not forced to sell an asset based on a redemption request. So, we have been prudent in terms of looking at the underlying assets and the investments we have in our funds and making sure that we're not just seeking to sell an asset at what I would call a terrible time to sell. We are looking at the properties that we own to maximize profit and the return for all investors, not just for an investor seeking a redemption. We have certainly seen redemption requests increase over time as interest rates went up in our underlying funds, but we've been managing that effectively so far.

And looking at the prepared remarks, you mentioned there’s a goal to provide more single asset investment offerings. Is that initiative more appealing to target investors? And then as a follow-up, how does that impact the 2026 financial targets?

If you think about single asset offerings, they have two significant benefits. One is they're just easier for an investor to understand. Since our strongest fundraising has been in our direct-to-high-net-worth channel, which we call the retail channel, that's the right matchup between the type of offering that those investors typically like to invest in—something they can get their hands around on a single project—and our strength in fundraising. At the same time, what we have seen in the current environment with investors being uncertain about the future and with interest rates and with fears of a recession, investors want to know they're going to invest in this specific project with this specific planned outcome. So, I think there's a lot of certainty in single asset offerings. The second thing we've found ties into the business plan from last year rolling into this year. Last year, we spent a lot of time launching our larger multi-asset funds. We needed to do that to fit with the wholesale channel for fundraising. As we started selling those funds, we received feedback from broker-dealers and investment advisors we've been working with that they liked the funds, but they wanted to see more assets in the funds to show them to their clients. The best way to do that, and the fastest way, is to create our single asset investment offerings, acquire attractive projects for both our retail and wholesale investors, and provide an allocation to our multi-asset funds that they can take a piece of each deal and start to build the track record. This strategy does not impact our goals; we believe this is the best possible strategy for Caliber in the near term to both raise capital and achieve those goals.

One more question for me: looking at the financial targets, the $3 billion targeted AUM by 2026, has that target or has your confidence in achieving that target changed at all throughout the first six months of the year?

We have not changed the targets, and we don't intend to. We feel pretty confident about what we put out there because when we built those targets, we accounted for some of the current environment. Our acknowledgment of the fact that it's a difficult environment and that interest rates are up was part of the original plan. If you tie out that $3 billion target, presuming we execute our minimum goal for CHT, we will be bringing the portfolio AUM up to close to $2 billion with that transaction, which leaves the remaining $1 billion to be additional assets over the next two and a half years. Therefore, we feel comfortable with the targets.

There are no further questions at this time. I will now turn the call back to Chris for closing comments.

Great, thank you, and thank you Brendan, appreciate the engagement. In closing, I'd like to reiterate our gratitude to our employees for their ongoing dedication and commitment. I know how hard you have all been working and I really appreciate it. I'd also like to thank our loyal investors and partners for their continued interest in Caliber, your investment, and your faith and trust in our leadership and management team. Thank you again for your time today. For everyone on the call, 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 especially if you can go to our website and sign up for the investor relations newsletter. So, thank you very much and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.