Creative Media & Community Trust Corporation (CMCT) Earnings Call Transcript & Summary

Good day, and welcome to the Creative Media & Community Trust Corporation Fourth Quarter 2021 Earnings Call. [Operator Instructions] 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 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 could be found in the Investor Relations section of our website. We'll start the call off today with David, who will discuss some exciting developments with our business and our 2022 strategy, then Shaul will outline our vision for the future of the office and multifamily market, and I will discuss some updates to our portfolio. And then Nate will finish up with our fourth quarter results. Then we'll be happy to take your questions. David?

Thanks, Steve, and thank you for joining our call today. This morning, we announced our fourth quarter 2021 earnings, which were marked by strong results in our lending segment and improving performance at our one hotel asset. Our office net operating income declined year-over-year, but we continued to see a significant increase in leasing activity, and we're making progress on our value-add assets. In early January, CIM Group, the manager of CMCT, agreed to a reduction in the management fee that amounts to approximately $0.21 per share in annual cost savings. This reduced fee started January 1, 2022, and we will start seeing the benefit in the first quarter of 2022. We'll get into more detail on our performance in the quarter later in the call, but first, I wanted to take some time to speak about some exciting updates for our business and our go-forward strategy. As you know, we are seeing a shift in the live-work lifestyle with many high-growth companies and employees embracing hybrid, in-person and work-from-home structures and committing to locations in vibrant, culture-oriented, walkable communities. We believe that many of these underlying trends are secular. To reflect this belief, last week, we changed our name to Creative Media & Community Trust. This change was made to highlight and sharpen our focus on investing in and developing premier multifamily and creative office properties that cater to fast-growing industries, like tech, media and entertainment. We distinguish creative office from traditional office as bright, open, thoughtfully designed and comfortable spaces that encourage creativity, flexibility and collaboration. I would like to turn it over to Shaul Kuba to discuss this strategy in further detail.

Thanks, David. There has been a considerable change in the office and multifamily landscape. Years before the pandemic, we were already seeing the trend towards hybrid-work lifestyle. As David described, CIM was an early institutional participant in creative office and modern multifamily, especially in Los Angeles. The pandemic accelerated the trend nationally. In response, we have positioned the company to capitalize on what we think is a very significant opportunity over the long term. Going forward, CMCT will primarily focus on 2 things. First, we will be a leader in investing in and developing creative office assets in vibrant markets, catering to fast-growing industries like technology, media and entertainment. Tenants from a range of industries are demanding office space that is comfortable and modern. If you have a great product, a great market, there is a very strong tenant demand. Second, we will invest in and develop multifamily in those same markets that benefit from those changes in business dynamic. Since professionals are spending more time working from home, there is a great demand for premium amenities as well as proximity to entertainment, dining and culture. Back to the office market. We have seen significant bifurcation based on product and location. Traditional office can be a challenging asset class. It is competitive and capital-intensive, but we continue to see strong demand for creative office, which only makes up about 5% of the U.S. office market. Leasing for creative office is nearly back to a pre-pandemic level, and it has commanded a 40%-plus rate premium. Potential tenants for creative office space are primarily focused on product and location, while pricing is secondary. They want to be in a space that has a modern, comfortable and a cool aesthetic, that inspires employees. The creative office space is used as a tool to retain and attract top talent and motivate professionals to want to come back to the office. We will invest in markets where those dynamics exist. We will look to grow markets where we're already in, Austin, Los Angeles and the Bay Area. And we are open to investing in other major markets where we see those dynamics. And as a longstanding owner and developer across the U.S., CIM Group has resources, market knowledge, relationships and boots on the ground. For this new real estate dynamic in place, we have been working hard to assemble attractive pipelines of opportunity. We are looking at core assets, value-add and development opportunities. Our recent acquisition in Echo Park is a great example of our new business focus. Last month, CMCT acquired 1910 West Sunset Boulevard, a 99,000 square-feet office property in the Echo Park neighborhood in L.A. The property is located in an emerging trendy submarket in a walkable area, that also has dozens of dining and entertainment options. And 8-story tall with a floor-to-ceiling window, it is the tallest building in Echo Park, with views in all directions. We plan to reposition the property into a creative office space that will appeal to tenants in the fashion and entertainment sector already in the area. We are also planning to develop approximately 15 multifamily units on a surface parking lot in the back. Also, in February, we closed on a development site in the Jefferson Park submarket of Los Angeles, and we have a second site under contract. We intend to develop a total of about 200 units. For certain development and value-add opportunities, we will look to bring a co-investor at the asset level. We did this with the Echo Park acquisition, for which we partnered with a sovereign wealth fund. We believe those types of co-investment give CMCT significant advantage as we get the benefit of the value creation as well as diversification and in some instances, fee income. We expect to be able to share more detail on additional deals in the pipeline on future calls. I'll turn the call back to David.

Thanks, Shaul. As we shift our business to the vision Shaul described, we're focused on a few strategic goals this year. First, we will continue to seek to divest noncore assets over time, assets that are not premier multifamily or creative office. We plan to redeploy the proceeds in the type of assets Shaul described. As you may recall, we sold approximately $1 billion worth of traditional office assets in 2019, which was a big first step in sharpening our focus toward creative office and premier multifamily. Second, we're working to create greater financial flexibility and are actively monitoring the debt and preferred financial markets. Third, we continue to focus on reducing our cost structure. As I mentioned earlier, our manager, CIM Group, agreed to a reduction in our management fee that amounts to approximately $0.21 per share in annual cost savings, which we are starting to see the benefits of in the first quarter of 2022. We also believe there's an opportunity to further reduce G&A costs. And fourth, we continue to make progress on the value-add assets in our portfolio. For an update, I will turn it back to Steve.

Thanks, David. We continue to make progress on our value-add portfolio. Starting with 4750 Wilshire in Los Angeles, we're continuing to actively market the space for an office user while simultaneously pursuing entitlements to convert the unleased space to luxury-for-rent multifamily. The return profile on the conversion has been improving as multifamily market rents increase. In February, we received design review approval, which was the most significant step required for approval. We anticipate having the option to start the conversion in the second half of 2022, with an anticipated construction time line of about 18 months. At 9460 Wilshire Boulevard in Beverly Hills, our lease percentage increased to approximately 73% at year-end, from 65% at the end of the first quarter of 2021. The remaining vacancy is primarily the retail. 9460 Wilshire is located in one of the most prominent locations in L.A. in the prestigious Golden Triangle of Beverly Hills. The building is located immediately next to the Four Seasons Beverly Wilshire and is just 1 block from Rodeo Drive. Given the prime location of the retail and the extended term tenants are seeking, we were patient in backfilling leases that expired over the last 2 years. We are pleased that we are seeing an uptick in interest in the space at improving rates. One update on our stabilized portfolio. At our Penn Field creative office campus in Austin, we signed an approximately 20,000 square-foot lease with Google Fiber in the fourth quarter, taking our lease percentage at Penn Field to about 97%. Earlier this year, Google Fiber exercised an option to take another 5,000 square feet. We expect to start seeing the benefit of these leases in the second quarter of 2022. With that, I'll turn it over to Nate for an update on the financials.

Thank you, Steve. Fourth quarter core FFO was $0.03 per diluted share compared to a loss of $0.21 in the prior year period. Our total segment net operating income increased to $12.1 million from $7.4 million in the prior year period. The increase was primarily driven by an increase in the lending and hotel segment. Hotel segment NOI increased to $1.8 million from a loss of $393,000. Occupancy improved to 69.9% in the quarter, up from 26.8%, while the ADR improved $153.77 from $120.86. Our lending division segment NOI increased to $3.6 million from $787,000. During 2021, the lending segment benefited from a temporary increase in the maximum SBA guaranty support on loans, from 75% to 90% per loan. This allowed us to increase the volume of loans originated, leading to an increase in premium income from the sale of the guaranteed portion of our SBA 7(a) loans. The guaranteed portion has now reverted back to 75%. Our office segment NOI declined to $6.6 million from $7 million, primarily due to lower revenues at office properties in Beverly Hills, Brentwood and Oakland, all due to decreases in occupancy as compared to the prior year. This was partially offset by an increase in revenues at an office property in Austin due to an increase in occupancy. However, as Steve and David mentioned, we're seeing leasing activity pick up. We signed approximately 57,000 square feet of leases in the fourth quarter and the first 2 months of 2022, including a 20,000 square-foot lease with Google Fiber at our Austin property. Our asset management fee and expense reimbursements were $3.4 million in the fourth quarter. Starting in the first quarter, we expect the management fee to decrease over 50% from the fourth quarter due to the new fee structure that went into effect, January 1, 2022. Turning to our liquidity. We had approximately $60 million drawn on our revolver at the end of the year. We estimate we have approximately $117.6 million of availability as of December 31, 2021. Our revolver matures later this year. But as a reminder, we have a 1-year extension option, which would extend the maturity to October 31, 2023. With that, I will now turn the call over to David for some closing remarks.

Thanks, Nate. To wrap up, we are excited about the opportunity ahead of us as we 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're encouraged by the pickup in our leasing activity. We have a very attractive growth pipeline and look forward to sharing more details on future calls. For value-add and development assets, we will at times look to co-invest to increase our diversification and supplement returns by generating fee income. And finally, we have significantly reduced our cost structure. Operator, you may now open the call to questions.

[Operator Instructions] The first question comes from [ Eric Sloan ] with [ First Foundation ].

I appreciate you having this call, especially given you have the Board on. Steve, I appreciate that, and David. So thanks for the attendance as well. My question, I think, is best for Mr. Kuba. But David or Steve, if you want to weigh in, please. So we applaud you guys, a sharper focus on evolving your asset base. We think that's smart. My question is, if your existing assets that you have that are outside of your sharpened focus are indeed monetized as you speculate in the press release or at least open up the idea that they could be, with the shares trading at such a material discount to the net asset value, isn't -- is the Board considering the shares as deserving a material portion of the reinvested capital in a tender? So is that something the Board would consider, especially given the forward business trajectory, which looks good, given the updates Steve provided and given kind of the niche you're carving. Where is the Board's head at on capital reinvestment?

Yes, I'm happy to address the question, and this is David Thompson. And Shaul can jump in if he wants to add any color. But I guess, first, [ Eric ], I appreciate the comments, I appreciate the question. With respect to a stock buyback, with proceeds from the asset sales, I mean, I think it's something that we will always evaluate and one of the tools that we have in our toolkit. We certainly agree that the shares are trading well below intrinsic value today. In fact, as you probably know, we had affiliates in the market that were purchasing shares in late 2021. But really, right now, I mean, our focus is on creating more financial flexibility, reinvesting in our assets to improve the cash flow and continue to selectively grow the portfolio. So that's the primary focus. That being said, it's something we will always evaluate when we have proceeds and are looking to deploy. And again, it's always going to be one of the tools in the toolkit.

Yes. Eric, this is Shaul Kuba. So yes, I'm just going to echo what David Thompson said. And obviously, we are looking right now very hard on every aspect of the business, including buying back share, whether it's a small amount or a large amount, but it's -- everything is on the table for us as we are divesting some of the assets.

Yes, I think that, to us, the value-add and the development stuff makes sense, but you're hearing investing in core real estate. I mean for us, given what you guys are -- have been able to do, especially if something comes up in Sacramento or Oakland, it would be our point of view that we would like to see some of that return, especially while the shares are -- have been kicked out of the Russell and at levels that would be so accretive to owners. And I love that you guys have been buying, and I hope that you do it on the company's behalf as well because I think you've got an exciting future, and I would love to see us own more with increasing participation that a buyback or a tender would involve. And I don't need it to be for the smaller assets, but if something were to happen in Oakland or Sacramento, that would be something where we would have our hand up and say we think it would be a great outcome.

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

Congrats on the leasing you achieved this quarter and here in the first quarter as well. I appreciate the color on the Google Fiber leases, but can you give us a sense of when the other tenants that signed leases are typically going to take economic occupancy? Is that also maybe second quarter? Is that maybe further along in the year?

Hey, Craig. This is Steve. I can take that one. It is primarily the second and third quarter.

Okay. Great. And I think about 13% of your office leases are scheduled to expire this year. Can you give us a sense of what your renewal expectations are? And are you aware of any move-outs at this point?

Sure. So our expectation would be that we would renew at least 50% of those expiring. A good number of them are -- of the expirations are back-weighted in the year, so it's a little bit early. And one thing -- one other thing I would point out, one of the expirations is in our Penn Field property in Austin, and that particular lease is really substantially below market. The market is -- we're generally doing leases north of 50. In-place rents on average at that property are around 44, but that particular lease is even below the average.

Okay. Great. Kind of changing gears. Not too much commentary on the hotel. I think you guys were about 70% occupied here in the fourth quarter. Has that asset come back enough from an operations perspective? And frankly, has the market come back enough for that to potentially be a disposition candidate here in 2022?

So we are seeing the asset rebound quite a bit. I think probably like most, January was a little soft with the spike of Omicron. But after that, we're continuing to see the asset rebound pretty nicely. And generally speaking, the capital markets for hotels is pretty robust right now.

I would add, even before the property had come back to the levels that it is at now and it's achieving now, it was certainly a candidate for disposition.

Got it. And when you think about some of these larger assets that are stabilized and throwing off cash flow and thinking about recycling capital, are you tilting, increasingly, it sounds like, based on the company's sort of new strategy, to development? Or are you thinking from the standpoint of kind of current cash flow as well as it relates to your dividend and your earnings run rate?

Yes. Well, I think it's really the combination of both, right? I mean we've got a strong, stabilized portfolio. We've got a portion of the portfolio that's value-add. And really, where we want to grow the company is going to be in the premier multifamily and in the creative office, and that's where you're going to see more of the development. So I think the benefit we have is, as we're structured today, we can have the benefit of those stabilized assets again. And as we complete the work on some of the value-add assets, to get them in a position to reposition the portfolio, you've got that income while we move toward kind of the new paradigm and again, much more focused on multifamily, the creative office and the development associated with that.

Got it. And based on your commentary, at 4750, I know that's been an asset for a while that you sort of have been working through approvals, but also trying to lease it. Is it fair to say that you're pretty much at the point where you're more likely than not to move forward with the conversion? Or are you still kind of holding out the potential for office? Or do you just see more value in, ultimately, multifamily regardless?

Yes. I mean I think we're still keeping both options open. I think, ideally, for us, if we could get it leased up in the near term while we move through -- some of the space leased up in the near term as we move through the process of getting the approvals for the multifamily option, that would be ideal. And again, kind of back to your first point of keeping some cash flow going while we move forward to the -- where we think more value can be created over the long term, would be where we would like to take it.

Okay. Great. And just when we think about you've got 1910 West Sunset, which you entered into the joint venture here this quarter to acquire, can you talk about what you're expecting your total budget to be there? I think the initial investment was about $51 million. You've got 44% of that. But kind of what you're expecting there and how we should think about some of these other land parcels that you purchased or have under contract from a budgeting perspective as we think about 2022 and '23.

It's Steve. I can take this one. So with respect to the land parcels, we haven't disclosed the figure yet, but they're fairly small dollars. I mean the 2 western parcels total would be less than $10 million. And I think Shaul also mentioned in his script that these are developments that, on the development side, we would look to bring on co-investors and seek to also generate a fee off the development. With respect to West Sunset, it's on the office redevelopment. It's fairly small dollars as well. We also have not provided that figure, but we're basically talking about adding some amenity space, potentially redoing the lobby. But that particular asset, the in-place rents are really pretty substantially below what market is. So yes, it's not a really heavy redevelopment, it's more of a value-add, better -- newer lobby, a little bit more amenities, potentially a roof deck, those sorts of things.

Got it. And I want to say, at the time of the rights offering and sort of thinking back to this fall, I think we were expecting that you guys might be doing a little bit more on the core-plus side, maybe buying some assets that are currently cash-flowing. Is that still the expectation for this year? Or do you anticipate any capital or the vast majority of capital that you have and availability on your line to go into more of these developments, possibly structured as joint ventures?

Really both. I mean we're really looking at both core as well as value-add and development.

Got it. But you don't currently have any acquisitions, core acquisitions under contract or moving names? Do you have any sense of a pipeline there? Or is that still TBD?

TBD, nothing is imminent, but we're continuing to look.

And we have a question from John Moran with Robotti & Company.

Steve, I had 2 questions. One is, you guys normally would have your NAV published by now in some form or another, either in your slide deck or an 8-K filing. Is that something you're going to do this year? And when might we see that? And then for Shaul, my question is, is this -- is there an asset management business that's going to be embedded in CMCT going forward? Or is this just a feature on a couple of deals? And what are the terms? Can you just sort of -- for illustrative purposes, just what are the terms of that -- of those deals look like in terms of the participation, fees, et cetera, if you can, please?

I can...

I...

Go ahead, Shaul.

Go ahead, Steve. No, go ahead. I'll add to it...

Okay. Yes. So on the NAV question, so you may recall the reason we had published the NAV was because the preferred stock offering had some warrants that were priced based off and that pricing was struck off the NAV. We no longer have that component. So we have not -- we are not planning to publicly update the NAV. We obviously, as David mentioned, believe the stock is trading well below the intrinsic value, but we're not planning to continue to publish the net asset value. And then with respect to the co-investments, it really varies in terms of the pricing. I'll let Shaul answer the strategic question. But it's generally in the context of 1% of commitments, plus a promote, is generally the structure that we see on co-investments.

Yes. I think the idea of bringing in co-investors to assets and going through our channel of distribution to core investors is to create a small little competition among our co-investors and basically pick up the best deal and promote for CMCT. All the fees and the promote are all going to be flowing to CMCT. So I think it's going to be asset by asset. We're going to negotiate really hard for CMCT, on behalf of CMCT. Multifamily site is probably going to demand and generate a higher promote and higher fees for CMCT than the creative office space. Now if we can generate a deal that has -- we can line up a tenant that has a good credit, we're probably going to generate a very nice fee and promote for that asset. So we're just in the beginning stages of creating that opportunity. And we'll see. I mean we need to build up the pipeline. We're looking for a very attractive asset, so they can actually want to participate and compete on the co-invest opportunity.

But do those deals look like your one-off joint ventures that you do at CIM? And I guess, I mean, a follow-up is just -- is the promote. What is a promote? In other words, is this something where there's a preferred return and you're splitting the...

The promote can go from 20% promote to 50% promote. Again, it all depends on the asset and the asset class. So I'm not going to have -- we're not going to have a very standard co-invest memo. I think it's going to be more tailored to each asset. So in some cases, the promote might be we may be demanding 50% of the promote. In some cases, it might be just 20%.

But John, you are thinking about it right. I mean it generally is, there's a base fee, and then there is an, effectively, an incentive fee if you had achieved some predetermined hurdle.

Okay. Yes, I was just trying to -- I don't know if there's anything you say about what the structure of these things look like. So both of those projects at Echo Park in La Brea not only look like pretty large projects, they're certainly large based on your current liquidity position. So I mean, can you say what -- how those might be capitalized, what that would look like? How much debt do you put in the joint ventures? What's the debt look like and the -- or capital contributions from a partner, hypothetical partner? Does that make sense? It looks like both of those -- each of those projects would be, I don't know, $100 million-plus projects.

Well, with respect to La Brea, I mean, we haven't closed on that yet. So it's a little bit too early. But I mean, generally, the way we are thinking about this is with CMCT having a minority investment in some of these deals, call it, 20% or so and then you co-invest the other 80%, and you're supplementing your return with fee income. Sunset, as we mentioned, yes, that was, as we talked about a little bit earlier on the call, that's a much smaller project.

This concludes our question-and-answer session and the Creative Media & Community Trust Corporation Fourth Quarter 2021 Earnings Call. Thank you for attending today's presentation. You may now disconnect.