Creative Media & Community Trust Co. Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 9 speakers on the call.

Operator

Good day, and welcome to the Creative Media and Community Trust Second Quarter 2023 Earnings Conference Call. Mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Steve Altobranto, Portfolio Oversight.

Operator

Please go ahead.

Speaker 1

Hello, everyone, and thank you for joining us. My name is Steve Altobrando, 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 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.

Speaker 1

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 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. Mode. 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.

Speaker 1

With that, I'll turn the call over to David Thompson.

Speaker 2

Thanks, Steve, and thank you, everyone, for joining our call today. In the Q2, we made good progress improving occupancy at our recently acquired multi family assets. These acquisitions are part of our previously defined plan to grow the multi family side of our portfolio to achieve more balance between creative office and multifamily assets. As a reminder, during the Q1, we completed That's a high barrier to MV Markets added 6 96 units to our portfolio. At

Speaker 3

the end of

Speaker 2

the June quarter, our overall multifamily 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 Further steps to improve our liquidity and balance sheet during the quarter. We paid down our credit facility by $30,000,000 in the quarter, primarily with proceeds from our Series A1 preferred stock offering. Turning to the 2nd quarter financials.

Speaker 2

We continue to see a strong rebound in our hotel NOI, which increased by 28% from prior year period. Our multifamily segment generated just over $500,000 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, increase from the Q1 due to higher occupancy. Our lending NOI decreased year over year, partially due to the securitization completed in the Q1, which increased interest expense attributable to that segment.

Speaker 2

I would now like to turn the call over to Shaul Kuba.

Speaker 4

Thank you, David. I will provide some more color on some recent positive update on our development pipeline and then given an update on some of our recent acquisition. Starting in East Austin, At our East 7th Street Properties, our multifamily entitlement was approved in June, allowing us to build up to 145 multifamily units. On 2 adjacent properties, we spent several years assembling this project. The development will replace the existing single story office building.

Speaker 4

The East 7th Street Corridor is among the most desirable location in Austin with numerous food and dining option within close proximity and providing direct access to both The Central Business District and Eastside. We also received good news at our Pemfield campus. In July, We were successful in changing the zoning, so that the entire 16 acre campus is now entitled for multifamily. Session. We are now in the planning phases of those Austin area development and we'll have more information in future calls.

Speaker 4

Mode. As we have previously discussed in those calls, those value creation opportunity 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 4,750 Wilshire Boulevard. We continue to expect the project to start leasing up in the Q4 of 2024.

Speaker 4

This will add another 68 residential unit to the portfolio. We believe this is a very attractive project given the asset location in Hancock Park, a supply constrained neighborhood that is adjacent to a multimillion dollar single family home. Session. We also now have 2 ground up development projects that are fully entitled. Our 40 unit multifamily project in Jefferson Park and our 36 unit multifamily development in EchoPark, which is a joint venture between CMCT, an international institutional investor.

Speaker 4

Currently, session. Our creative office building at 1910 West Sunset Boulevard is now 94% leased, up from 74% a year ago. EchoPark is a trendy, walkable submarket with numerous dining and entertainment options. There is a limited office supply in this submarket and our 8 story building is the tallest in the area, providing spectacular view across Los Angeles. For the balance of our development pipeline, We continue to work to obtain all the necessary approval as well as completing the design work, As we have previously mentioned, for development assets, we will look to bring in a co investor to increase our diversification and supplement return by generating fee income when advantageous, just like we have done at 4,750 Wilshire Boulevard.

Speaker 4

Now for the update on our recent multifamily acquisition. First, in EchoPark in Los Angeles, 1902 Park Avenue, a 75 Unit Apartment Building was acquired in the Q1 this year and in off market transaction. Our basis in 190 2 Park Avenue is highly attractive changes including upgrading the landscaping, lighting and common amenities to the building, key of the building for residents and provide a significant opportunity to increase rent to market rate over time as new tenant move in. Next, an update on 2 Oakland properties that David discussed. As you may recall, we completed those acquisitions last quarter.

Speaker 4

The Channel House, a 333 Unit Apartment Building 1150 Clay, a 288 Unit Apartment Building. Both assets are premier Class A building that were completed in 2021. We are making some 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 before it is economic to see significant multifamily construction to start again.

Speaker 4

With that, I will turn it over to Steve to provide a further update on the portfolio.

Speaker 1

Thanks, Shaul. I will provide a quick update on our leasing activity. Starting with the multifamily portfolio, on a consolidated basis at quarter end, our multifamily 33.9% occupied compared to 80.7% at the end of the Q1. The increase was driven by higher occupancy in our recently acquired Oakland session. 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.

Speaker 1

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've been executing new leases for new tenants at a substantially higher rate. Turning to office, we leased approximately 29,000 square feet in the 2nd quarter. Our occupancy rate at the end of the 2nd 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%.

Speaker 1

With that, I'll turn it to Barry. Thank you, Steve.

Speaker 5

Moving on to financial highlights. Our segment NOI decreased to $12,000,000 for the Q2 of 2023 compared to $12,800,000 in the prior year comparable period. This decrease in NOI was driven by a $1,200,000 decrease in our lending segment NOI as well as a $1,100,000 decrease in our office segment NOI. This was partly offset by a $900,000 increase in our hotel segment as well as $500,000 contribution from our newly acquired multifamily segment. Our lending segment NOI was impacted by the leverage achieved from the securitization in Q1.

Speaker 5

Interest relating to the securitization is directly expensed at the lending segment level, Our hotel segment NOI continued its positive quarter over quarter trend and increased to $4,100,000 from $3,200,000 in the prior year. This was driven by both improved occupancy for the quarter, which increased to 81% from 78% and improved ADR for the quarter, which increased to $201 per room from $176 per room. As mentioned, we recorded a $500,000 NOI from the new multifamily segment. We began reporting multifamily segment NOI Q1 of 2023 after we acquired 2 multifamily properties in Oakland in late January late March as well as invested in another multifamily property in Los Angeles through a fifty-fifty joint venture investment. Finally, our lending division NOI decreased $524,000 from $1,700,000 in the prior year comparable period.

Speaker 5

This was primarily due to the increased interest 3 as well as an increase in allocated payroll costs. For our non segment expenses, we had 2 significant events. The largest was an increase of $15,500,000 in depreciation and amortization expense. This non cash expense increase was driven by an increase and acquired in place lease intangible asset amortization at our new multifamily properties located in Oakland. The remaining asset balance of around $9,400,000 for those assets will be absorbed during the remainder of 2023.

Speaker 5

The second item being an increase in non segment allocated interest expense, which increased by around $5,100,000 primarily due to market interest rate rises and the assumption of 2 mortgages as well as borrowing on a revolver in connection with the acquisition of our 2 multifamily properties in Oakland during the first quarter of 2023. Our FFO was negative $0.19 per diluted share compared to positive $0.11 in the prior year comparable period. And our core FFO was negative $0.17 per diluted share 2 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 $27,400,000 in net proceeds from the sale of our Series A1 preferred talk during the quarter.

Speaker 5

At June 30th, we had approximately $58,000,000 of additional borrowing capacity. With that, Our host can now turn the call over for questions.

Operator

We will now begin the question and answer session. Please go ahead.

Speaker 6

Hi, yes. Good afternoon and thank you for taking my question. 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?

Speaker 7

Hey, Brandon. How are you?

Speaker 6

Good to see you.

Speaker 7

Good. So, Kaiser's lease, as I think you know, runs through 2025 and then part of it through 20 27. They have been pretty public about their plans to stay in Oakland. And I think we obviously feel very good about our asset. We view it as the best the premier building really in Oakland.

Speaker 7

So we feel good about the outlook for 1 Kaiser and the building, but not much we can report beyond that.

Speaker 6

Okay. That's understandable. And then lastly, just reading through some of the slide deck information. I know you talked about the target capital structure. I'm wondering if you can expand on the timing outlook on that target capital structure.

Speaker 6

I believe it's aiming for 40% debt, 30% preferred and the rest common. What's I guess are you going to provide What's the outlook like to eventually or what's the outlook is like to eventually achieving that target?

Speaker 7

Yes. So that's a target that basically is over time. Today, we're a little bit below that target given the couple positions that we completed in the Q1. But there's really there's no hard fast rule in terms of when we get back In line, I mean, we would expect when we look at our and by the way, that capital structure is based on the fair value of our assets of which we believe there is some upside as well. So we would there's no set time period, but over time that is a guideline that we'd like to stick to.

Speaker 7

We thought these were very compelling acquisitions. And So we proceeded with them knowing that we were dipping a little bit below the target. But we would expect over the next couple of years that we would get back in line with those targets.

Speaker 6

Got it. That's helpful. And then one more. Is it still reasonable to expect roughly $30,000,000 of A1 preferred issuance per quarter?

Speaker 7

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

Operator

For questions. The next question comes from Craig Kucera with B. Riley. Please go ahead.

Speaker 8

Yes. Good morning, guys. 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 is a component of that acquisition. And it looks like you wrote off quite a bit of it this quarter.

Speaker 8

Can you kind of walk us through what was Kind of the accounting there and sort of what's going on there.

Speaker 3

Yes. This is David. I can take that. And Craig, thanks for calling. We appreciate it.

Speaker 3

Appreciate the question. Yes, so this really kind of goes it gets into kind of accounting nuance a little bit, but We use an independent firm to kind of do the purchase price allocation when we acquire an asset. And the thing The thing you run into is a bit unusual with respect to multifamily is they put a value on the in place leases. And it's not the above market or below market. It's just the You have leases there themselves and it's generally based on the revenue that those leases generate not kind of the net income.

Speaker 3

You end up with a relatively large amount of value ascribed to this intangible asset that really has a if you think about multifamily properties, You've got leases that are generally 1 year. So on average, it's about a 6 month life that you have in these leases that are in place. And so they just get written off relatively quickly. I think the good news is it's a non cash item. It's going to clear itself off the balance sheet and through our P and L and primarily through the end of the Q3.

Speaker 3

I There will be a very small piece left in the Q4, but as we noted in the release and you'll see in our documents we filed, it's about $9,400,000 of that tangible remaining relating to those Oakwood assets that will burn off in the Q3 primarily in the Q3 and a little bit into the 4th quarter. But really just kind of accounting oddity, if you will.

Speaker 8

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

Speaker 3

It's a little more defined than that. They actually are required to look at those intangible assets and ascribe value to them. So the that's just part of their process of like they would value the assets, the fixed assets themselves. They specifically look at the leases in place and say, look, you've got You got to ascribe some value to this. So it's really not I mean, you could say it's above and beyond the fixed assets, but They really view it as part of what you were paying for from an accounting perspective.

Speaker 8

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

Speaker 3

Yes. And again, I think it's an oddity you'll have a multifamily. If you had an office and you had a 10 year 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.

Operator

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

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Key Takeaways

  • CMCT made progress improving occupancy at newly acquired multifamily assets in Oakland and Los Angeles, generating $0.5 million in segment NOI in Q2 with clear upside as these properties continue their lease-up phase.
  • The hotel segment delivered a 28% year-over-year NOI increase, driven by occupancy rising to 81% and average daily rates climbing to $201 per room.
  • Development momentum includes entitlement approval for 145 multifamily units on Austin’s East 7th Street, rezoning of the 16-acre Pemfield campus, and an LA office-to-residential conversion adding 68 units at 4750 Wilshire Boulevard.
  • Office metrics improved with occupancy up to 83%, positive leasing spreads, and a notable 94% lease rate at the 1910 West Sunset creative office building.
  • Balance sheet strengthened by a $30 million paydown of the credit facility using Series A1 preferred stock proceeds, raising $27.4 million net this quarter, and maintaining $58 million of borrowing capacity toward a 40/30/30 capital structure target.
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Earnings Conference Call
Creative Media & Community Trust Co. Q2 2023
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