Creative Media & Community Trust Co. Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the Creative Media and Community Trust Second Quarter 2024 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 Altobrando, Portfolio Oversight. 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 are 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 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 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 other 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.

Speaker 1

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'll turn the call over to David Thompson.

Speaker 2

Thanks, Steve, and thank you everyone for joining our call today. Morning, we released our Q2 2024 results. Net operating income improved from the Q1 across all our real estate operating segments, office, multifamily and hotel. While we are pleased with this improvement from last quarter, our cash flow continues to be impacted by elevated short term interest rates, the widely known challenges in the office market and continued soft rental rates at our Bay Area multifamily assets. We are focused on strengthening our balance sheet and improving our cash flow.

Speaker 2

As such, we continue to evaluate asset sales and other ways to reduce both our recourse debt and overall debt. We also expect to eventually benefit from lower SOFR on our floating rate debt and lower preferred dividends as the Fed funds rate is expected to come down over time. As a reminder, our Series A1 preferred dividend is a greater of 6% or Fed funds plus 2.5%. We continue to make progress on our development and redevelopment pipeline and we are ahead of schedule at 2 of our 3 active projects. We have 2 multifamily projects underway and we commenced the room renovation at our 1 hotel in July.

Speaker 2

Steve will provide more details in a moment. As for our results in the quarter, our same store office segment NOI increased 9% year over year to $7,600,000 The increase was primarily driven by an increase in our JV income. We had an unrealized gain in the Q2 of 20 24, whereas in the Q2 of 2023, we had an unrealized loss. This was primarily driven by appraised values. Overall, our office lease percentage remained stable in the quarter at 83.5 percent and we executed approximately 52,000 square feet of office leases in the quarter.

Speaker 2

However, we do expect our occupancy to decline in the Q3. As previously disclosed, we have a large tenant that gave back approximately 130,000 square feet at the end of July at our 1 Keiser Plaza office building in Oakland. Our hotel segment NOI increased 5% from the prior year to $4,300,000 primarily due to improving average daily room rate. Our multifamily segment generated $2,300,000 of NOI in the quarter compared to $900,000 of NOI in the Q1 of 2024. The increase was driven by occupancy gain, which improved to 92.5% at the end of the 2nd quarter from 79.3% at the end of 2023.

Speaker 2

However, the rental rate at our 2 largest properties, Channel House and 1150 Clay located in Oakland, continues to be below our expectations. Our lending segment NOI increased 42% year over year to $743,000 The increase was primarily due to a decrease in interest expense resulting from the amount of principal repayments on our SBA 7 loan backed notes. With that, I will turn it over to Steve to provide a further update on our development pipeline and the portfolio.

Speaker 1

Thanks, David. Starting with our development pipeline, we have 3 projects underway. 2 multifamily projects in LA and the hotel room renovation in Sacramento. Starting with multifamily, our office to residential project at 4,750 Wilshire is nearing completion. 4,750 Wilshire is located in Hancock Park, an affluent residential submarket of LA where housing is supply constrained.

Speaker 1

This property was previously a 3 story office building. We preserved the ground floor creative office space, which is 100% leased, and we have been converting the top 2 floors to 68 high end, 4 end residential units. We are on track to complete the project in the 3rd quarter, ahead of the previously announced timeline of the Q4. The residential component has been renamed 701 South Hudson and we have launched the property's website and expect to start marketing units for lease in the coming weeks. We are excited about this project, which we believe reflects CMCT's strategy to invest in and develop premier multifamily and creative office assets in high barrier to entry markets.

Speaker 1

Our second development is 1915 Park in the Echo Park section of Los Angeles with an expected mid-twenty 25 delivery. Upon completion, the new 7 story building will feature 36 units. EchoPark is a highly desirable walkable neighborhood with dozens of dining and entertainment options. Turning to the hotel, in July, we began an approximately $21,000,000 room renovation at the Sheraton Grand in Sacramento. The renovation includes a refresh of all 503 rooms.

Speaker 1

We expect to complete the project around the end of 2024 and believe this renovation will generate a solid return on investment. The hotel is one of just 2 hotels located directly across the street from Sacramento's Convention Center, which itself completed a major renovation and expansion in 2021. Now turning to our operating portfolio. On a consolidated basis at quarter end, our multifamily segment was 92.5% occupied, up from 86.2% in the 1st quarter and 79 point 3 percent at the end of the 4th quarter. In EchoPark Los Angeles, our multifamily asset at 190 2 Park, occupancy increased to 93.3% at the end of the quarter, up 40 basis points from 2023 year end.

Speaker 1

We've been executing new leases for new tenants at substantially higher rates on our in place rents. Monthly rent per occupied unit was $1806 as of the end of the second quarter. This represents a 4% increase from a year ago and our rate for new tenants generally exceeds $2,200 per month, a more than 20% increase from our in place rents. In Oakland, we continue to make progress improving occupancy and we had an increase in NOI this quarter. However, as David referenced, our rental rate at Channel House and 11 50 Clay have been below expectations as the market absorbs the high level of supply added in Oakland in 2018 through 2022.

Speaker 1

We believe the local rents would need to increase dramatically before it's economical to see new multifamily construction, so we expect minimal new supply for the foreseeable future. The pipeline for development in the East Bay for multifamily remains well below the average for the top 25 U. S. Markets. With that, I'll turn it over to Barry.

Speaker 3

Thank you, Steve. Good morning. I will be going over some of our financial highlights for the Q2, starting with segment NOI, which was $16,200,000 for the Q2 of 2024, compared to $12,000,000 in the prior year comparable period. This increase of $4,200,000 was driven by segment increases of $2,100,000 in our office segment, $1,700,000 in our multifamily segment, and $200,000 in both our Hotel and Lending segments. Our Office segment NOI increased by $2,100,000 to $8,900,000 from $6,800,000 in the prior year comparable period.

Speaker 3

As mentioned by David, this was primarily driven by an unrealized gain on the value of real estate at 1 of our unconsolidated office entities compared to aggregate unrealized losses at our unconsolidated office entities in the prior year comparable period. Our hotel segment NOI increased $200,000 to $4,300,000 for the Q2 of 2024 compared to $4,100,000 in the prior year comparable period, which was attributed to an increase in revenue per available room, driven by increased ADR. Our lending division NOI increased to 740 $3,000 from $524,000 in the prior year comparable period, primarily due to the decreased interest expense resulting from the amount of principal repayments on our SBA 7 loan back notes. At our Multifamily segment, which commenced with asset acquisitions during the Q1 of 2023, reported NOI of approximately $2,300,000 compared to approximately $522,000 for the prior year comparable period. The increase is primarily due to higher rental revenues at our multi family properties in Oakland, California from increased occupancy and from an increase in monthly rent per occupied unit as adjusted by rent concessions.

Speaker 3

Our non segment expenses had a significant decrease in depreciation and amortization by $14,000,000 which was driven by the full amortization during 2023 of the acquired in place lease intangible assets for our Oakland assets. There was no amortization for acquired in place lease intangible assets during 2024. Partially offsetting the non segment expense decrease was a $1,000,000 increase in non segment allocated interest expense, which was primarily due to market interest rate rises and higher average outstanding principal balances on our revolver. The bottom line is that our FFO was a negative 0.14 $4 per diluted share compared to negative 0 point 19 dollars in the prior year comparable period and our core FFO was a negative 0 point 9 dollars per diluted share compared to a negative 0 point 17 dollars in the prior year comparable period. These increases were primarily driven by the increase of $4,200,000 in our segment NOI, partially offset by an increase in interest expense of $1,000,000 and an increase in our redeemable preferred stock dividends of approximately $1,700,000 I also wanted to note that during the Q2 of 2024, we recommenced the issuance of our Series A-one preferred stock and raised an additional $8,300,000 in net proceeds from the sale of securities during June.

Speaker 3

We can now open the line for questions.

Operator

We will now begin the question and answer session. The first question comes from John Massocca from B. Riley Securities. Please go ahead.

Speaker 4

Good morning out there. Good morning. So, can you maybe go provide a little more color on the leasing situation at Lake Merritt and just how the giveback space is going to impact things in 3Q?

Speaker 5

Sure. So we're currently in the process of lease negotiations with the largest tenant in the building, Kaiser, which is about today, they lease about 2 thirds of the building. So those negotiations are ongoing. They did give back and this is something that we previously disclosed that they gave back about 130,000 square feet at the end of July. That will not be those are that square footage is not part of the negotiation for future lease.

Speaker 5

So we're but we are in the process of negotiating an extension on their space that expires part of it in 2025 and part of it in 2027.

Speaker 4

Okay. And then maybe on the open multifamily side of things, obviously, it seems like in the current market, supply shouldn't be much of an issue, but what are you seeing on the demand side in terms of multifamily in that market?

Speaker 5

We actually I mean, as you could see by the numbers, we had a pretty good first half in terms of picking up occupancy, which was very encouraging. So I would say we have seen a pickup in demand. Having said that, the market is still, I think, market wide vacancies roughly 10% still, which is much better than the trough, which was 17%, 18% or so a couple of years ago. So we've seen a lot of absorption. But we what we really haven't seen yet is a pickup in rate.

Speaker 5

That continues to be a challenge and it continues to be a market where there's it's a very high concessions market at the moment. But we have seen, I would say, a pickup in just overall lease velocity. And we were able to get our occupancy into low 90s, which was encouraging.

Speaker 4

Okay. Where would you think occupancy need to trend in those assets before you could start pushing back a little bit on concessions and maybe pushing more aggressively on aggressively on rate?

Speaker 5

Probably in the mid-ninety percent range. And overall markets, as I mentioned, somewhere around 90% occupied.

Speaker 4

Okay. And then on the balance sheet side of things, given the moves you've seen in interest rates, maybe excluding today, but the moves you've seen in interest rates in the last couple of weeks, how does that impact your outlook for refinancing, anything maybe on the balance that you could pull forward or out if rates continue to trend downward, particularly long term rates?

Speaker 5

Yes. So it's certainly been good to see from our perspective. We have a good amount of floating rate debt, which those rates come down. Short term rates, there's pretty significant savings for us. But in addition to that, I think what you're more referencing is the potential to potentially fix some of our loss fix some of our rate on some longer term financing.

Speaker 5

And so that's something we will take a look at as well as we've seen kind of the 5 year come down quite a bit. So there is a potential opportunity for us to swap from floating into some potentially, we're looking at that right now into some a little bit longer term fixed rate debt.

Speaker 4

Okay. And then last one, I mean, in the past calls you talked about some assets that you being non core and some disposition opportunities that might be out there, especially as financing has gotten cheaper for your counterparties in any deals. Have negotiations or talks there picked up or is it still kind of a little bit early innings on capital recycling and dispositions?

Speaker 5

We're still, I would say, more in the evaluation phase. What we would like to do we would like to reduce both our recourse and overall debt. So we are really evaluating and doing some work on an asset by asset level to see where we can basically generate the most value. And I think some of the non core assets that we've discussed in the past, I would also include them in that mix as well, particularly the hotel and lending division.

Speaker 4

Would the primary use of proceeds be on the multifamily side still in the same markets you're in today?

Speaker 5

I think the primary use of proceeds today really would just be to pay down debt. That's really our focus at this moment. And then I think as the market settles a little bit, look to potentially be back as an acquirer. But for now, we really want to get the debt balanced down a bit.

Speaker 4

Okay. I appreciate the color and that's it for me. Thank you.

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Key Takeaways

  • Net operating income rose to $16.2 million in Q2 2024, with year-over-year gains across office (+9% to $7.6 million), hotel (+5% to $4.3 million), multifamily and lending (+42% to $743K), though cash flow remains pressured by elevated short-term rates and soft Bay Area multifamily rents.
  • The company is prioritizing balance-sheet strength by evaluating asset sales to reduce recourse and overall debt, expects relief from declining SOFR and Fed funds rates, and raised $8.3 million net proceeds from a June Series A1 preferred stock issuance.
  • Its development pipeline is ahead of schedule on two of three projects: a 68-unit conversion at 701 South Hudson to complete in Q3, a 36-unit 1915 Park delivery by mid-2025, and a $21 million, 503-room renovation at the Sheraton Grand Sacramento due by year-end 2024.
  • Multifamily occupancy climbed to 92.5% (from 79.3% at end-2023) and EchoPark reached 93.3%, with new-tenant rents over 20% above in-place rates, yet rental growth at Oakland assets remains below expectations amid market supply absorption.
  • FFO per share losses narrowed to $0.144 diluted (from $0.19 a year ago) and core FFO losses to $0.09 (from $0.17), driven by higher segment NOI partially offset by increased interest expense and preferred dividends.
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Earnings Conference Call
Creative Media & Community Trust Co. Q2 2024
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