Creative Media & Community Trust Corporation

Hello and welcome to the Creative Media and Community Trust third quarter 2024 earnings call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad and to withdraw from the queue, you may press star then two. As a reminder, this conference is being recorded. I would now like to hand the call to Steve Alto Brando. Please go ahead.

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

Thanks Steve, and thank you everyone for joining our call today. We continue to work through the challenges in the real estate market, particularly the traditional office asset class, as well as the challenges in the Bay Area. We remain committed to increasing our multifamily portfolio as well as reducing our traditional office assets, a strategy that we have pursued for more than two years and believe is best suited for the current market environment. In the third quarter, we announced actions to accelerate our focus towards premier multifamily assets. These steps are also aimed at strengthening our balance sheet and improving our liquidity and cash flow. We are making progress against these goals. First, we are in the advanced stages of refinancing several of our assets, including our Sheraton Grand Hotel and several of our high quality Los Angeles office assets. We intend to use the proceeds from these property level refinancings to fully repay and retire our recourse corporate level credit facility. We plan to invest any remaining proceeds, along with proceeds from future potential asset sales or refinancings, principally to acquire additional Premier multifamily properties. Second, we continue to make progress on rebalancing our portfolio, including through our multifamily development pipeline and the renovation of our hotel asset. And we will continue to evaluate the disposition of assets that do not fit our strategy. With respect to our multifamily pipeline, We recently completed an office to multifamily conversion at 4750 Wilshire and are on track to complete our 36-unit multifamily development in Echo Park in Los Angeles in the third quarter of 2025. We also just closed a co-investment at 1902 Park Avenue, another premier Class A apartment property, which is located also in Echo Park. That transaction provided a cash distribution to CMCT and will contribute recurring management fees. We believe we have a growing portfolio of premier assets and these steps will better position the company to participate in the real estate recovery. Turning to our third quarter results, we continue to be impacted by elevated short-term interest rates, continued soft rental rates at our Bay Area multifamily assets, lower office occupancy, and renovation disruption at our hotel. With respect to the office, we noted last quarter our largest tenant at 1 Kaiser Plaza gave back approximately 130,000 square feet at the end of July. With respect to our hotel, our results were significantly impacted this quarter by a temporary disruption from the renovation of our hotel property in Sacramento. However, we anticipate finalizing the room renovation around year end, which will be in time for the busier seasonal period, typically in the first and second quarters of each year. With that, I will turn it over to Steve to provide a further update on our development pipeline, the portfolio, and our co-investment activity. Thanks, David.

Starting with the co-investment, we just closed at 1902 Park Avenue, a 75-unit fully leased apartment community. An international institutional investor acquired a 49% interest in this premier Class A apartment property located in Echo Park, a thriving walkable sub-market with abundant dining and entertainment options. Proceeds from the investment were used to pay off the mortgage and fund a distribution to CMCT and another CIM-advised fund. CMCT and the CIM-advised fund each acquired a 50% ownership interest in 1902 Park Avenue in early 2023 in an off-market transaction. After this transaction, CMCT's ownership will decline to about 25.5%. CMCT will earn a management fee and potentially an incentive fee based on future performance. This represents CMCT's second co-investment where CMCT earns fee income. Turning to our development pipeline, and as David just mentioned, we have three projects underway or just completed, including two multifamily projects in LA and the hotel room renovation in Sacramento. Starting with our multifamily projects, our office to residential project at 4750 Wilshire was completed in the third quarter ahead of schedule with the residential component being renamed 701 South Hudson. The asset is located in Hancock Park, an affluent residential sub-market of LA where housing is supply constrained. The property was previously a three-story office building and the ground floor creative office is 100% leased and the top two floors were converted to 68 high-end for rent residential units. Leasing has commenced and as of today, the residential portion is currently 10% leased. We are also evaluating additional multifamily development opportunities at this property on adjacent land that is currently used for surface parking. We are in the initial stages of seeking entitlements. Our second multifamily development is 1915 Park in Echo Park, which has an expected mid 2025 delivery. Upon completion, the new seven story building will feature 36 units. The building is currently being topped off with rough in work underway. Turning to our hotel, our $21 million room renovation at the Sheridan Grand Sacramento, which began in July, includes a refresh of all 503 rooms. We have completed nearly 300 rooms so far, and we expect to complete the project around the end of 2024, which is also ahead of our original schedule. We believe this renovation will be especially beneficial to the asset as it is one of just two hotels located directly across the street from Sacramento's Convention Center, which itself completed a major renovation and expansion in 2021. Turning to our operating portfolio, on a consolidated basis at quarter end, our multifamily segment was about 92% occupied, excluding the recently opened 701 South Hudson property. This compares to 79.3% at the end of 2023. This increase is largely driven by a significant improvement in occupancy at our Channel House and 1150 Clay multifamily assets in Oakland. Our achieved rental rates have been below expectations as the market continues to absorb the high level of supply added across Oakland in 2018 through 2022. Given the still elevated cost to develop, we believe the local rents would need to increase dramatically before it is economical to see new multifamily construction. Therefore, we expect minimal new supply for the foreseeable future and eventually market rent growth. Turning to office, overall, our office lease percentage declined to 72.9% at the end of the quarter from 83.5% last quarter, primarily due to the lower occupancy at our one Oakland office building, a traditional office investment that does not fit our current strategy. With that, I'll turn it over to Barry.

Thank you, Steve. Good morning. I will be going over some of our financial highlights for the third quarter, starting with our segment NOI, which was $7.6 million for the third quarter of 2024, compared to $11.2 million in the prior year comparable period, a decrease of $3.6 million. Broken down by our four segments, we experienced decreases of $3.9 million in our office segment and $950,000 in our hotel segment, which were partially offset by increases of $900,000 and $320,000, respectively, in our multifamily and lending business segments. Our office segment decrease of $3.9 million in NOI to $5.4 million from $9.3 million was was primarily driven by the pickup of earnings from our unconsolidated office entities, which collectively experienced net unrealized losses on their investments in real estate during the current quarter compared to net unrealized gains in Q3 last year. Additionally, we saw an increase in operating expenses at our consolidated properties, primarily at an office property in Oakland, California, and an office property in Austin, Texas. Our hotel segment decrease of $950,000 in NOI to $970,000 for the third quarter of 2024 from $1.9 million in the third quarter last year was primarily attributable to a decrease in occupancy, which was negatively impacted by construction related to hotel renovations that began during the third quarter of 2024. Our multifamily segment increase of approximately $900,000 in NOI to a profit of $510,000 from a loss of $390,000 for the third quarter last year. The improvement was primarily due to higher occupancy and higher monthly rent per occupied unit net of rent concessions at our multifamily properties in Oakland, California. And our lending division increase of $325,000 net OI to approximately $690,000 from $365,000 for the third quarter last year was primarily due to decreased interest expense resulting from principal repayments on our SBA 7 loan back notes. In our non-segment expenses, we had a significant decrease in depreciation and amortization of $9.7 million, which was driven by the full amortization during 2023 of the acquired in place intangible assets for our Oakland assets, while there was no amortization for acquired in-place lease intangible assets during 2024. Also of importance is our election to redeem a total of approximately 2.6 million shares of Series A1 preferred stock and 2.2 million shares of Series A preferred stock in late September 2024. We paid for these redemptions through the issuance of shares of our common stock, which in total amounted to approximately 60.5 million shares. Concurrent with such redemption, we suspended our offering of the Series A1 preferred stock. The redemption caused us to record approximately $16 million as a reduction of net income available to common stockholders. The preferred redemptions are part of our ongoing efforts to improve our liquidity in FFO and, based on the current Fed funds rate, will reduce our preferred dividend by nearly $8 million per year. Our FFO was a negative $1 per diluted share compared to negative $0.31 in the prior year comparable period, and our core FFO was a negative $0.40 per diluted share compared to a negative $0.29 in the prior year comparable period. The decrease in FFO was primarily caused by the redeemable preferred stock redemptions of $15.7 million and the decrease of $3.6 million in segment NOI. The decrease in core FFO was driven by the previously mentioned decrease in segment NOI, but not impacted by the increase in redeemable preferred stock redemptions, as these are excluded from our core FFO calculation. We can now open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, you may press star then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from John Masoka with B Reilly Securities. Please go ahead.

Good morning. Maybe just going first to the preferred conversion. Can you maybe provide some color on the drivers behind the decision to convert those into common equity? And I guess maybe longer term, what's the potential for more conversions going forward?

Sure. This is David. I'll take a shot at that and see if you can fill in if I miss anything. I mean, As we noted in our press release and our discussions, we're very focused on strengthening the balance sheet, improving cash flow, focusing on liquidity. We've long said that our target capital structure has about 40% common equity. And what we've seen over the last couple of years with the values of real estate going down because of interest rates, and particularly for us, challenges in the Bay Area, that had gotten out of balance. So this helps us in that regard. And it also helps us with, again, taking more proactive steps to improve cash flow. So we save on the cash preferred dividend by converting it into common. And again, this kind of aligns with some of the other things we've talked about doing, including being in the advanced stages of refinancing the hotel and several of our high-quality LA office assets. And again, to put us in a better position to be, again, focused on strengthening the balance sheet and improving the cash flow. I think with respect to going forward, I mean, it's something we're just going to have to continue to evaluate. Ultimately, that will be a decision of our board, but it's something that we're keeping an eye on and, again, don't have a view one way or the other at this point, but it's something we'll continue to evaluate.

Okay. Is there a certain kind of conversion price that is off-putting to doing more going forward? I mean, the stock obviously has been down significantly. You know, the common equity has been down significantly since the conversion happened. And I don't know if that, you know, if you or the board find that off-putting for more conversions going forward or if it's just kind of this is something that needs to happen in order to right-size, you know, where you want the balance sheet to be positioned.

Yeah, I mean, I think they're all factors we're going to have to look at. We'll have to look at where it's trading. We'll have to look at, again, what are the benefits to our liquidity, what are the benefits to, again, getting our capital structure back more in line with the target. So it's all going to come into play. And, again, ultimately it will be something the board will have to make a decision on.

Okay. And then, you know, in terms of some of the planned future refinancings, is there – you know, broad strokes, kind of a range of interest rate savings you're kind of looking at today as you think about some of those, that refinancing activity, or is it still, you know, too early? Steve, you want to take that on?

Yeah, I mean, a lot of it is really dependent on the five-year, which has been pretty volatile of late. But I think more than anything, I think there is an opportunity for interest rate savings, but kind of bigger picture for us is we are shifting our financing strategy more to a property-level strategy. And, you know, there's certain benefits of that, including, I think, just overall risk to the enterprise. I think there is an opportunity for some interest rate sinkings and certainly an opportunity to term out our debt, extend the maturities. So that's really the driver behind it is really, I would say, the

shift of the strategy as opposed to the rate yeah but having said that i do think there are some opportunities to reduce rate a little bit would you be looking to um you know kind of create more capital via those refinancings or is it kind of going to be a one for one and you're just kind of looking to um you know shift stuff positional positionally and then also Would the focus be more on fixed or kind of floating, you think, at a property level?

There is an opportunity to free up some capital. Our leverage, when you look at just pure debt versus our assets, is pretty low. So there is an opportunity to free up some capital. And with respect to rate, for the most part, we're looking at fixed rate, the exception being the hotel where there's a business plan short term with respect to the renovations. in which case we're looking at refinancing that asset right now, and it would be a floater. And the benefits of that is it allows you to basically refinance at a later date without any restrictions of basically prepayments.

And then any kind of other things going forward that could create additional capital, maybe disposition of assets you're looking at today and or other forms of raising capital now that the preferred pipeline, if you will, has been turned off?

We are really looking across every asset in the portfolio and evaluating whether it makes sense to potentially sell. I would say everything is on the table on that front and we'll continue to Really be focused on positioning the portfolio, raising some capital near term, positioning the portfolio for growth going forward.

Okay. And then one last one for me. Sorry, it's a little all over the place given the direction of the last couple of questions. But if you did create more capital on the balance sheet today, any thoughts to a buyback just given where the stock is trading?

I think it's a little too early. Go ahead, Steve.

Yeah, I think it's a little too early. We still have some wood to chop on the refis. Once we get through that, the goal is to retire the credit facility entirely and wind up with some additional capital. And at that point, we can start evaluating whether something like that makes sense.

I appreciate taking questions. That's it for me. Thank you. Thanks, John.

Thank you. This concludes our question and answer session, and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.