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spk02: Ladies and gentlemen, welcome to Calibre's third quarter 2023 conference call. As a reminder, today's call is being recorded for replay purposes. I would now like to turn the call over to Tamara Gonzalez, investor relations for Calibre. Please go ahead.
spk01: Good afternoon, everyone. Welcome to Calibre's third quarter 2023 financial results conference call. With me today are Chris Woffler, Chief Executive Officer and Co-Founder, and Jay 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 at www.caliberco.com. 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. There could be no assurances that these will actually take place. So our actual future results could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. It is now my pleasure to turn the call over to Chris. Chris?
spk05: Thank you, Tamara, and thank you, everyone, for joining us on the call today. This is our first call since going public in May of 2023, and we've taken time since then to build our investor relations program and raise Caliber's awareness among investors and analysts. We've enjoyed engaging with the community, and we really look forward to our ongoing conversation. Some of your listeners have known Caliber for many, many years, and many are new to the Caliber story. I'd like to take a few minutes to explain who we are, what we do, our business strategy, and our competitive advantage. Throughout the call, I will also define some of the specific terminology used in discussing our business so it's easier for you to follow Caliber. Starting with who we are, Caliber is an investor, developer, and manager of real estate. We currently have more than $2.9 billion of managed assets, and a 15-year track record built on a singular goal, to make money in all market conditions. Our business is designed to provide our customers with real estate investment opportunities and real estate projects, strategies, and geographies that they could not access working with traditional global institutions. Our customers invest in Calibre's funds, which are managed by Calibre as a real estate asset manager. Our shareholders enjoy growth, as Caliber increases fundraising from our customers into our funds and then invest that capital from our fund into real estate investments. Along the way, we generate various forms of fees from managing those funds and underlying investments successfully. There's a direct correlation that if Caliber's customers succeed, so do our shareholders. The company generated $84 million in total revenue and $24 million in segment revenue in 2022. We've delivered positive adjusted EBITDA for three of the last four years, spanning from 2019 to 2022, and we expect to grow profitably over the long term. Moving deeper into what we are and what we do, Caliber is a financial services company, specifically a real estate asset manager. We focus on investing in projects that are generally 5 to 50 million in total size, something that we define as middle market real estate investments. We believe real estate investing is cyclical and local, and because of that, we think of our business more as a speedboat, driving towards each opportunity that presents itself as the market evolves. The contrast to that would be a cargo ship, which rarely changes course while pursuing the exact same asset class or strategy. Furthermore, we are asset class agnostic, and we have experience investing in nearly all real estate asset classes. Our current focus includes multifamily, hospitality, office-to-residential conversions, retail, entertainment, and mixed-use development in qualified opportunity zones. Caliber invests in geographies where we have a competitive advantage. For most asset classes, we focus on investments in Arizona, Colorado, and Texas. For hospitality, we develop a national scope focusing on growth-oriented markets in the southeast and southwest. Caliber employs a variety of real estate investment strategies that we believe will enable us to make money in all market conditions. The first strategy is buying real estate at a discount to its replacement costs, often referred to as distressed investing. Second, involves building value on land through new development or changing the use of an asset, also called adaptive reuse, or completing transformative renovation of existing assets. All three of these activities are often referred to as opportunistic investing. Third, we build strategies designed to provide our customers with steady income from real estate, mainly through buying stabilized assets and something that we refer to as core plus investing. Finally, we create investments that allow our customers to lend their funds and generate fixed rates of return, a form of private credit investing. Caliber's business model is to identify opportunities in the real estate market, create investment strategies to capture those opportunities, fundraise into each strategy, and then manage those investments and strategies to their conclusion. We generate revenue through three primary fee categories. The first is asset management fees. The second, performance fees, also known as carried interest. And the third, transaction and advisory fees. Our fee growth is a function of our success in fundraising, our success in growing our assets and our management, and our success in managing the journey of each asset. When we discuss fundraising, we sometimes refer to that as the change or growth in our managed capital. To be clear, this fundraising is occurring in Calibre's fund, which are products managed on our platform. This is not fundraising into Calibre or CWD, the public company. This fundraising does not create dilution for our shareholders. Calibers funds are marketed through Calibers in-house fundraising team and external partners. Our channels for capital include direct sales to private high net worth investors and family offices, wholesale sales to investment advisors and licensed brokers, and co-investing strategies for institutions. Caliber's competitive advantage lies in our ability to provide our customers with an experience analogous to what they may have had with a large global institution, while executing their real estate investment strategy as flexible entrepreneurs with on-the-ground knowledge. To do this, Caliber built our own in-house asset services group, which provides many of the critical services necessary to acquire, transform, construct, and manage real estate investments. Revenues generated by this group ultimately lead to better returns for our customers. Our deep involvement in each project through these services enhances Caliber's ability to find the opportunity to market in the first place and to create shareholder value as we generate more revenue on a per dollar of AUM basis. Critically, these functions also allow us to invest in assets that are frequently overlooked by large asset managers. Middle market assets often require in-house services to generate profitable return, as hiring all third-party providers may not work at this scale. Our third quarter results reflect the investments we made in our strategic growth initiatives. We expect to gain value from our investments going forward in the form of revenue growth. We continue to execute on our strategy in a very dynamic marketplace that includes a challenging fundraising environment, a real estate investment market that has come under distress, global conflict, and looming potential U.S. or global recession. Marketplace disruption is not new to Caliber. As we enter our 15th year of operations, we have managed through a wide variety of marketing conditions. Our team has the proven experience, vision, and agility needed to move the market. The rise in interest rates started in 2022, and it was the steepest in modern history. We believe we are at or near the end of interest rate increases, which also marks the beginning of a new cycle in the real estate investment world. Time will tell what this cycle will mean. At Caliber, we believe we are entering a market where assets can be purchased at a discount to their replacement value, and projects will struggle to find funding. Turning to an overview of the quarter, in the first nine months of the year, total revenues for the third quarter of 2023 decreased 12.7% to $17 million due to lower transaction and advisory fees. This reflects the impact of a one-time fee we recorded in Q3 of 2022. AUM for the quarter increased 20% year-over-year to $822 million. and managed capital increased 18% year-over-year to $412 million, reflecting the success of our continued fundraising in Caliber's real estate investment fund. We reported a net loss in the third quarter of $3.4 million, or $0.16 per diluted share. This loss reflects an accumulation of expenses related to the significant investments we made throughout 2023 in the growth of our team, the launching of three new funds, the launching of the Caliber Hospitality Trust, or CHT, Dave will take you through our financials in greater detail in a few minutes. While the environment has impacted Caliber, our team doubled down on fundraising this year, which remained on track to meet or exceed our prior year's results. We are in a new real estate investment cycle, as I mentioned, which drove Caliber to complete a year-long process starting in 2022 and ending this year to restructure and launch three new real estate investment funds, to capture the potential discounted buying opportunities that we see now and expect to continue to see. The funds offer an opportunistic strategy, a core plus strategy, and a qualified opportunity zone strategy. Notably, Caliber's new funds offer Caliber customers the ability to capture new investments without significantly diluting their ownership with assets purchased at a higher cost basis prior to 2022. We are in conversations with developers in need of funding that will allow us to invest in projects that material discounts the cost. This includes projects in opportunity zone locations we are active in, such as Scottsdale, Arizona, and Bryan College Station in Texas. This is also true for owners of existing real estate assets and associated financial institutions. They now appear ready to sell at a discount. Throughout the first nine months of this year, we built a foundation for growth. Our strategy has been centered on building funds, fundraising channels, and raising capital to prepare for the new reality in the market. We are entrenched in the capital raising process right now and expect to be ready to capitalize on these opportunities as they come. Further to that goal, we entered the wholesale distribution channel with our partner Skyway Capital. We hired an internal team of sales professionals along the way. This allows us to reach a large and growing market of registered investment advisors and licensed security brokers nationwide. We continue to make great strides in building out Caliber Hospitality Trust, our externally advised private hospitality company. We recently received our first investment capital into CHT's preferred equity, and our plans for CHT remain on track. We expect CHT will more than double our AUM in the near term. Our team is an important driver of our success during the quarter. We invest in the strategic high quality hires across our business. And we are pleased to welcome Ignacio Martinez, who joined our team earlier this year as SVP of operations. Ignacio has made critical improvements to our operations, including enhancing our customer portal and interconnecting our data. We are also pleased to welcome Jonathan Pettit as SVP of investments. Jonathan is the former CEO of a successful single family office and bench strength to manage and grow our new and existing funds, such as the Caliber Tax Advantage Opportunity Zone Fund II and the Caliber Diversified Opportunistic Growth Fund. We continue to build a team of analysts and financial professionals that will enhance our ability to pursue a broader range of deal flow and special situation opportunities. We believe that making strategic investments, even when the market is challenging, positions us to capitalize on the opportunities this environment will produce, which will enable us to grow revenue and accelerate our path to profitability. Today, we announced our three-year financial target to assist investors in understanding our plans for financial performance and to provide better clarity on the returns and timing we expect in the investments we have made. Caliber has issued three specific financial targets. The first, a cumulative fundraising target of $750 million in total for the period between 2024 and 2026, so essentially the next two years. The second, an AUM target of $3 billion in AUM by year-end of 2026. And the third, a target of generating annualized segment revenue of $50 million per year by year-end of 2026. Now, I'll turn the call over to Jay for a detailed look at our third quarter results and some commentary around our financial targets.
spk06: Thank you, Chris. Good afternoon, everyone. Nice to be with you all today.
spk07: Before I dive into our results for the quarter, I thought I'd spend a few minutes explaining the structure of our consolidated financial statements. Caliber's consolidated financial statements include our wholly owned subsidiaries and certain of our funds that we manage. Generally speaking, we consolidate any fund which has third-party debt that has a payment guaranteed by Caliber or any of our wholly owned entities. Consolidation occurs even if we only own a nominal equity interest. To assist readers of our consolidated financial statements in understanding the performance of Caliber and our wholly owned entities only, we have included our statement of operations, essentially the income statement, presented on a segment basis and discussed major changes over the periods presented. We believe that segment reporting is the best representation of Caliber's performance to its shareholders. Our business is organized into three reportable segments, which basically align to how we earn fees. These segments are fund management, development, and brokerage. As Chris mentioned, because Caliber is vertically integrated, we earn multiple revenue streams on the assets we manage. Caliber receives revenues in the form of fees that we collect from our funds or assets. These fees include An asset management fee, which includes both a fee generally equal to one to one and a half percent of the total capital managed in a particular fund to compensate us for the overall administration of that fund. In addition, we also receive certain cost recoveries. Performance allocations or carried interest, which are earned on cash distributions made by a particular fund and are generated on cash flows from operations or when we sell or refinance any real estate assets held in a fund, and transaction and advisory fees, which generally include fees for services, including fund setup fees, organization and offering fees, brokerage fees, construction and or development management fees, loan placement and guarantee fees. So with that background, let's go through our results for the third quarter of 2023, starting with our consolidated results. Total revenues were $17 million, a decrease of 12.7% versus the same period a year ago, primarily due to lower transaction and advisory fees. In the prior year, we opened and began fundraising into our second Opportunity Zone Fund, the Caliber Tax-Advantaged Opportunity Zone Fund 2 LLC. This generated a $4.4 million organization and offering fee in the quarter. By comparison, we did not open a new fund in the current year quarter. Consolidated asset management fees were $1.3 million, a 29.6% increase compared to the same period a year ago due to the steady increase of capital managed. Keep in mind, consolidated asset management fees are lower than what we show on a segment basis because we eliminate all of our fees earned from assets that we are required to consolidate. total managed capital grew from 349 million to 412 million from September 30th, 2022 to 2023. Consolidated expenses for the third quarter were 28.4 million, up 32.9% over the same period one year ago, primarily due to an increase in consolidated fund related expenses from our Hilton Hotel in Tucson. which was consolidated during the first quarter of this year. Hotel expenses were impacted by rising labor costs and variable costs associated with increased revenue, such as management and franchise fees and loyalty program costs. Hotel expenses were also impacted by closing costs incurred from shutting down operations for our Four Points Hotel project, which I will refer to in our development segment update shortly. As Chris discussed, we invested in talent during the quarter to enhance our capabilities across the organization as we prepare to capitalize on opportunities we see in the market. As such, operating costs were $4.9 million, up 52.4% versus the same period one year ago due to our investment in human capital across the organization. Despite the tight labor market, we have been successful at attracting high-quality, experienced people who enhance our ability to source attractive investment opportunities as part of our growth initiatives. Our total headcount has grown from 70 at December 31, 2022, to 99 full-time employees at September 30, 2023. For the third quarter of 2023, net loss attributed to Caliber, which excludes net loss attributable to non-controlling interests, was $3.4 million, or $0.16 per diluted share. This compares to net income attributed to Caliber of 4.4 million or 22 cents per share during the same period a year ago. Consolidated adjusted EBITDA for the third quarter was a loss of 3.2 million compared to a profit of 4.7 million during the same period a year ago due to the higher expenses we outlined related to investments in our strategic growth initiatives and decreased transaction advisory fees.
spk06: Now turning to our segments.
spk07: Total segment revenues for the third quarter were 3.7 million, 55.6% lower than the same period a year ago, primarily due to lower transaction and advisory fees in the fund management segment. Notably, we previously discussed the organizational and offering fees we earned in 2022. Transaction and advisory fees are typically the most affected by a reduction in the velocity of our fundraising. When we raise capital, we can deploy it into buying or constructing assets, both of which generate fees. Our fund management segment consists of fund management activities, along with back office and corporate support functions, such as accounting and human resources. In our fund management segment, revenues for the third quarter were $3 million, a decrease of $4 million, or 57.2% compared to the same period a year ago. To provide our shareholders with a forecast of asset management fee revenue for the year, we also look at the asset management revenue annual run rate, which is calculated by taking the asset management fees in the last quarter, in the last month of the quarter, and annualizing it for a yearly measure. In September 2023, asset management fees were approximately 800,000, which translates to a run rate of approximately 9.8 million for the year. which is an increase of 18.2% as compared to total asset management fees earned throughout 2022. The higher asset management fees were driven by a higher year-over-year average balance of managed capital.
spk06: Fund performance allocations remained relatively constant at 100,000.
spk07: One way to think about performance allocations is to reference the fair value of our assets under management, or AUM, over time. As Chris previously mentioned, AUM was $822 million, a 20% increase versus the same period one year ago. Asset values are estimated using models and assumptions determined by management and reviewed by an external specialist for reasonableness. Changes in fair value can be impacted by changes in forecasts of future performance, discounts in interest rates, investment hold periods, and progress made over construction and development cycles. The fair value of our AUM is a leading indicator of the company's potential ability to generate performance allocations in the future. Transaction and advisory fees decreased by 4.4 million, or 88.8%. This decline was highlighted earlier and caused by the formation of the Caliber Tax Advantage Opportunity Zone Fund II LLC during the third quarter of 2022. Total fund management segment expenses for the third quarter of 2023 or 6 million an increase of 1.9 million or 45.4% versus the same period, a year ago. The increase was primarily due to an increase in operating costs resulting from the investment in our strategic initiatives. Gain on extinguishment of debt represents the gain recognized in 2022 on the forgiveness of a PPP loan of 1.4 million principal plus accrued interest. Interest expense for the third quarter of 2023 was 1.1 million. The increase in interest expense was primarily due to the increase in corporate notes. Total corporate notes grew from 14.7 million at December 31, 2022, to 54.2 million at September 30th, 2023. Of that increase, 16.3 million was in the form of an assumed mortgage on the acquisition of our corporate office. The remaining 24 million was used to acquire assets and fund investments in our business. Moving on to our development segment, activities in this segment are associated with providing real estate construction and development management services. These services include managing and supervising third party developers and general contractors for the construction and development of the properties owned by our funds. Revenues that are generated by this segment are generally based on 4% of the total expected costs of the development or construction project.
spk06: Development segment revenues for the third quarter of 2023 were about a half a million dollars.
spk07: a decrease of 700,000 or 56.3% versus the same period a year ago. The decrease was primarily due to a decrease in development fees related to a commercial development project in Arizona, our Four Points Hotel in Ahwatukee next to Tempe. This project is being transformed from an underperforming hotel brand to a multifamily asset. The work performed in 2022 was focused on obtaining necessary permits Whereas in 2023, we have been working on legal structure and other administrative requirements to begin construction, which are activities that generally do not generate development fees. Finally, our brokerage segment includes our real estate brokerage operations. Caliber receives commission revenue by acting as a broker for residential and commercial real estate transactions on behalf of our funds and on behalf of owners and investors seeking to buy, sell, and or lease properties. as well as primary residences. Our second performance has not materially changed over the comparative period. Looking ahead, the fourth quarter is typically our best fundraising quarter of the year. We have every indication that we will finish the year strong as we have in prior years, although we are experiencing the same market headwinds as the rest of the industry. And finally, as Chris shared Today we announce financial targets we expect to achieve by fiscal year end 2026. First, we expect to expand fundraising activity to reach 750 million. Increased fundraising will enable Caliber to accelerate growth in AUM. Our investments in our private client and wholesale distribution platforms are expected to be the primary contributors to achieving our fundraising targets. Second, we expect to grow AUM to 3 billion. driven primarily by expanding our product offerings and the addition of assets into the Caliber Hospitality Trust, which we anticipate reaching a billion dollars in AUM by late 2024. Third, we are committed to driving profitable growth with achieving $50 million in annualized total segment revenues through the optimization of our vertically integrated business model. Caliber's model provides opportunities across different markets and resiliency in challenging times. Our proprietary middle market real estate funds enable us to generate multiple revenue streams from various investments, and we are well positioned for future growth as we continue to seize new opportunities and investments, in particular those that arise in market dislocation and disruption. I'll now turn it back to Chris for his final remarks before we take your questions.
spk05: Thank you, Jade. I'll leave you all with why we believe now is the time to invest in Caliber. During periods of increasing interest rates, the fundamentals of the real estate market can change quickly, which creates dislocations and demand for increased liquidity. In the middle markets, these scenarios can be exacerbated as this portion of the market is often ignored by many investors. Caliber can supply this liquidity with our deep real estate experience and knowledge. Our strategy is nimble, we are asset-light, and we are poised to take advantage of this disruptive real estate market, which we believe would provide opportunities to acquire good assets at a discounted price. Simultaneously, our funds can benefit by generating attractive returns for our growing number of investors who are seeking alternative investments and for our shareholders who benefit from the fee income from those investments. While it may seem counterintuitive, This is an exciting time to capitalize on the opportunities we see in the real estate market today. Alternative investments are seeing strong demand, but the only way the asset class will grow is if the capital is invested and if companies like Caliber create an access point to invest that capital. Caliber is meeting this demand by providing those investment structures and funds, and we're establishing Caliber to be the preferred alternative for middle market real estate. This is how we'll increase our revenue, earnings, and create value for you, our shareholders. In closing, I'd like to thank our employees for their dedication and hard work, and our shareholders and investors for your continued interest and investment in Caliber.
spk06: Thank you for your time today. Thank you.
spk02: Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star 1 on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. If you would like to withdraw from the question queue, please press star 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question.
spk06: Your first question comes from Brendan McCarthy of CDOD. Your line is already open. Hey, Chris and Jade. Good afternoon, and thank you for taking my question. Hey, Brendan.
spk03: Hey, so I'm wondering, you know, just to start off more of a general question here just just curious as to where you're finding your team is finding the best value whether it be across your multifamily hospitality office or retail from a distressed perspective yeah so from a distressed perspective and apologize for my voice here i caught the uh whatever the flu is going around but um the uh you know i think the deepest discounts in
spk04: purchase price as compared to the value to build an asset or an office. And what we're looking at is office conversions, so opportunities to buy office that can be converted to multifamily primarily and other uses. We're also finding some interesting distress in the hotel sector. And it doesn't make a lot of sense because when you look at hotels, you can see that they're actually increasing in profitability year over year. They're actually in the best performing sector. But the capital stack associated with those hotels The fact that the debt is probably overdue and the fact that those hotels had to find a way to make their way through COVID is causing issues around being able to refinance the properties and ultimately forcing a sale.
spk03: Got it. That's helpful. And then looking at the fundraising, it looks like roughly a little over $68 million from October of last year through September 30th. Just wondering if there was a pretty meaningful contribution from the SkyWay wholesale partnership there?
spk04: Yeah, excuse me, not yet. So far, that's all been our internal team that's been in place for a while. And they're doing a good job, especially in a difficult fundraising environment. As an example of that, they're still on track for us to kind of meet or exceed last year's numbers. And yet they've had to make three times as many phone calls, probably do three times as many emails, et cetera. So it's a lot more work in this environment. On the Skyway relationship, most of the infrastructure didn't get in place until the end of June of this year. And so we've had about right through the first quarter so far to get that team actually selling and meeting with investors and such. So we're starting to see the pipeline build, and we expect it to start contributing in a meaningful way going forward.
spk03: Understood. And I think in the earnings press release, I saw, you know, after the quarter closed, Caliber signed the first selling agreement with a regional broker dealer for investments into Caliber funds. Can you kind of walk us through what that process looked like and then maybe talk about what the pipeline looks like with regards to, you know, similar partnerships?
spk04: Sure. Yeah. So the fundraising function of our business is sort of the leading indicator for revenue growth. As we fundraise into the funds, we generate certain initial revenue, but then when we go out and invest in real estate, we start to generate other types of fees and growth in the AUM of the company. When we talk about wholesale fundraising, instead of going from caliber directed to a high net worth or ultra high net worth investor in a one-for-one relationship, we're now winning a relationship with more of a B2B structure with an investment advisory firm or a broker-dealer In that case, advisory firms typically have between five and 30 reps on average versus broker-dealers will have 30, 40, 50, 100, hundreds of reps across the country. So the process is we win a relationship, we go through due diligence, that broker-dealer agrees to sign a selling agreement with Caliber. At that point in time, every broker on the platform can now sell Caliber's products to their customers. So it's a significant increase in our ability to distribute our funds and ultimately raise capital into the funds.
spk06: Great. Thank you.
spk03: And just out of curiosity, are you able to disclose, you know, other conversations you're having with other RIAs or broker dealers and I guess, you know, some of the larger wire houses maybe?
spk04: Yeah. So we're, we're, um, planning to continue to disclose as we sign meaningful selling agreements. As far as the pipeline goes, we've got about five full-time professionals in the wholesaling channel at this point in time with national relationships across the country, as well as regional relationships. And so each one of those professionals is expected to raise once they are stabilized. And once they, once they, you know, know the products and they've got their, their, their territories established typically between 20 and 50 million a year. So there's going to be some ramp up time for them to establish their territories. We're seeing a pretty significant list of leads coming in, but we probably won't make any announcements until we actually sign a selling agreement.
spk06: Thank you. That's helpful. That's all for me. Thank you very much.
spk02: There are no further questions at this time. I would hand over the call to Chris Loeffler for closing comments. Please go ahead.
spk04: Thank you very much, and again, we appreciate the interest in Caliber. The company is very excited for the market that we find ourselves in now, and as we mentioned, our strategic initiatives across the next three years. We intend to continue to report each quarter on our progress towards those initiatives, so hope that you will continue to track with us in terms of our fundraising our increase in AUM, and our revenue growth. Thank you very much.
spk02: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.
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