CaliberCos Inc.

Ladies and gentlemen, welcome to Caliber's third quarter 2024 earnings call. As a reminder, today's call is being recorded for replay purposes. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. I would now like to turn the call over to Maura Cunlan, Investor Relations for Caliber. Please go ahead.

Thank you, Camille. Good afternoon, everyone. And thanks for joining us for Caliber's third quarter 2024 financial results conference call. I'm here today with Chris Laughler, Chief Executive Officer and co-founder, and Jade Leung, Chief Financial Officer. 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 .caliberco.com. After management's commentary, we will open the call up to your questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, accept, and anticipate refer to our best estimates as of this call, and there can 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, please go ahead.

Thank you, Maura. And thank you, everyone, for joining the call today. For those of you who are new to Caliber, we are a real estate asset manager. In the business of investing in developing and managing real estate through private funds and similar vehicles. We generate income through recurring asset management fees and one-time performance fees that continue through the life of the investments we manage, which typically spans from five to 10 years. We invest in attractive markets, namely Arizona, Colorado, and Texas, for our non-hospitality commercial and residential real estate and nationally through our hospitality investment platform. Investors can choose to participate with Caliber as a client of the firm, investing in our various private real estate funds, or as a stockholder in Caliber, owning a proportionate share of our operating business, also known as the sponsor of our private funds. Caliber became public in May of 2023 by listing on the NASDAQ through traditional IPO. And wanted to turn now to our quarterly results. I'm very pleased with our progress this past quarter and through a combination of well-placed cost savings and solid revenue growth, we've achieved positive adjusted EBITDA and positive platform earnings during the quarter. And we also nearly doubled our asset management revenues over the quarters. In our earnings release, we provided a definition of our platform results, which we believe, management believes, that directly shows the business performance that Caliber stockholders benefit from. Jay will provide you with some further detail on this during his comments when we get to his section. On our second quarter earnings call, we shared that we thought we would achieve positive platform adjusted EBITDA in Q4 of 2024 and positive platform net operating income in 2025. We are pleased to see that Caliber is tracking slightly ahead of our objectives that you all may now see what we see for Caliber's future. Prior to that, we shared with you that Caliber's expenses had grown ahead of our revenue growth and that we needed to take some austere measures to right size our business and return to consistent profitable growth. This quarter's results show that we were not as far away from that goal as some may have thought. Having said that, we still face some volatility in our business. And long term, we expect to achieve our strategic objectives with business results generally flowing up to the right, albeit not perfectly linear. As you know, some of our prior headwinds have been caused by macro trends, such as the rapid rise in interest rates, corresponding decrease in commercial real estate values, and decrease in the pace of fundraising into private real estate funds. While these trends continue, we are also noticing countervailing information, such as the expectation from Deloitte's recent survey of real estate industry experts, showing that 88% of surveyed participants expect revenues in commercial real estate to grow next year. So what has changed in the market? With the recent reduction in interest rates, asset prices, which had been falling rapidly, are now decelerating in their decline, and in some cases, they're finding their bottom. When we look at the data and we combine that with our on the ground knowledge, we think that we've reached an inflection point where it makes sense for us to buy real estate again. The timing is not dissimilar to what we saw in 2009, following the 2008 financial crisis, where asset values found a floor quickly, but the ability to buy those assets at a newly discounted price occurred slowly for years to come. Some of the fees associated with us gearing up for our investment engine came through in this quarter, which partially drove our results. And we saw an improvement in the debt financing fundamentals, which allowed us to close some financings despite the ongoing challenged debt environment. We are cautiously optimistic that better deal terms will continue to trend favorably for Caliber. Moving to Caliber's inner workings, we've mostly been very busy this quarter. Sometimes the announcements and activity can be hard to follow, so I would like to take some time to weave together some of our most recent announcements as they relate to our objective to increase revenue growth through three strategic priorities. The first priority is to acquire more income generating real estate investments. As I mentioned, the real estate market has seen a significant drop in value from its most recent valuation peak. And we believe now is the time to start acquiring more attractive priced assets. One way we are doing this is through our planned roll up of the Caliber Hospitality Trust or CHT, targeting middle market income producing hotels throughout the United States. We recently reached a definitive agreement with the Satori Collective to contribute seven hotels to the trust for a combined value of $120 million. These properties include a mix of middle market, full service, select service, and extended stay hotels in the Midwestern and Southern U.S. and represent well known brands, including Marriott, Hilton, and IHG. With these Satori properties, CHT now has 15 hotels in the closing process, including the eight from LTD we announced previously. Assuming all these properties close, CHT will have a total of 22 hotels in its portfolio, and we will have expanded CHT's asset center management from 234 million to 530 million. In addition, with all 22 properties in CHT, we expect Caliber's asset management revenue run rate to increase by approximately 2.4 million or 42%, given the value of the portfolios contributed in the terms of the contribution and management agreements. Another avenue for bolstering our income generating AUM is the elevated experience we have created for 1031 exchange investors seeking quality income generating assets. If you're not familiar with a 1031 exchange, it's a program that allows an investor to sell real estate and avoid capital gains taxes by buying new real estate within 180 days of the sale date. The short window investors have to sell an asset, identify a new asset, and close drives challenges for many investors seeking to reduce their tax liabilities. We believe Caliber provides a solution for these persistent challenges. Caliber offers a unique white glove experience for investors seeking a quality partner to complete their exchange, and we expect to close our first exchange investment in the fourth quarter of 2024. We've also created a 1031 focused page on our website, and we have been pleasantly surprised with the early results of incoming inquiries for seven figure exchange candidates. Our second revenue growth priority is to accelerate is to create more single asset investment offerings. We believe we'll be able to attract more investment capital in this format, and we have a series of projects ready to present investors who are seeking to build wealth with real estate. For example, in September, we acquired the Canyon Corporate Center in Phoenix, which features over 300,000 square feet of Class A, but mostly vacant office space, as well as two parking garages and nine acres of development property. We were able to purchase this property at a very attractive price point and plan to renovate the two buildings into a minimum of 400 apartment units with the potential to go up to 700 units on the project site. Additionally, there is an adjacent vacant parcel of land that we will evaluate for future development. The property is ideally located near the redevelopment of Metro Center Shopping Mall and is in close proximity to Taiwan Semiconductors North Phoenix Campus, making it an attractive housing option for their expanding workforce. Canyon is an exciting single asset investment opportunity that is well positioned in the multifamily asset class, where demand continues to exceed supply as the housing shortage in this country persists. Another example is our Pure Pickleball and Padel project at Riverwalk in Scottsdale, Arizona. On an 11 acre parcel, we plan to build a state of the art pickleball facility, including 50 indoor courts for daily open play, as well as large tournaments, a clubhouse, fitness center, pro shop, teen center, office, restaurant, cafe, and locker rooms. We expect to break ground in 2025 and complete construction in 2026. Single asset offerings boost fundraising as they offer multiple ways for investors to participate, including as a diversified fund investor, direct project investor, a 1031 investor, an opportunity zone investor, or as a self-directed IRA investor. Our third priority to drive revenue growth is what we call build what we own. Recent macro improvements to the construction financing environment and Caliber's recent on the ground success in gaining approval from the town of Johnstown, Colorado's council to issue special improvement bonds or SIDS bonds is driving our ability to keep projects moving forward in attractive markets. Where our competitors may not be finding a path forward, Caliber has tapped its creativity to uncover unique, complex and accretive financing sources. Speaking of unique, complex and accretive financing sources, this quarter, Caliber announced the launch of its innovative new qualified opportunity zone fund roll up program or QOF, which is what we name opportunity zone funds to save us some words here. And we completed our first merger with a third party fund, resulting in a 14 million dollar increase in managed capital in Caliber's existing QOF, the Caliber Tax Advantage Opportunity Zone Fund LP or CTAP-1. This program offers a potential solution for investors who have not previously been able to realize the benefits of these complex investment vehicles. For Caliber, the program offers a unique way for us to raise large raise larger investments into our opportunity zone strategy without sourcing capital in small amounts over time. For investors who manage their own fund, our new QOF roll up program solves many problems for single asset or single family funds. Many of these funds have investment capital to deploy, but they lack access to quality investment targets. Additionally, some funds have made investments and are facing challenges to finish their projects. Caliber was one of the first firms in the United States to create and successfully fund a QOF. And we are uniquely positioned to rapidly deploy a new new QOF capital into potentially attractive projects, particularly the acquisition and development of distressed real estate properties. Caliber's platform includes in-house development and construction management, allowing our team to efficiently assess projects midstream and continue or improve the existing plans. Turning to a few high level comments about the quarter, as I mentioned in my opening remarks, in Q3 2024, we achieved positive adjusted EBITDA and platform earnings one quarter ahead of our plan. The cost savings we implemented in the first half, combined with the healthy revenue growth in the quarter drove these strong results. We remain on track to continue realizing the initial six million of annualized savings in the final quarter of 2024. With the benefit of cost improvements anticipated in 2025 for the full year, we also stand by our target to achieve positive net operating income at the platform level for the full year 2025. Moreover, we remain confident in Caliber's medium and long term growth prospects, and we are acting to ensure that we can achieve our previously announced three year goals. I will now turn the call over to Jade, who will take you through our third quarter financials in greater

detail.

Thank

you, Chris. Good afternoon,

everyone. Before I begin, I wanted to respond to feedback we received from our partners and investors who are unsure how Caliber's financial performance is impacted by the changes that were reflected in our consolidated financial presentation. I'd like to take a moment to simplify what that change is and how it impacts our results. Consolidation is very simply the process of combining the activities of individual businesses and presenting their results altogether in one view or presentation. Any activities that are generated between those individual businesses are removed in this presentation to avoid inflating or double counting results. Consolidation generally occurs when one company owns more than 50 percent of the equity of another company. However, it can also be required for other reasons that have nothing to do with equity ownership. An investor in Caliber, the CWD, is invested in an entity which provides management and related services, platform, if you will, to real estate investment funds. These real estate investment funds each have their own separate investors who are responsible for the risks and the benefits of their respective fund. Because of this, being an investor in CWD is very different than being an investor in one of these real estate investment funds. CWD is required to include some of the real estate investment funds we manage in our consolidated results simply because we were a guarantor of debt that is secured by the real estate asset held in that fund. This financing structure and as a result, this requirement to consolidate is not uncommon in the asset management and private equity industries. Some of these assets were in the normal course of business, refinanced in the current year, and the terms of that new debt did not require CWD to be a guarantor anymore. Guarantor requirements can vary by lender and the necessity to have a guarantor can be impacted by the strength and health of the underlying real estate. As a result of this event, we are no longer required to include these real estate funds in our consolidated results. As we have previously discussed, beginning in Q1 of this year, we are no longer required to consolidate Caliber Hospitality LP and the underlying six caliber hotels. In Q2, we are also no longer required to consolidate Elliott and 51st Street LLC and its underlying asset, which is being converted from a hotel to a multifamily apartment. And now in Q3, we are also no longer required to consolidate DT Mesa and its underlying commercial properties. As a result, our comparative financial information is less meaningful since the prior year's results continue to include the historical performance of these assets. It's for these reasons that we continue to include unconsolidated platform performance information in these updates to provide a clearer understanding of the performance and growth of the company over time. We use the term platform interchangeably with unconsolidated in this regard. With that, I'll now turn to our results for the third quarter of 2024. Third quarter total consolidated revenue was $12 million, a decrease of .5% versus the same period a year ago, primarily due to a decrease in consolidated fund revenues. This decrease was due to the deconsolidation of Caliber Hospitality LP and the Caliber Hospitality Trust in March of Elliott and 54th Street and DT Mesa in Q2 and Q3 respectively, and was partially offset by an increase in asset management revenue due to an increase in fund management revenues. Consolidated expenses for the third quarter declined by .8% to $11.1 million. The decrease was primarily due to a decrease in consolidated fund expenses, which was due to the deconsolidation of the same assets noted prior. For the third quarter of 2024, net income attributed to Caliber, which excludes net loss attributable to non-controlling interest, was 0.1 million or 0.1 per diluted share. This compares to net loss attributed to Caliber of 3.4 million or 16 cents per diluted share in the same period a year ago. Total platform revenue increased .9% to 7.4 million. The increase in platform revenue was primarily driven by development and construction fees due to the commencement of two new development projects in addition to the achievement of milestones related to existing activities. The increase was also driven by higher fund management fees related to an increase in managed capital and fees earned from the growth in the Caliber Hospitality Trust impacted by the acquisition of one hotel property. Fund management fees were based on 1 to .5% of the unreturned capital contributions in each fund and a fund management fee of .7% of the Caliber Hospitality Trust enterprise value. The increase in fund setup fees is due to capital raise fees earned related to an existing fund during the three months ended September 30th, 2024, as well as revenue earned from two new fund offerings during the nine months ended September 30th, 2024, for which revenue was not recognized in 2023. Performance allocations during the quarter were nominal. Total platform expenses in Q3 were $6.5 million, a decrease of .4% compared to Q3 last year, primarily due to a decrease in expenses resulting from our cost reduction campaign implemented in May of 2024, which reduced both operating expenses or payroll and general and admin expenses, which included a decrease in legal fees and some accounting fees. Platform interest expense in the third quarter was $1.3 million, essentially flat compared to the year ago period. Platform adjusted EBITDA for the third quarter was $2.4 million compared to platform adjusted EBITDA loss of $1.5 million during the same period a year ago due to the improvements of the platform's performance noted above. Managed capital was $485.3 million, a .9% increase compared to December 31, 2023, with originations of $61.4 million, partially offset by redemptions of $13.8 million. Turning to an update on our platform balance sheet. As Chris mentioned, and as we've discussed previously, we have approximately $33 million of debt consisting of 211 individual unsecured notes due within the next 12 months. Each note generally has a 12-month term with an option to extend for an additional 12 months. Although we have historically been able to extend a significant number of these notes, our lack of available cash on hand is causing pressure in terms of cash flow in the company. In an effort to manage and improve our cash flow position, during the nine months ended September 30, 2024, we collected 8.2 million of notes receivable and 2.7 million of accounts receivable. The company also executed a reduction in force of approximately 10% of its employees in May, with an expected annual compensation and benefits expense saving of $4 million. The company has also executed on a cost reduction plan with an estimated annual savings of $2.5 million. We have seen the impact of these efforts and their contribution to our positive performance. Demonstrated in the third quarter, we continue to look for opportunities to refinance and recapitalize our balance sheet and are confident in our ability to achieve our goals. I'll now turn it back to Chris for his final remarks before we take your questions.

Thank you, Jade. Before turning to the Q&A session, I'd like to recap the progress we've made. As a management team, we're pleased to see that Caliber is on track, making progress to achieve consistent, profitable growth. For those of you who have run a business in the past or participated in companies growing through change, I'm sure it comes as no surprise to you that the heroes of this story are the employees at Caliber who have worked incredibly hard and made sacrifices to help us achieve these goals, and the investment clients of Caliber, who have been our steadfast partners through the ups and downs of many cycles. It is with heartfelt thanks from our leadership team to our employees and clients that I conclude this call and turn over to the Q&A. Thank you to the listeners for joining, and Jade and I look forward to taking your questions now.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, press the star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys.

One moment please for your first question. Your first question comes from the line of Brendan McCarthy from CEDOTI.

Hey Chris, hey Jade. Congratulations on the results. I just wanted to start off looking at CHC. I believe that we previously discussed there were seven hotels in the NCC now, with remaining eight on track to close by the end of the year. Is that still a reasonable expectation, and then can you also comment on the preferred equity environment there for raising preferred equity to ultimately bring those deals to close?

Sure, thank you for the question, Brendan. I think we are still on track for those eight assets through year end. And subject to the natural ups and downs of the holidays, of course. We did announce on our previous call that we had signed a definitive term sheet for the majority of the equity necessary to close on that transaction. And we have recently done the same on the debt side to refinance their debt. And so we feel like we're in good shape to get that closed on time. And then the Satori Collective transaction I just announced as well is rapidly moving behind them. So, subject to all the customary closing conditions, we hope to get that closed very quickly as well.

Great, thanks

Chris, thanks for the insight. Looking at the third quarter results, the 90, roughly 99% increase in platform revenue. Can you just go into detail on the higher income from the loan placements and offerings and what that came about?

Sure, I mean, I think one thing I'll state and then I'll actually turn it over to Jade to go through some of the detail is that, you know, I put in my prepared remarks the note that you're getting to see a chance to see the company through our eyes. And we're starting to see those results come through as part of our long term business plan. So, well, it's certainly a sizable jump quarter over quarter than it has been in the past. It is, you know, we are working very hard to generate higher levels of revenue consistently. And like I said, you know, to the best of our ability and up into the right fashion. But of course, you know, there's nothing linear in the type of market environment that we're in. So we'll see, you know, we're pushing hard with the management team to continue to show this kind of growth and performance. But I'll let Jade get into the details on specifically the drivers there.

Hey, Brendan, I think the one thing that I will comment on is as the as the. The managed capital managed capital that we that we have grows. The there's a direct impact on our fund management fees. And so as those as those fund as that fundraising continues to to advance and and. And move forward, our fees are are growing at the at the same rate and then how those fees are being deployed into different assets, then stimulates other areas of of the business. So, what I what I highlighted there earlier was around some of the some of the positive momentum that we're seeing in our development and construction activities, which we think will continue to move forward in the same fashion through

the end of the year. Got it. Thanks for explaining. I mentioned fundraising.

Solid. Originations of roughly sixty one million in the quarter. I guess are you starting to get a nice benefit from the wholesale channel or I guess where we're from which channel. Yeah,

I'm happy to share that we actually have started to see as you know, we started the wholesale channel about a year ago and we're starting to see actual checks come through from a fundraising perspective. We've seen investment advisors really take to our products, specifically independent registered investment advisors and some in the broker dealer channel. And we're starting to see some pickup. It's probably still the minority of the capital we're raising for the quarter, but we're starting to realize what we hope to see as a good path going forward. The other thing I'd add to that on the fundraising side is that year over year fundraising across the industry has been down in private real estate funds and significantly up in private lending funds. But again, with the decrease in real estate values that we talked about and the expectation that revenues on those assets are going to start growing again, it does beg the question. When does the reversal happen? That's something we're watching closely. So we think that it's the right time to invest in private real estate and we're prepared for that. And in order to achieve our fundraising goals, we've been introducing some of these unique programs like the 1031 program and the QOF merger program to attract more capital.

Thanks, Chris. That's helpful. One more for me and then I'll turn it back over. Just looking at performance allocations. I know it can be a material part of the business, but I think it makes sense at this point that it's been roughly flat just considering the environment that you can drive in your prepared remarks. But

how

can investors kind of think about

allocations now? Yeah, I think you

cut out a little bit, but I think your question is sort of around the concept of how to investors think about performance allocations. It's a difficult thing to predict because when's the right time to sell an asset and when is the environment going to be good for that? With prices declining, we've been hesitant to sell anything that we currently manage that doesn't have a story around it and why we want to sell it. But with interest rates coming down, the decline starting to find their footing, we are starting to see opportunities to harvest some of the embedded gains that we have in our asset pool. So I think that performance allocations looking forward are still something that is difficult for us to predict and to share any forward-looking information on. But I can tell you that the growth in our NOI for next year and our expectation to be profitable next year that we've announced is driven by ongoing growth in our asset management fee income and that mix of different fees that Jade mentioned.

That's helpful. Thanks Chris. Thanks Jade. That's all for me. Thanks Brendan.

Thank you. There are no further questions at this time.

I'd now like to turn the call over to the presenters for final closing comments.

Thank you. So I'd just like to reiterate our gratitude as you heard to our employees for their ongoing dedication and commitment and thank our loyal investors and partners for your continued interest and investment with Caliber. Thank you for your time today. If you want to follow along with our story, the best way to do so is to sign up on our website under the CWD, or public investors section. Make sure that many of you have followed us for a long time in our private real estate funds. But if you aren't signed up on that CWD page, you may miss some of the announcements around us as a public company. And if you have any additional questions, please reach out to our investor relations team at Financial Profiles. Thanks

very much.

Thank you. Ladies and gentlemen, this concludes your conference call for today.

We thank you for participating and ask that you please disconnect your lines.