Business Overview: Creative Media & Community Trust Corporation (NASDAQ: CMCT) is a real estate investment trust (REIT) that has been navigating a challenging market environment, particularly in the office and multifamily sectors. After years of diversifying its portfolio, the company has recently announced a strategic shift to refocus on premier multifamily assets, aiming to strengthen its balance sheet and improve liquidity amidst headwinds.
CMCT was founded in 2015 as a Maryland real estate investment trust, primarily focusing on acquiring, developing, owning, and operating premier multifamily properties and Class A creative office real assets in vibrant communities throughout the United States. The company’s strategy has been to leverage the expertise of its parent company, CIM Group, in identifying and investing in high-barrier-to-entry markets with positive population trends and strong public and private investment.
In its early years, CMCT built a portfolio of office and multifamily properties in qualified communities carefully evaluated by CIM Group. This thoughtful approach allowed the company to establish a strong presence in strategically selected markets. Over time, CMCT has faced challenges common to real estate companies, including fluctuations in occupancy and rental rates, particularly in its office portfolio. The company has also had to navigate the impact of the COVID-19 pandemic, which negatively affected its hotel and certain office assets.
To manage these headwinds, CMCT has worked to diversify its portfolio by acquiring additional multifamily properties and expanding its lending business, which originates loans under the Small Business Administration’s 7(a) loan program. The company has also achieved significant milestones, such as the completion of a mixed-use project in Los Angeles in 2023, which converted a former office building into 68 luxury apartment units while retaining 30,000 square feet of ground floor creative office space.
CMCT has been actively working to optimize its capital structure and asset portfolio. In 2022, the company refinanced its credit facility to provide more flexibility, and has recently taken steps to strengthen its balance sheet and liquidity, including redeeming preferred stock in exchange for common stock. These actions are intended to better position the company for future opportunities as it continues to focus on its core multifamily strategy.
Financials and Key Metrics: CMCT’s financial performance has been mixed in recent periods. For the most recent fiscal year (2023), the company reported annual revenue of $119.26 million, with a net loss of $48.49 million. Operating cash flow for the year was $12.00 million, while free cash flow was negative at -$1.33 million.
In the most recent quarter (Q3 2024), CMCT reported revenue of $28.62 million, representing a year-over-year growth of 1.8%. However, the company continued to experience net losses, with a reported net loss of $10.38 million for the quarter. Operating cash flow improved to $10.01 million, and free cash flow turned positive at $1.01 million.
The company’s financial performance has been impacted by various factors across its different segments. In the office segment, revenue for Q3 2024 decreased to $13.82 million from $14.05 million in the same period of 2023, primarily due to lower occupancy at an office property in Oakland, California. This was partially offset by higher rental revenues at properties in Los Angeles and Beverly Hills.
The hotel segment also faced challenges, with revenue decreasing to $7.14 million in Q3 2024 from $7.95 million in Q3 2023, largely due to decreased occupancy resulting from ongoing construction related to a hotel renovation project.
On a more positive note, the multifamily segment showed improvement, with revenue increasing to $4.77 million in Q3 2024 from $3.33 million in Q3 2023. This growth was attributed to higher rental revenues due to increased occupancy and higher monthly rent per occupied unit.
The lending segment, which primarily originates loans under the SBA 7(a) loan program, saw a slight increase in revenue to $2.72 million in Q3 2024 from $2.57 million in Q3 2023, driven by an increase in premium income from higher loan sale volume.
Funds from operations (FFO), a key metric for REITs, was negative $28.4 million, or $1.00 per diluted share, in Q3 2024. The company’s overall financial position remains challenging, with a debt ratio of 55.1% as of September 30, 2024.
Liquidity: CMCT has been taking steps to improve its liquidity position. As of September 30, 2024, the company had cash reserves of $18.45 million. The company’s debt-to-equity ratio stands at 1.40, indicating a significant level of leverage. Both the current ratio and quick ratio are reported at 1.40, suggesting that the company has sufficient short-term assets to cover its immediate liabilities.
However, CMCT’s available credit line under its 2022 Credit Facility was fully drawn as of September 30, 2024, with no additional borrowing capacity available. This limitation on credit availability underscores the importance of the company’s efforts to improve liquidity through other means.
CMCT has been exploring the sale of non-core assets, including its hotel and lending divisions, to generate additional cash. The proceeds from these potential dispositions are expected to be used to pay down debt, which should help improve the company’s overall financial flexibility. Additionally, CMCT has suspended its Series A1 preferred stock offering and plans to satisfy some or all redemption requests for its preferred shares through the issuance of common stock during the fourth quarter of 2024, which should help preserve cash.
Operational Highlights and Strategic Shifts: In the third quarter of 2024, CMCT’s same-store office portfolio occupancy declined to 72.9%, down from 83.5% in the prior quarter. This was largely due to the departure of a large tenant at the company’s One Kaiser Plaza property in Oakland, California. As of September 30, 2024, the office properties were 72.2% occupied, with an annualized rent per occupied square foot of $60.31.
The multifamily segment showed significant improvement, with occupancy increasing to 92% from 79.3% at the end of 2023. As of September 30, 2024, the multifamily properties maintained a 92% occupancy rate, with a monthly rent per occupied unit of $2,560.
The hotel segment faced challenges due to ongoing renovation work. For the nine months ended September 30, 2024, the hotel had an occupancy rate of 71.4% and an average daily rate (ADR) of $203.98, resulting in a revenue per available room (RevPAR) of $145.74.
Recognizing the challenges in the office market, CMCT has announced a strategic shift to refocus its efforts on premier multifamily properties. The company has suspended its Series A1 preferred stock offering and plans to satisfy some or all redemption requests for its preferred shares through the issuance of common stock during the fourth quarter of 2024.
CMCT is also actively exploring the sale of several non-core assets, including its hotel and lending divisions, to strengthen its balance sheet and improve liquidity. The proceeds from these potential dispositions are expected to be used to pay down debt, with the ultimate goal of reducing the company’s leverage and positioning it for future growth in the multifamily sector.
Amid these changes, CMCT has maintained its focus on development and redevelopment projects, including the completion of the 4750 Wilshire project in Los Angeles, which converted a former office building into 68 luxury apartment units. The company also has two other multifamily projects underway, one in Los Angeles and another in Sacramento, California.
Risks and Challenges: CMCT faces several key risks and challenges that investors should be aware of:
Execution Risk in Multifamily Transition: CMCT’s ability to successfully refocus its portfolio on premier multifamily assets and execute its strategy will be critical to its long-term success. Any missteps or delays in this transition could further hinder the company’s performance.
Leverage and Debt Refinancing: With a debt ratio of 55.1%, CMCT will need to continue its efforts to reduce leverage and refinance or repay its outstanding debt to improve its financial flexibility and resilience.
Macroeconomic Uncertainty: The broader economic environment, including factors such as interest rates, inflation, and consumer spending, could have a significant impact on the company’s core real estate operations and overall financial performance.
Geographic Concentration: CMCT operates primarily in the United States, with a focus on vibrant and improving metropolitan communities. While this strategy aligns with the company’s expertise, it also exposes CMCT to regional economic fluctuations and market-specific risks.
Rental Rate Challenges: The company has faced rental rate challenges in some markets, particularly in its Oakland multifamily properties, where rents have been below expectations. This highlights the importance of effective property management and market positioning.
Conclusion: CMCT’s decision to refocus its efforts on the multifamily sector represents a necessary and strategic shift in response to the challenges faced in the office and hotel markets. By streamlining its portfolio and strengthening its balance sheet, the company aims to position itself for long-term growth and to better navigate the evolving real estate landscape. Recent improvements in multifamily occupancy and the completion of development projects like 4750 Wilshire are positive signs. However, the execution of this transition, as well as broader macroeconomic factors, will be critical in determining the success of CMCT’s repositioning efforts. The company’s ability to manage its debt, improve liquidity, and capitalize on opportunities in the multifamily sector will be key factors to watch in the coming quarters.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.