Artistic Media & Neighborhood Belief (CMCT, fka CIM Business Belief) (~$20MM market cap) is a tire fireplace of a REIT (externally managed by CIM Group) that owns a combination of conventional workplace, “artistic workplace”, multi-family and a lodge, the vast majority of that are situated in California. I owned CMCT briefly again in 2021 as it was the goal of an activist marketing campaign, CIM Group finally thwarted the activist by doing a dilutive rights providing (and backstopping the rights providing) at $9.25 (the shares commerce for $0.23/share immediately) to cement voting management. After the rights in 2021, administration owned 45+% of the corporate.
As most know, the business actual property market has struggled considerably as the results of gradual return-to-office traits, increased for longer rates of interest and a few location particular points to the Oakland/Bay Space market the place a number of of CMCT’s chunkier belongings are situated.
This is a fast snapshot of the corporate’s belongings:
CIM Group had an ongoing most popular inventory issuance program going at CMCT, it was a strategy to enhance belongings (and thus exterior administration charges) with out issuing frequent inventory at beneath NAV and CIM additionally had an affiliate act as a placement agent to gather further charges. As the actual property asset worth dropped at CMCT and most popular inventory issuance did not gradual (CMCT was issuing most popular inventory as latest as earlier this yr), the frequent inventory felt the ache and was the other way up. Moreover, their financial institution credit score facility is now not in compliance with its monetary covenants.
Earlier this yr, CMCT tried to promote a handful of belongings to be able to increase money and payoff the credit score facility, however the purchaser wasn’t in a position to shut:
CMCT not too long ago explored the sale of a number of high-quality belongings to enhance its frequent fairness ratio. The supply CMCT obtained mirrored what the Firm believed to be the truthful worth of those belongings, however the purchaser was unable to shut. Because of this and the latest decline in rates of interest, CMCT has determined to shift its focus to refinancing reasonably than a sale of those belongings.
CMCT’s most popular inventory is convertible into frequent shares on the possibility of the issuer. Subsequentially to the failed asset sale, in September, CMCT determined to “enhance its frequent fairness ratio” by changing some most popular inventory to frequent:
As a part of its program to enhance its frequent fairness ratio, the Company is suspending its Sequence A1 Most well-liked Inventory providing and asserting the redemption of roughly 2.2 million shares of Sequence A Most well-liked Inventory and roughly 2.6 million shares of Sequence A1 Most well-liked Inventory, with the redemption worth to be paid in shares of frequent inventory in accordance with the phrases of the Sequence A Most well-liked Inventory and Sequence A1 Most well-liked Inventory, respectively.
In complete, they redeemed $118.9MM (~$345MM is remaining) of most popular inventory with 60,526,804 frequent shares, or at a worth of $1.96/share.
Most well-liked inventory holders (in all probability RIA’s within the HNW channel) naturally puked the inventory out (they solely had 22.8 million shares excellent earlier than the popular conversion, almost 4x’ing the shares excellent to motivated sellers), when the value dropped because of the compelled promoting, it created tax loss promoting and additional spiraling down the drain to $0.23/share the place it trades immediately. The brand new plan, to refinance on the property degree and repay the credit score facility is printed within the most up-to-date 10-Q:
Administration plans to deal with any attainable future occasion of default underneath the 2022 Credit score Facility by coming into into new financing preparations to repay quantities excellent underneath the 2022 Credit score Facility. The Firm is within the strategy of acquiring refinancing for the Firm’s lodge in Sacramento, California (the “Sheraton Refinancing”). If accomplished, the Firm intends to make use of the proceeds of the Sheraton Refinancing to repay a part of the quantity excellent underneath the 2022 Credit score Facility and to pay for the Resort Renovation described above. As well as, the Firm is within the strategy of acquiring refinancing (the “Los Angeles Refinancing”) for 3 of its properties in Los Angeles, California. If accomplished, the proceeds of the Los Angeles Refinancing, together with a portion of the proceeds from the Sheraton Refinancing, are anticipated to be in an quantity ample to repay all quantities excellent underneath the 2022 Credit score Facility, with the remainder for use for normal company functions. The Firm expects that every of the Sheraton Refinancing and the Los Angeles Refinancing will shut by the tip of the primary quarter of 2025.
Administration of the Firm believes that its plans to repay quantities excellent underneath the 2022 Credit score Facility are possible based mostly on the next: (1) the Firm has executed time period sheets with the respective lenders underneath the Sheraton Refinancing and the Los Angles Refinancing; (2) the Firm expects that each the Los Angeles Refinancing and the Sheraton Refinancing will shut by the tip of the primary quarter of 2025; (3) the favorable loan-to-value ratios (“LTVs”) of the properties which can be the topic of the Sheraton Refinancing and the Los Angeles Refinancing and (4) the Firm’s plans and efforts thus far to acquire further financing to be secured by two properties that it owns (along with the Sheraton Refinancing and the Los Angeles Refinancing), and the favorable LTVs of those two properties. Administration’s plans are supposed to mitigate the related situation that might increase substantial doubt concerning the Firm’s potential to proceed as a going concern inside one yr after the date that the interim monetary data contained on this Quarterly Report on Type 10-Q is issued. The accompanying consolidated monetary statements have been ready assuming that the Firm will proceed its operations as a going concern and don’t embody any changes that may outcome from the result of occasions described on this paragraph.
Doubtlessly there’s some worth right here if the corporate is ready to change from recourse to non-recourse debt and experience out any actual property restoration. CMCT does have a sequence of potential growth websites, (by way of CIM) entry to co-investors for mission particular capital (so they will not want to boost it on the CMCT degree, as a result of they cannot), there is a world the place they do not file for chapter they usually can limp alongside far sufficient to make to the opposite facet of their transition to “artistic workplace” and multi-family. The underlying asset worth of the corporate have not modified a lot since the popular conversion (doubtless solely improved barely as short-term charges come down and extra corporations name workers again into the workplace) and they are going to save roughly $8 million per yr in most popular dividends on account of the conversion. But the inventory is down ~90% from the conversion worth. May this be a possible January impact beneficiary? Once more, tremendous speculative, however I believe it would.
In try to find out how a lot if any worth is right here, a method is to again into an implied cap price of 5.8% based mostly on the last-twelve months of web working earnings, not significantly low cost. Howard Hughes (HHH) simply had an investor day the place they laid out their NAV utilizing an 11% cap price for his or her workplace properties.
One other method, CMCT pays CIM Group a base administration payment based mostly on the NAV which is set by a 3rd get together, they used to reveal NAV, however I have never seen it known as out for year-end 2023. However based mostly on the quarterly payment (0.25% of Internet Asset Worth Attributable to Widespread Stockholders) you possibly can again into the NAV.
In fact all the conventional caveats apply to the NAV, there’s an inherent battle of curiosity to inflate it when your administration charges are calculated off it.
- This very doubtless may very well be a zero, it’s a name possibility disguised as frequent inventory on business actual property values enhancing and rates of interest persevering with to fall.
- CMCT may convert extra most popular to frequent and crash the inventory once more.
- CMCT pays their dividend in shares now, so do not get excited over the looks of a giant dividend yield.
- They’ve a small SBA lending operation that lends into the mother and pop proprietor/operator lodge market, this together with their lodge they’ve known as out as being non-core and probably look to promote these belongings to reinvest in additional multi-family developments.
- After the conversion, administration now solely owns 15% of the corporate. Bear in mind, they had been patrons at $9.25, odd that they tanked their very own place to such a level, however now with much less possession, could be much more more likely to do it once more to save lots of their administration payment earnings.
