Creative Media & Community Trust (CMCT, fka CIM Commercial Trust) (~$20MM market cap) is a tire fire of a REIT (externally managed by CIM Group) that owns a mixture of traditional office, "creative office", multi-family and a hotel, the majority of which are located in California. I owned CMCT briefly back in 2021 as it was the target of an activist campaign, CIM Group eventually thwarted the activist by doing a dilutive rights offering (and backstopping the rights offering) at $9.25 (the shares trade for $0.23/share today) to cement voting control. After the rights in 2021, management owned 45+% of the company.
As most know, the commercial real estate market has struggled significantly as the result of slow return-to-office trends, higher for longer interest rates and some location specific issues to the Oakland/Bay Area market where several of CMCT's chunkier assets are located.
Here's a quick snapshot of the company's assets:
CIM Group had an ongoing preferred stock issuance program going at CMCT, it was a way to increase assets (and thus external management fees) without issuing common stock at below NAV and CIM also had an affiliate act as a placement agent to collect additional fees. As the real estate asset value dropped at CMCT and preferred stock issuance didn't slow (CMCT was issuing preferred stock as recent as earlier this year), the common stock felt the pain and was upside down. Additionally, their bank credit facility is no longer in compliance with its financial covenants.Earlier this year, CMCT tried to sell a handful of assets in order to raise cash and payoff the credit facility, but the buyer wasn't able to close:
CMCT recently explored the sale of several high-quality assets to improve its common equity ratio. The offer CMCT received reflected what the Company believed to be the fair value of these assets, but the buyer was unable to close. As a result of this and the recent decline in interest rates, CMCT has decided to shift its focus to refinancing rather than a sale of these assets.
CMCT's preferred stock is convertible into common shares at the option of the issuer. Subsequentially to the failed asset sale, in September, CMCT decided to "improve its common equity ratio" by converting some preferred stock to common:
As part of its program to improve its common equity ratio, the Company is suspending its Series A1 Preferred Stock offering and announcing the redemption of approximately 2.2 million shares of Series A Preferred Stock and approximately 2.6 million shares of Series A1 Preferred Stock, with the redemption price to be paid in shares of common stock in accordance with the terms of the Series A Preferred Stock and Series A1 Preferred Stock, respectively.
In total, they redeemed $118.9MM (~$345MM is remaining) of preferred stock with 60,526,804 common shares, or at a price of $1.96/share.
Preferred stock holders (probably RIA's in the HNW channel) naturally puked the stock out (they only had 22.8 million shares outstanding before the preferred conversion, nearly 4x'ing the shares outstanding to motivated sellers), when the price dropped due to the forced selling, it created tax loss selling and further spiraling down the drain to $0.23/share where it trades today. The new plan, to refinance at the property level and repay the credit facility is outlined in the most recent 10-Q:
Management plans to address any possible future event of default under the 2022 Credit Facility by entering into new financing arrangements to repay amounts outstanding under the 2022 Credit Facility. The Company is in the process of obtaining refinancing for the Company’s hotel in Sacramento, California (the “Sheraton Refinancing”). If completed, the Company intends to use the proceeds of the Sheraton Refinancing to repay part of the amount outstanding under the 2022 Credit Facility and to pay for the Hotel Renovation described above. In addition, the Company is in the process of obtaining refinancing (the “Los Angeles Refinancing”) for three of its properties in Los Angeles, California. If completed, the proceeds of the Los Angeles Refinancing, along with a portion of the proceeds from the Sheraton Refinancing, are anticipated to be in an amount sufficient to repay all amounts outstanding under the 2022 Credit Facility, with the rest to be used for general corporate purposes. The Company expects that each of the Sheraton Refinancing and the Los Angeles Refinancing will close by the end of the first quarter of 2025.Management of the Company believes that its plans to repay amounts outstanding under the 2022 Credit Facility are probable based on the following: (1) the Company has executed term sheets with the respective lenders under the Sheraton Refinancing and the Los Angles Refinancing; (2) the Company expects that both the Los Angeles Refinancing and the Sheraton Refinancing will close by the end of the first quarter of 2025; (3) the favorable loan-to-value ratios (“LTVs”) of the properties that are the subject of the Sheraton Refinancing and the Los Angeles Refinancing and (4) the Company’s plans and efforts to date to obtain additional financing to be secured by two properties that it owns (in addition to the Sheraton Refinancing and the Los Angeles Refinancing), and the favorable LTVs of these two properties. Management’s plans are intended to mitigate the relevant condition that would raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the interim financial information contained in this Quarterly Report on Form 10-Q is issued. The accompanying consolidated financial statements have been prepared assuming that the Company will continue its operations as a going concern and do not include any adjustments that might result from the outcome of events described in this paragraph.
- This very likely could be a zero, it is a call option disguised as common stock on commercial real estate values improving and interest rates continuing to fall.
- CMCT could convert more preferred to common and crash the stock again.
- CMCT pays their dividend in shares now, so don't get excited over the appearance of a big dividend yield.
- They have a small SBA lending operation that lends into the mom and pop owner/operator hotel market, this along with their hotel they've called out as being non-core and potentially look to sell those assets to reinvest in more multi-family developments.
- After the conversion, management now only owns 15% of the company. Remember, they were buyers at $9.25, odd that they tanked their own position to such a degree, but now with less ownership, might be even more likely to do it again to save their management fee income.
Have looked at this many times and it's always too hairy for me! Hope it works out; will almost certainly be tremendous if it does.
ReplyDeleteI read this as "godspeed", and I'll take it, we'll see what happens.
DeleteIf it’s too hairy for ADL you know you’re buying something spicy!
Delete“Management” is a misnomer - “gonniffs” would be a better description.
ReplyDeleteFWIW, Kaiser 1 tenant Kaiser Permanente is talking about downsizing its Oakland HQ. Not sure how/if this changes your calculation.
ReplyDeletehttps://www.sfchronicle.com/bayarea/article/kaiser-oakland-19932710.php
Yep, I should have called it out more explicitly, but in the first screenshot of their assets, I note that 1 Kaiser is likely going back to the lender. 2 Kaiser (the parking lot, development site, although probably not a near term development site) is unencumbered by the mortgage and would stay at CMCT.
DeleteIt is a bizarre comparison, but this reminds me a little of CLMT in 2017-2020 time frame. Decent assets, but a broken balance sheet, self-serving GP, and no logical investor base once they became a non-distribution-paying MLP. Buying at the nadir netted a 4x-8x return depending on when you entered, and all it took was for them to stop doing dumb stuff.
DeleteCMCT is clearly a different industry. But It doesn’t take much to turn sentiment around and get the stock moving in the other direction. In this case, some basic corporate actions could easily move the needle. Someone like Gordon Dugan could probably 10x this is two years.
Kaiser extended its lease to 2027.
Deletehttps://www.sec.gov/ix?doc=/Archives/edgar/data/0000908311/000090831124000066/cmct-20241126.htm