Artistic Media & Group Belief (CMCT, fka CIM Business Belief) (~$20MM market cap) is a tire hearth 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 positioned in California. I owned CMCT briefly again in 2021 because 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 at present) 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, larger 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 positioned.
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 method to enhance belongings (and thus exterior administration charges) with out issuing frequent inventory at under 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 not in compliance with its monetary covenants.
Earlier this yr, CMCT tried to promote a handful of belongings with a purpose to elevate money and payoff the credit score facility, however the purchaser wasn’t capable of shut:
CMCT just lately explored the sale of a number of high-quality belongings to enhance its frequent fairness ratio. The provide CMCT obtained mirrored what the Firm believed to be the truthful worth of those belongings, however the purchaser was unable to shut. On account of this and the latest decline in rates of interest, CMCT has determined to shift its focus to refinancing relatively 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 ratiothe Company is suspending its Sequence A1 Most popular Inventory providing and saying the redemption of roughly 2.2 million shares of Sequence A Most popular Inventory and roughly 2.6 million shares of Sequence A1 Most popular Inventory, with the redemption value to be paid in shares of frequent inventory in accordance with the phrases of the Sequence A Most popular Inventory and Sequence A1 Most popular Inventory, respectively.
In whole, they redeemed $118.9MM (~$345MM is remaining) of most popular inventory with 60,526,804 frequent shares, or at a value of $1.96/share.
Most popular 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 at present. 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 handle any doable future occasion of default beneath the 2022 Credit score Facility by coming into into new financing preparations to repay quantities excellent beneath the 2022 Credit score Facility. The Firm is within the technique 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 beneath the 2022 Credit score Facility and to pay for the Lodge Renovation described above. As well as, the Firm is within the technique 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 adequate to repay all quantities excellent beneath the 2022 Credit score Facility, with the remaining for use for normal company functions. The Firm expects that every of the Sheraton Refinancing and the Los Angeles Refinancing will shut by the top of the primary quarter of 2025.
Administration of the Firm believes that its plans to repay quantities excellent beneath the 2022 Credit score Facility are possible primarily based on the next: (1) the Firm has executed time period sheets with the respective lenders beneath 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 top of the primary quarter of 2025; (3) the favorable loan-to-value ratios (“LTVs”) of the properties which are the topic of the Sheraton Refinancing and the Los Angeles Refinancing and (4) the Firm’s plans and efforts to this point 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 may elevate substantial doubt in regards to the Firm’s potential to proceed as a going concern inside one yr after the date that the interim monetary info contained on this Quarterly Report on Kind 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 embrace any changes which may consequence from the result of occasions described on this paragraph.
Doubtlessly there’s some worth right here if the corporate is ready to swap from recourse to non-recourse debt and trip out any actual property restoration. CMCT does have a sequence of potential improvement websites, (by way of CIM) entry to co-investors for challenge particular capital (so they will not want to boost it on the CMCT degree, as a result of they can not), there is a world the place they do not file for chapter they usually can limp alongside far sufficient to make to the opposite aspect 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 (possible solely improved barely as short-term charges come down and extra firms name staff again into the workplace) and they will save roughly $8 million per yr in most popular dividends because of the conversion. But the inventory is down ~90% from the conversion value. Might this be a possible January impact beneficiary? Once more, tremendous speculativehowever 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 charge of 5.8% primarily based on the last-twelve months of internet working revenue, not notably low-cost. Howard Hughes (HHH) simply had an investor day the place they laid out their NAV utilizing an 11% cap charge for his or her workplace properties.
One other method, CMCT pays CIM Group a base administration charge primarily based on the NAV which is set by a 3rd occasion, they used to reveal NAV, however I have never seen it referred to as out for year-end 2023. However primarily based on the quarterly charge (0.25% of Web Asset Worth Attributable to Widespread Stockholders) you’ll be able to again into the NAV.
After all all the traditional 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 possible might 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 an enormous 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 referred to 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 consumers at $9.25, odd that they tanked their very own place to such a level, however now with much less possession, is perhaps much more more likely to do it once more to avoid wasting their administration charge revenue.