CMCT(CMCT) - 2022 Q2 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, income statements, equity statements, cash flow statements, and detailed notes Consolidated Balance Sheets The consolidated balance sheets show the company's financial position, with total assets increasing by $16.879 million | ASSETS | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | |:--------------------------------------|------------------------------|----------------------------------| | Investments in real estate, net | $502,607 | $497,984 | | Investment in unconsolidated entity | $22,788 | — | | Cash and cash equivalents | $16,480 | $22,311 | | Restricted cash | $11,208 | $11,340 | | Loans receivable, net | $68,540 | $73,543 | | Accounts receivable, net | $3,353 | $3,396 | | Deferred rent receivable and charges, net | $36,474 | $36,095 | | Other intangible assets, net | $4,812 | $5,251 | | Other assets | $11,483 | $10,946 | | TOTAL ASSETS | $677,745 | $660,866 | | LIABILITIES: | | | | Debt, net | $207,816 | $201,145 | | Accounts payable and accrued expenses | $19,195 | $26,751 | | Intangible liabilities, net | $108 | $237 | | Due to related parties | $7,013 | $4,541 | | Other liabilities | $20,471 | $16,861 | | Total liabilities | $254,603 | $249,535 | | REDEEMABLE PREFERRED STOCK | $36,136 | $37,782 | | EQUITY: | | | | Total stockholders' equity | $386,645 | $373,204 | | Noncontrolling interests | $361 | $345 | | Total equity | $387,006 | $373,549 | | TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND EQUITY | $677,745 | $660,866 | - Total Assets increased by $16.879 million (2.55%) from December 31, 2021, to June 30, 2022, primarily due to increased investments in real estate and an unconsolidated entity[8] - Total Liabilities increased by $5.068 million (2.03%) from December 31, 2021, to June 30, 2022, mainly driven by an increase in Debt, net, and Due to related parties[8] Consolidated Statements of Operations Net income significantly improved for the three and six months ended June 30, 2022, driven by increased revenues | REVENUES (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---------------------------------------|----------------------------------|----------------------------------|--------------------------------|--------------------------------| | Rental and other property income | $14,194 | $13,309 | $28,290 | $26,658 | | Hotel income | $9,107 | $3,130 | $16,511 | $4,862 | | Interest and other income | $3,102 | $6,234 | $6,384 | $10,032 | | Total Revenues | $26,403 | $22,673 | $51,185 | $41,552 | | EXPENSES (in thousands) | | | | | | Rental and other property operating | $12,731 | $9,115 | $24,223 | $17,405 | | Asset management and other fees to related parties | $920 | $2,260 | $1,841 | $4,519 | | Interest | $2,403 | $2,673 | $4,573 | $5,305 | | General and administrative | $1,253 | $1,146 | $3,068 | $3,768 | | Depreciation and amortization | $4,974 | $5,069 | $9,978 | $10,106 | | Total Expenses | $23,411 | $21,150 | $45,704 | $43,326 | | Income from unconsolidated entity | $260 | — | $380 | — | | NET INCOME (LOSS) | $2,931 | $527 | $5,233 | ($3,144) | | NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | ($2,349) | ($4,210) | ($5,160) | ($12,416) | | Basic EPS | ($0.10) | ($0.28) | ($0.22) | ($0.83) | - Net Income (Loss) significantly improved, moving from a loss of $3.144 million in H1 2021 to a profit of $5.233 million in H1 2022, an increase of $8.377 million[11] - Total Revenues increased by 23.2% for the six months ended June 30, 2022, compared to the same period in 2021, primarily driven by a substantial increase in Hotel income (224.4% YoY)[11] - Net Loss Attributable to Common Stockholders decreased significantly from ($12.416) million in H1 2021 to ($5.160) million in H1 2022, leading to an improved Basic EPS from ($0.83) to ($0.22)[11] Consolidated Statements of Equity This statement details changes in stockholders' equity, including stock-based compensation, dividends, and net income/loss | Equity Component (in thousands) | Balances, December 31, 2021 | Balances, June 30, 2022 | |:--------------------------------|-----------------------------|-------------------------| | Common Stock Par Value | $24 | $24 | | Preferred Stock Par Value | $310,661 | $331,176 | | Additional Paid-in Capital | $866,746 | $864,602 | | Distributions in Excess of Earnings | ($804,227) | ($809,157) | | Total Stockholders' Equity | $373,204 | $386,645 | | Noncontrolling Interests | $345 | $361 | | Total Equity | $373,549 | $387,006 | - Total Equity increased by $13.457 million (3.6%) from December 31, 2021, to June 30, 2022, primarily due to net income and reclassification of Series A Preferred Stock to permanent equity, partially offset by dividends and stock repurchases[13] - Preferred Stock Par Value increased by $20.515 million, reflecting new issuances, including Series A1 Preferred Stock[13] - Distributions in Excess of Earnings increased negatively by $4.930 million, indicating higher dividend payments and preferred stock accretion[13] Consolidated Statements of Cash Flows Operating cash flow increased, while investing activities used more cash, and financing activities provided less cash | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:----------------------------------|--------------------------------|--------------------------------| | Net cash provided by operating activities | $25,288 | $17,840 | | Net cash used in investing activities | ($35,746) | ($4,822) | | Net cash provided by financing activities | $4,495 | $12,867 | | NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | ($5,963) | $25,885 | | Cash and cash equivalents (End of period) | $16,480 | $59,730 | | Restricted cash (End of period) | $11,208 | $9,804 | | Total cash and cash equivalents and restricted cash (End of period) | $27,688 | $69,534 | - Net cash provided by operating activities increased by $7.448 million (41.75%) for the six months ended June 30, 2022, compared to the same period in 2021, primarily due to increased net income[19][272] - Net cash used in investing activities significantly increased by $30.924 million (641.3%) for the six months ended June 30, 2022, mainly due to acquisitions of real estate ($8.115 million) and investment in an unconsolidated entity ($22.408 million)[19][273] - Net cash provided by financing activities decreased by $8.372 million (65.07%) for the six months ended June 30, 2022, largely due to lower net proceeds from common stock issuance (including repurchases) compared to the prior year's rights offering[19][274] Notes to Consolidated Financial Statements These notes provide detailed disclosures on accounting policies, financial instruments, and operational segments, offering crucial context 1. ORGANIZATION AND OPERATIONS Creative Media & Community Trust Corporation is a Maryland REIT focused on real assets, a hotel, and an SBA 7(a) lending platform - The Company is a Maryland REIT, primarily owning and operating Class A and creative office real assets, one hotel, and an SBA 7(a) loan program lending platform[23] - The Company's strategy is to acquire, operate, and develop premier multifamily and creative office assets in vibrant, emerging communities, particularly those catering to technology, media, and entertainment industries[23] - Common Stock (CMCT) and Series L Preferred Stock (CMCTP) are traded on Nasdaq and the Tel Aviv Stock Exchange (TASE)[24] 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the GAAP basis for interim financial statements and summarizes key accounting policies for various revenue streams - Interim consolidated financial statements are prepared in accordance with GAAP, with certain information condensed or excluded per SEC rules[28] - The Company consolidates entities where it has controlling interests, including variable interest entities (VIEs) where it is the primary beneficiary, such as the trust for SBA 7(a) loans[29][30] - Revenue recognition policies are detailed for leasing activities (straight-line minimum rents, variable payments), lending activities (interest income on loans), and hotel activities (cancellable/noncancelable room revenues, ancillary services)[37][40][47][48][49] - The Company expects to adopt ASU 2016-13, Financial Instruments-Credit Losses, beginning January 1, 2023, which will require more timely recognition of credit losses based on expected losses[66] 3. INVESTMENTS IN REAL ESTATE Net investments in real estate increased to $502.6 million, with two multifamily properties acquired for $7.91 million | Investments in Real Estate (in thousands) | June 30, 2022 | December 31, 2021 | |:------------------------------------------|:--------------|:------------------| | Land | $149,144 | $141,236 | | Buildings and improvements | $454,845 | $454,431 | | Work in progress | $13,446 | $10,260 | | Investments in real estate | $655,260 | $642,702 | | Accumulated depreciation | ($152,653) | ($144,718) | | Net investments in real estate | $502,607 | $497,984 | - Net investments in real estate increased by $4.623 million (0.93%) from December 31, 2021, to June 30, 2022[69] - During the six months ended June 30, 2022, the Company acquired two multifamily properties in Los Angeles, CA, for a total purchase price of $7.91 million, with plans to develop residential units starting in 2023 and 2024[69][70][75] - Depreciation expense for the six months ended June 30, 2022, was $8.4 million, consistent with $8.5 million in the prior year period[69] 4. INVESTMENT IN UNCONSOLIDATED ENTITY The Company invested $22.4 million for a 44% equity method interest in an unconsolidated joint venture, recognizing $380,000 income - In February 2022, the Company invested approximately $22.4 million for a 44% ownership interest in an unconsolidated joint venture to purchase an office property in Los Angeles, CA[34][76] - The investment is accounted for under the equity method, and the Company recognized income of $380,000 from this entity for the six months ended June 30, 2022[36][76] - The Unconsolidated Joint Venture plans a capital improvement program to renovate the office building into creative office space and a limited number of multifamily units[76] 5. LOANS RECEIVABLE Loans receivable, net, decreased to $68.54 million, primarily due to the substantial satisfaction of PPP loans | Loans Receivable (in thousands) | June 30, 2022 | December 31, 2021 | |:------------------------------------------------------|:--------------|:------------------| | SBA 7(a) loans receivable, subject to credit risk | $44,582 | $42,103 | | SBA 7(a) loans receivable, subject to loan-backed notes | $15,960 | $18,050 | | SBA 7(a) loans receivable, Paycheck Protection Program | $205 | $5,050 | | SBA 7(a) loans receivable, subject to secured borrowings | $6,387 | $6,857 | | SBA 7(a) loans receivable, held for sale | $958 | $1,200 | | Loans receivable | $68,092 | $73,260 | | Deferred capitalized costs, net | $1,402 | $1,226 | | Loan loss reserves | ($954) | ($943) | | Loans receivable, net | $68,540 | $73,543 | - Loans receivable, net, decreased by $5.003 million (6.8%) from December 31, 2021, to June 30, 2022[77] - SBA 7(a) Paycheck Protection Program loans decreased significantly from $5.050 million to $205,000, as substantially all PPP loans have been satisfied[77][79] - As of June 30, 2022, 99.9% of loans subject to credit risk were concentrated in the hospitality industry, and 100% of these loans were current[83] 6. OTHER INTANGIBLE ASSETS AND LIABILITIES Net intangible assets decreased to $4.812 million due to amortization of acquired in-place and above-market leases | Intangible Assets and Liabilities (in thousands) | June 30, 2022 | December 31, 2021 | |:-------------------------------------------------|:--------------|:------------------| | Acquired in-place leases, net | $1,833 | $2,266 | | Acquired above-market leases, net | $22 | $28 | | Trade name and license | $2,957 | $2,957 | | Total intangible lease assets, net | $4,812 | $5,251 | | Acquired below-market leases, net | $108 | $237 | - Total intangible lease assets, net, decreased by $439,000 (8.36%) from December 31, 2021, to June 30, 2022[84] Amortization (in thousands) | Amortization (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:-----------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Acquired above-market lease amortization | $3 | $3 | $6 | $6 | | Acquired in-place lease amortization | $195 | $257 | $433 | $553 | | Acquired below-market lease amortization | $60 | $84 | $129 | $199 | 7. DEBT Total debt, net, increased to $207.816 million, driven by increased borrowings under the 2018 Revolving Credit Facility | Debt Type (in thousands) | Balances as of Dec 31, 2021 | Debt Issuances & Assumptions | Repayments | Accretion & (Amortization) | Balances as of Jun 30, 2022 | |:---------------------------------------------|:----------------------------|:-----------------------------|:-----------|:---------------------------|:----------------------------| | Mortgage Payable | $96,980 | — | — | $13 | $96,993 | | Secured Borrowings — Government Guaranteed Loans | $6,976 | — | ($441) | ($34) | $6,501 | | 2018 revolving credit facility | $60,000 | $40,000 | ($25,000) | — | $75,000 | | Junior subordinated notes | $27,070 | — | — | — | $27,070 | | SBA 7(a) loan-backed notes | $7,670 | — | ($3,656) | — | $4,014 | | Borrowed funds from the Federal Reserve (PPPLF) | $5,050 | — | ($4,845) | — | $205 | | Total Debt, Net | $201,145 | $40,000 | ($33,922) | $593 | $207,816 | - Total Debt, Net, increased by $6.671 million (3.32%) from December 31, 2021, to June 30, 2022[88] - The 2018 Revolving Credit Facility balance increased by $15.0 million to $75.0 million, with the Company planning to extend its maturity to October 2023 or refinance it[88][92] - SBA 7(a) loan-backed notes decreased by $3.656 million, and PPPLF borrowings decreased by $4.845 million, with substantially all PPPLF obligations satisfied by June 30, 2022[88][95][96] 8. STOCK-BASED COMPENSATION PLANS The 2015 Equity Incentive Plan grants restricted shares to board members, with $92,000 expense for H1 2022 - The Company's 2015 Equity Incentive Plan grants restricted shares of Common Stock to independent Board members, generally vesting over one year of continuous service[101] Stock-based compensation expense (in thousands) | Period | Stock-based compensation expense (in thousands) | |:-------------------------------------|:------------------------------------------------| | Three months ended June 30, 2022 | $37 | | Three months ended June 30, 2021 | $50 | | Six months ended June 30, 2022 | $92 | | Six months ended June 30, 2021 | $110 | - As of June 30, 2022, $202,000 of total unrecognized compensation expense related to restricted shares of Common Stock will be recognized ratably over the remaining vesting period[102] 9. EARNINGS PER SHARE ("EPS") The Company reported improved basic and diluted EPS of ($0.10) and ($0.22) for the three and six months ended June 30, 2022 | EPS Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:-----------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Net loss attributable to common stockholders (in thousands) | ($2,349) | ($4,210) | ($5,160) | ($12,416) | | Basic EPS | ($0.10) | ($0.28) | ($0.22) | ($0.83) | | Diluted EPS | ($0.10) | ($0.28) | ($0.22) | ($0.83) | | Basic Weighted Average Shares Outstanding (in thousands) | 23,353 | 15,102 | 23,351 | 14,956 | - Basic and Diluted EPS improved significantly for both the three-month and six-month periods ended June 30, 2022, compared to 2021, reflecting a reduced net loss attributable to common stockholders[106] - Weighted average shares of Common Stock outstanding increased substantially year-over-year, impacting per-share calculations[106] 10. REDEEMABLE PREFERRED STOCK Total preferred stock increased to $331.176 million, with new Series A1 issuances and concluded offerings for Series A and D | Preferred Stock Type (in thousands) | Balances, Dec 31, 2021 | Issuance/Reclassification | Redemption | Balances, Jun 30, 2022 | |:------------------------------------|:-----------------------|:--------------------------|:-----------|:-----------------------| | Series A1 Preferred Stock | — | $4,770 | — | $4,770 | | Series A Preferred Stock | $156,431 | $8,304 + $10,857 | ($1,228) + ($2,188) | $172,176 | | Series D Preferred Stock | $1,396 | — | — | $1,396 | | Series L Preferred Stock | $152,834 | — | — | $152,834 | | Total Preferred Stock Amount | $310,661 | $23,931 | ($3,416) | $331,176 | - Total redeemable preferred stock increased by $20.515 million (6.6%) from December 31, 2021, to June 30, 2022[108] - The Company began a continuous public offering of Series A1 Preferred Stock in June 2022 and concluded offerings for Series A and Series D Preferred Stock in the same month[111][113][116] - Preferred stock dividends declared or accumulated for the six months ended June 30, 2022, totaled ($10,179) thousand, compared to ($9,087) thousand in the prior year[11] - Holders of Series L Preferred Stock will have the right to require redemption from November 2022, with the Company having the option to pay in cash or Common Stock[275] 11. STOCKHOLDERS' EQUITY Common stock dividends were $0.085 per share, and a $10.0 million share repurchase program was initiated | Common Stock Dividends Per Share | Declaration Date | Payment Date | Dividend Per Share | |:---------------------------------|:-----------------|:-------------|:-------------------| | Regular Quarterly | June 10, 2022 | July 5, 2022 | $0.085 | | Regular Quarterly | March 8, 2022 | April 1, 2022 | $0.085 | | Regular Quarterly | June 7, 2021 | June 30, 2021 | $0.075 | | Regular Quarterly | March 5, 2021 | March 30, 2021 | $0.075 | - The Company's Board of Directors approved a $10.0 million share repurchase program (SRP) in May 2022[135] Share Repurchase Program (SRP) | Share Repurchase Program (SRP) | Shares Repurchased | Average Price Paid Per Share | Cumulative Amount Repurchased (in thousands) | |:-------------------------------|:-------------------|:-----------------------------|:---------------------------------------------| | Three months ended June 30, 2022 | 41,374 | $7.32 | $303 | | Total | 41,374 | $7.32 | $303 | - As of June 30, 2022, there were 4,294,512 Series A Preferred Warrants outstanding, exercisable to purchase 1,113,569 shares of Common Stock[134] 12. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates for financial instruments primarily use Level 3 inputs, including debt and loans receivable - The Company primarily uses Level 3 inputs (unobservable inputs) for estimating the fair value of its financial instruments, including debt and loans receivable, due to limited reliable market information[140] - Fair value of mortgage notes payable and junior subordinated notes is determined using discounted cash flow analyses with appropriate market discount rates (e.g., 5.23% for mortgages and 6.54% for junior subordinated notes as of June 30, 2022)[143] Loans Receivable Fair Value Inputs (June 30, 2022) | Loans Receivable Fair Value Inputs (June 30, 2022) | Discount Rate | Prepayment Rate | |:---------------------------------------------------|:-------------------|:-------------------| | SBA 7(a) loans receivable, subject to credit risk | 8.00% - 10.00% | 4.33% - 17.50% | | SBA 7(a) loans receivable, subject to loan-backed notes | 7.50% - 9.50% | 5.00% - 17.50% | | SBA 7(a) loans receivable, paycheck protection program | 1.00% | N/A | | SBA 7(a) loans receivable, subject to secured borrowings | 8.75% - 9.50% | 5.00% - 17.50% | Financial Instruments (in thousands) | Financial Instruments (in thousands) | June 30, 2022 Carrying Amount | June 30, 2022 Estimated Fair Value | Dec 31, 2021 Carrying Amount | Dec 31, 2021 Estimated Fair Value | |:-------------------------------------|:--------------------------------|:-----------------------------------|:-----------------------------|:----------------------------------| | Mortgages payable | $97,100 | $93,287 | $97,100 | $100,838 | | Junior subordinated notes | $27,070 | $24,732 | $27,070 | $24,378 | 13. RELATED-PARTY TRANSACTIONS The Company engages in various related-party transactions, with a Fee Waiver reducing asset management fees - The Company has a Fee Waiver, effective January 1, 2022, with the Operator and Administrator, which reduced asset management fees. The Base Fee is now 1% annually of the average Net Asset Value Attributable to Common Stockholders[149][152] - The Company issued Series A1 Preferred Stock in July 2022 to pay the quarterly Base Fee for Q1 2022 and expects to continue this for the remainder of 2022[153][157] Related-Party Fees (in thousands) | Related-Party Fees (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:----------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Asset management fees | $920 | $2,260 | $1,841 | $4,519 | | Property management fees | $413 | $404 | $851 | $807 | | Expense reimbursements - corporate | $526 | $454 | $948 | $1,059 | | Expense reimbursements - lending segment | $604 | $433 | $1,073 | $1,164 | | Upfront dealer manager and trailing dealer manager fees | $152 | $272 | $274 | $422 | Due to Related Parties (in thousands) | Due to Related Parties (in thousands) | June 30, 2022 | December 31, 2021 | |:--------------------------------------|:--------------|:------------------| | Asset management fees | $4,083 | $2,244 | | Property management fees and reimbursements | $865 | $320 | | Expense reimbursements - corporate | $883 | $692 | | Expense reimbursements - lending segment | $360 | $341 | | Upfront dealer manager and trailing dealer manager fees | $555 | $638 | | Non-issuance specific offering costs | $198 | $143 | | Other amounts due | $69 | $163 | | Total due to related parties | $7,013 | $4,541 | 14. COMMITMENTS AND CONTINGENCIES The Company has $7.1 million in loan commitments and $6.0 million in future construction obligations, with no material litigation expected - Outstanding commitments to fund loans were $7.1 million as of June 30, 2022, mostly for prime-based SBA 7(a) loans, with the government-guaranteed portion intended for sale[176] - The Company has $6.0 million in future obligations for tenant improvement allowances and other construction as of June 30, 2022, with $2.5 million funded to reserve accounts[177] - Management believes current legal proceedings, including a lawsuit related to a previously owned property, will not have a material adverse effect on the Company's financial condition or operations[180][181] - The Company services $265.5 million of guaranteed SBA 7(a) loans and could face recovery claims for technical deficiencies, but based on historical experience, this contingency is not expected to be probable[182] 15. LEASES Future minimum rental revenue under long-term operating leases is projected to be $189.993 million as of June 30, 2022 | Years Ending December 31, | Future Minimum Rental Revenue (in thousands) | |:--------------------------|:---------------------------------------------| | 2022 (Six months ending Dec 31, 2022) | $22,785 | | 2023 | $43,637 | | 2024 | $42,198 | | 2025 | $26,095 | | 2026 | $18,641 | | Thereafter | $36,637 | | Total | $189,993 | 16. SEGMENT DISCLOSURE Total segment net operating income increased to $24.992 million, driven by significant growth in the hotel segment | Segment Net Operating Income (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:--------------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Office | $7,900 | $7,586 | $15,914 | $15,373 | | Hotel | $3,247 | ($2) | $5,641 | ($809) | | Lending | $1,689 | $5,047 | $3,437 | $7,153 | | Total segment net operating income | $12,836 | $12,631 | $24,992 | $21,717 | - Total segment net operating income increased by $3.275 million (15.08%) for the six months ended June 30, 2022, compared to the same period in 2021[188] - The Hotel segment showed a significant turnaround, moving from a net operating loss of ($809) thousand in H1 2021 to a profit of $5.641 million in H1 2022[188] Condensed Assets (in thousands) | Condensed Assets (in thousands) | June 30, 2022 | December 31, 2021 | |:--------------------------------|:--------------|:------------------| | Office | $470,779 | $449,843 | | Hotel | $99,211 | $101,308 | | Lending | $83,033 | $96,729 | | Non-segment assets | $24,722 | $12,986 | | Total assets | $677,745 | $660,866 | 17. SUBSEQUENT EVENTS On July 1, 2022, the Company acquired an office property in Austin, Texas, for $1.9 million for future development - On July 1, 2022, the Company acquired a 1,352 square foot office property in Austin, Texas, for $1.9 million, with intentions for further development on the land[191] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, highlighting improved net income and FFO, hotel recovery, and liquidity Executive Summary The Company is a Maryland REIT focused on office, hotel, and lending, aiming to develop multifamily and creative office assets - The Company's real estate portfolio as of June 30, 2022, consisted of 17 assets, including 12 office properties (1.4 million rentable square feet, 78.1% occupied), one hotel (503 rooms, RevPAR $127.98 for H1 2022), and three development sites[204] - The Company's strategy is to acquire, operate, and develop premier multifamily and creative office assets in rapidly growing industries and vibrant communities, applying CIM Group's expertise[205] - The Company intends to dispose of assets that do not fit its strategy opportunistically and reinvest proceeds into strategic assets[209] - The COVID-19 pandemic continues to impact operations, and its future effects remain uncertain, potentially affecting business, financial condition, and liquidity[203] Rental Rate Trends Office occupancy was 78.1% with $54.13 annualized rent, while hotel occupancy significantly improved to 73.3% with RevPAR at $127.98 Office Statistics | Office Statistics | June 30, 2022 | June 30, 2021 | |:----------------------------------|:--------------|:--------------| | Occupancy | 78.1% | 78.0% | | Annualized rent per occupied square foot | $54.13 | $52.32 | - Office occupancy remained stable, while annualized rent per occupied square foot increased by 3.46% year-over-year[215] Hotel Statistics (Six Months Ended June 30,) | Hotel Statistics (Six Months Ended June 30,) | 2022 | 2021 | |:---------------------------------------------|:--------|:--------| | Occupancy | 73.3% | 38.8% | | ADR | $174.48 | $119.99 | | RevPAR | $127.98 | $46.52 | - Hotel occupancy more than doubled, ADR increased by 45.41%, and RevPAR surged by 175.10% for the six months ended June 30, 2022, compared to 2021, indicating a strong recovery in the hospitality industry[220] Lending Segment The lending segment originates SBA 7(a) loans, with PPP loans largely concluded, and plans to diversify beyond hospitality - The lending segment is a national lender primarily originating SBA 7(a) loans to small businesses, with most loans having variable interest rates and maturities of approximately 25 years[222][223] - As of June 30, 2022, only $205,000 in PPP loans remained outstanding, with substantially all loans originated under the program having been repaid[222][224] - The Company intends to expand its loan origination efforts beyond the hospitality industry to include other real estate-collateralized loans in sectors like convenience stores, RV parks, and owner-occupied industrial operations[225] 2022 Results of Operations Net income increased by $2.4 million for the quarter and $8.4 million for six months, with FFO also significantly improving Financial Metric (in thousands) | Financial Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change ($) | Change (%) | |:--------------------------------|:---------------------------------|:---------------------------------|:-----------|:-----------| | Total revenues | $26,403 | $22,673 | $3,730 | 16.5% | | Total expenses | $23,411 | $21,150 | $2,261 | 10.7% | | Net income | $2,931 | $527 | $2,404 | 456.2% | Financial Metric (in thousands) | Financial Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change ($) | Change (%) | |:--------------------------------|:-------------------------------|:-------------------------------|:-----------|:-----------| | Total revenues | $51,185 | $41,552 | $9,633 | 23.2% | | Total expenses | $45,704 | $43,326 | $2,378 | 5.5% | | Net income (loss) | $5,233 | ($3,144) | $8,377 | (266.4)% | FFO (in thousands) | FFO (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:--------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | FFO attributable to common stockholders | $2,625 | $859 | $4,818 | ($2,310) | - The increase in FFO is primarily due to a $3.2 million increase in hotel segment net operating income (Q2 2022 vs Q2 2021) and a $1.3 million decrease in asset management fees (Q2 2022 vs Q2 2021), partially offset by a $3.4 million decrease in lending segment net operating income (Q2 2022 vs Q2 2021)[233] Cash Flow Analysis Operating cash flow increased by $7.4 million, while investing activities used $30.9 million more cash, and financing activities decreased - Net cash provided by operating activities increased by $7.4 million for the six months ended June 30, 2022, compared to 2021, mainly due to increased net income adjusted for non-cash items[272] - Net cash used in investing activities increased by $30.9 million for the six months ended June 30, 2022, primarily due to $8.1 million in real estate acquisitions and a $22.4 million investment in an unconsolidated joint venture[273] - Net cash provided by financing activities decreased by $8.4 million for the six months ended June 30, 2022, largely due to the absence of common stock issuance proceeds (compared to $78.5 million from a rights offering in 2021) and $303,000 in common stock repurchases[274] Liquidity and Capital Resources The Company faces short-term liquidity needs for acquisitions and debt service, with plans to refinance its credit facility and address preferred stock redemptions - The Company's principal short-term demands for funds include asset acquisitions, property development/repositioning, capital expenditures, debt service, SBA 7(a) loan originations, and distributions/redemptions of preferred and common stock[275] - The Company is working to refinance its 2018 Revolving Credit Facility, with $50.0 million outstanding as of August 3, 2022, and has submitted an extension notice to extend its maturity to October 2023[275][281] - Holders of Series L Preferred Stock will have the right to require redemption in November 2022, and the Company also has the option to redeem, with payment in cash or Common Stock at its discretion[275] - Future financing methods may include offerings of equity/debt securities, credit facilities, asset sales, and cash flows from operations, but the ability to obtain sufficient long-term funding is uncertain and subject to various risks[275][279] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to interest rate risk, with 53.6% of its debt being floating rate, impacting earnings - The fair value of the Company's mortgage payable is sensitive to interest rate fluctuations; its book value was $97.1 million and fair value $93.3 million as of June 30, 2022[299] - As of June 30, 2022, 53.6% ($112.3 million) of the Company's debt was floating rate, exposing it to interest rate risk[300] - A 50 basis point change in LIBOR would result in an annual impact of approximately $562,000 to the Company's earnings[300] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control - As of June 30, 2022, the Company's disclosure controls and procedures were deemed effective by management, including the Principal Executive Officer and Principal Financial Officer[302] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2022[304] PART II. Other Information Item 1. Legal Proceedings The Company is not involved in any material legal proceedings, and existing actions are not expected to have a material adverse effect - The Company is not currently involved in any material pending or threatened legal proceedings, other than routine litigation in the ordinary course of business[307] - Management does not expect the resolution of current legal actions to have a material adverse effect on the Company's business, financial condition, results of operations, cash flow, or ability to satisfy debt service or maintain distributions[307] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's 2021 Annual Report on Form 10-K - No material changes to the risk factors disclosed in the 2021 Form 10-K have occurred[308] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Board approved a $10.0 million share repurchase program, under which 41,374 shares were repurchased for $303,000 - The Company's Board of Directors approved a share repurchase program (SRP) in May 2022, authorizing up to $10.0 million for Common Stock repurchases[309] Share Repurchase Program (SRP) | Period | Shares Repurchased | Average Price Paid Per Share | Cumulative Amount Repurchased (in thousands) | |:------------|:-------------------|:-----------------------------|:---------------------------------------------| | June 2022 | 41,374 | $7.32 | $303 | | Total | 41,374 | $7.32 | $303 | Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities occurred[311] Item 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable[311] Item 5. Other Information There is no other information to report under this item - No other information to report[312] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Dealer Manager Agreement and officer certifications - Key exhibits include the Third Amended and Restated Dealer Manager Agreement (Exhibit 10.1), Section 302 and 906 Officer Certifications (Exhibits 31.1, 31.2, 32.1, 32.2), and various XBRL taxonomy documents[314]