CMCT(CMCT) - 2024 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Net operating income (NOI) improved across all real estate operating segments (office, multifamily, and hotel) compared to Q1 2024 [4] - Same-store office segment NOI increased 9% YoY to $7.6 million, driven by an unrealized gain in Q2 2024 compared to an unrealized loss in Q2 2023 [5] - Hotel segment NOI increased 5% YoY to$ 4.3 million, primarily due to improved average daily room rates [6] - Multifamily segment NOI increased to $2.3 million in Q2 2024 from$ 900,000 in Q1 2024, driven by occupancy gains (92.5% at the end of Q2 2024 vs. 79.3% at the end of 2023) [6] - Lending segment NOI increased 42% YoY to $743,000, primarily due to decreased interest expense from principal repayments on SBA 7(a) loan-backed notes [7] - FFO was negative$ 0.14 per diluted share in Q2 2024, compared to negative $0.19 in the prior-year period, driven by a$ 4.2 million increase in segment NOI [16] Business Line Data and Key Metrics - Office segment lease percentage remained stable at 83.5% in Q2 2024, with 52,000 square feet of office leases executed [6] - Multifamily occupancy improved to 92.5% at the end of Q2 2024, up from 79.3% at the end of 2023, with monthly rent per occupied unit at $1,806, a 4% YoY increase [6][10] - Hotel segment benefited from increased revenue per available room, driven by higher average daily rates [14] - Lending segment saw a decrease in interest expense due to principal repayments on SBA 7(a) loan-backed notes [14] Market Data and Key Metrics - Oakland multifamily rental rates remain below expectations due to high supply levels added between 2018 and 2022 [11] - East Bay multifamily development pipeline remains below the average for the top 25 US markets [11] - LA multifamily projects are progressing ahead of schedule, with 4750 Wilshire nearing completion and 1915 Park expected to deliver by mid-2025 [8][9] Company Strategy and Industry Competition - The company is focused on strengthening its balance sheet and improving cash flow through asset sales and debt reduction [4] - Development and redevelopment pipeline progress includes two multifamily projects in LA and a hotel room renovation in Sacramento [5][8] - The company aims to invest in premier multifamily and creative office assets in high barrier-to-entry markets [9] - The company expects to benefit from lower SOFR on floating rate debt and lower preferred dividends as the Fed funds rate declines [4] Management Commentary on Operating Environment and Future Outlook - Elevated short-term interest rates and challenges in the office market continue to impact cash flow [4] - The company anticipates a decline in office occupancy in Q3 2024 due to a large tenant returning 130,000 square feet at One Kaiser Plaza in Oakland [6] - Management expects minimal new multifamily supply in Oakland due to low rental rates making new construction uneconomical [11] - The company is optimistic about the multifamily market, with increased demand and lease velocity, but acknowledges challenges in rental rate growth [19][20] Other Important Information - The company raised an additional$ 8.3 million in net proceeds from the sale of Series A1 preferred stock in June 2024 [16] - Non-segment expenses decreased significantly due to the full amortization of acquired in-place lease intangible assets for Oakland assets in 2023 [15] Q&A Session Summary Question: Impact of tenant space giveback at Lake Merritt on Q3 leasing - The company is negotiating lease extensions with Kaiser, the largest tenant, for space expiring in 2025 and 2027, but the 130,000 square feet returned in July 2024 will not be part of future lease negotiations [18] Question: Multifamily demand trends in the current market - The company has seen a pickup in demand, with occupancy improving to the low 90s, but rental rates remain a challenge due to high concessions [19] Question: Conditions needed to reduce concessions and push rental rates - The company believes occupancy needs to reach the mid-90s range before it can reduce concessions and push rental rates more aggressively [20] Question: Impact of recent interest rate trends on refinancing outlook - The company is considering opportunities to swap floating-rate debt into longer-term fixed-rate debt as rates decline [21] Question: Progress on non-core asset dispositions - The company is still evaluating non-core assets, including the hotel and lending divisions, for potential dispositions to reduce recourse and overall debt [22] Question: Use of proceeds from asset sales - The primary use of proceeds from asset sales would be to pay down debt, with potential future acquisitions once the market stabilizes [23]