Artistic Media & Group Belief (CMCT, fka CIM Industrial 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 at present) to cement voting management. After the rights in 2021, administration owned 45+% of the corporate.
As most know, the industrial actual property market has struggled considerably as the results of sluggish 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.
Here is a fast snapshot of the corporate’s belongings:
CIM Group had an ongoing most well-liked inventory issuance program going at CMCT, it was a option to enhance belongings (and thus exterior administration charges) with out issuing widespread inventory at beneath NAV and CIM additionally had an affiliate act as a placement agent to gather extra charges. As the true property asset worth dropped at CMCT and most well-liked inventory issuance did not sluggish (CMCT was issuing most well-liked inventory as latest as earlier this 12 months), the widespread 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 12 months, CMCT tried to promote a handful of belongings as a way to elevate money and payoff the credit score facility, however the purchaser wasn’t capable of shut:
CMCT not too long ago explored the sale of a number of high-quality belongings to enhance its widespread fairness ratio. The supply CMCT obtained mirrored what the Firm believed to be the honest 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 somewhat than a sale of those belongings.
CMCT’s most well-liked inventory is convertible into widespread shares on the choice of the issuer. Subsequentially to the failed asset sale, in September, CMCT determined to “enhance its widespread fairness ratio” by changing some most well-liked inventory to widespread:
As a part of its program to enhance its widespread fairness ratio, the Company is suspending its Collection A1 Most well-liked Inventory providing and asserting the redemption of roughly 2.2 million shares of Collection A Most well-liked Inventory and roughly 2.6 million shares of Collection A1 Most well-liked Inventory, with the redemption value to be paid in shares of widespread inventory in accordance with the phrases of the Collection A Most well-liked Inventory and Collection A1 Most well-liked Inventory, respectively.
In complete, they redeemed $118.9MM (~$345MM is remaining) of most well-liked inventory with 60,526,804 widespread shares, or at a value of $1.96/share.
Most well-liked inventory holders (most likely 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 as a result of 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 deal with any attainable future occasion of default below the 2022 Credit score Facility by getting into into new financing preparations to repay quantities excellent below the 2022 Credit score Facility. The Firm is within the means 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 below the 2022 Credit score Facility and to pay for the Resort Renovation described above. As well as, the Firm is within the means 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 below the 2022 Credit score Facility, with the remainder for use for common 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 below the 2022 Credit score Facility are possible primarily based on the next: (1) the Firm has executed time period sheets with the respective lenders below 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 so far to acquire extra 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 meant to mitigate the related situation that might elevate substantial doubt in regards to the Firm’s capacity to proceed as a going concern inside one 12 months after the date that the interim monetary data 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 embody any changes which may outcome from the result of occasions described on this paragraph.
Probably there’s some worth right here if the corporate is ready to swap from recourse to non-recourse debt and journey out any actual property restoration. CMCT does have a collection of potential improvement websites, (by means of CIM) entry to co-investors for mission particular capital (so they will not want to lift 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 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 (seemingly solely improved barely as short-term charges come down and extra corporations name workers again into the workplace) and they’ll save roughly $8 million per 12 months in most well-liked 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 speculative, however I feel it’d.
In try to find out how a lot if any worth is right here, a technique is to again into an implied cap charge of 5.8% primarily based on the last-twelve months of internet working earnings, 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 price primarily based on the NAV which is decided by a 3rd celebration, they used to reveal NAV, however I have not seen it known as out for year-end 2023. However primarily based on the quarterly price (0.25% of Web Asset Worth Attributable to Widespread Stockholders) you’ll be able to again into the NAV.
In fact 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 seemingly could possibly be a zero, it’s a name choice disguised as widespread inventory on industrial actual property values enhancing and rates of interest persevering with to fall.
- CMCT may convert extra most well-liked to widespread 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 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 have been patrons at $9.25, odd that they tanked their very own place to such a level, however now with much less possession, may be much more prone to do it once more to save lots of their administration price earnings.
