Creative Media & Community Trust Corp Q2 FY2024 earnings call

• Net operating income improved from the first quarter across all real estate operating segments – office, multifamily, and hotel. • Cash flow impacted by elevated short-term interest rates, office market challenges, and soft rental rates at Bay Area multifamily assets. • Focused on strengthening balance sheet and improving cash flow, evaluating asset sales and reducing debt. • Expect to benefit from lower SOFR on floating rate debt and lower preferred dividends as Fed funds rate is expected to come down. • Made progress on development and redevelopment pipeline, ahead of schedule at two of three active projects. • Office segment same store NOI up 9% YOY to $7.6 million, driven by JV income and appraised value changes. • Hotel segment NOI up 5% YOY to $4.3 million due to improving average daily room rate. • Multifamily segment NOI increased to $2.3 million in Q2 2024 from $900k in Q1 2024, driven by occupancy gain. • Lending segment NOI up 42% YOY to $743k due to decrease in interest expense. • Development pipeline: 4750 Wilshire office to residential project nearing completion, 1915 Park multifamily project expected mid-2025, hotel room renovation in Sacramento commenced in July.

Office segment: Same store NOI increased 9% year-over-year to $7.6 million. Multifamily segment: Generated $2.3 million of NOI in the quarter compared to $900,000 of NOI in the first quarter of 2024. Hotel segment: NOI increased 5% from the prior year to $4.3 million. Lending segment: NOI increased 42% year-over-year to $743,000.

• Expect occupancy to decline in the third quarter due to a large tenant giving back ~130,000 square feet at One Kaiser Plaza office building. • Eventually expect to benefit from lower SOFR on floating rate debt and lower preferred dividends as Fed funds rate is expected to come down. • Two multifamily projects and hotel room renovation are ahead of schedule.

• Elevated short-term interest rates impacting cash flow. • Challenges in the office market. • Soft rental rates at Bay Area multifamily assets. • Forward-looking statements may differ from actual results due to known and unknown risks, trends, uncertainties, etc.

Q: Can we go put a little more cover on the leasing situation at Lake Merritt and just how the give back of space is going to impact things in 3Q?

A: We're currently in the process of lease negotiations with the largest tenant in the building, Kaiser, which is about – today, they lease about two-thirds of the building. Those negotiations are ongoing. They did give back, and this is something that we previously disclosed, that they gave back about 130,000 square feet at the end of July. That will not be – that square footage is not part of the negotiation for future lease, but we are in the process of negotiating an extension on their space that expires part of it in 2025 and part of it in 2027.

Q: Maybe on the open multifamily side of things, obviously, it seems like in the current market supply shouldn't be much of an issue, but what are you seeing on the demand side in terms of multifamily in that market?

A: As you can see by the numbers, we had a pretty good first half in terms of picking up occupancy, which was very encouraging. So I would say, we have seen a pickup in demand. Having said that, the market is still – I think market-wide vacancies roughly 10% still, which is much better than the trough, which was 17%, 18% or so a couple years ago. So we've seen a lot of absorption, but what we really haven't seen yet is a pickup in rate. That continues to be a challenge and it continues to be a market where – it's a very high concessions market at the moment. But we have seen, I would say, a pickup in just overall lease velocity. And we were able to get our occupancy into the low 90s, which was encouraging.

Q: Where would you think you need to trend in those assets before you could start pushing back a little bit on concessions and maybe pushing more aggressively on rate?

A: Probably in the mid-90s range. And the overall markets, as I mentioned, somewhere around 90% occupied.

Q: On the balance sheet side of things, given the moves you've seen in interest rates – maybe excluding today, but the moves you've seen in interest rates in the last couple of weeks, how does that impact your outlook for refinancing, anything maybe on the balance that you could pull forward or fix out if rates continue to trend downward, particularly long-term rates?

A: It's certainly been good to see from our perspective. We have a good amount of floating rate debt, which shows rates come down. Short-term rates, there's pretty significant savings for us. But in addition to that, I think what you're more referencing is the potential to potentially fix some of our rate on some longer-term financing. And so, that's something we will take a look at as well as we've seen kind of the five-year come down quite a bit. So there is a potential opportunity for us to swap from floating into some – potentially, we're looking at that right now into some a little bit longer-term fixed rate debt.

Q: Last one, in the past calls, you talked about some assets that were being non-core and some disposition opportunities that might be out there. Especially as financing has gotten cheaper for your counterparties in any deals, have negotiations or talks there picked up or is it still kind of a little bit early innings on capital recycling and dispositions?

A: We're still, I would say, more in the evaluation phase. We would like to reduce both our recourse and overall debt. So we are really evaluating and doing some work on an asset by asset level to see where we can basically generate the most value. And I think some of the non-core assets that we've discussed in the past, I would also include them in that mix as well, particularly the hotel and lending division.

Q: Would the primary use of proceeds be on the multifamily side still in the same markets you're in today?

A: I think the primary use of proceeds today really would just be to pay down debt. That's really our focus at this moment. And then I think as the market settles a little bit, look to potentially be back as an acquirer. But for now, we really want to get the debt balanced down a bit.