Artistic Media & Neighborhood Belief (CMCT, fka CIM Industrial Belief) (~$20MM market cap) is a tire hearth of a REIT (externally managed by CIM Group) that owns a mix of conventional workplace, “inventive workplace”, multi-family and a resort, the vast majority of that are positioned 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 right now) 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, greater 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 property are positioned.  

Here is a fast snapshot of the corporate’s property:

CIM Group had an ongoing most well-liked inventory issuance program going at CMCT, it was a technique to enhance property (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 further 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 current as earlier this 12 months), the widespread inventory felt the ache and was the wrong 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 property so as 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 property to enhance its widespread fairness ratio. The provide CMCT acquired mirrored what the Firm believed to be the truthful worth of those property, however the purchaser was unable to shut. Because of this and the current decline in rates of interest, CMCT has determined to shift its focus to refinancing quite than a sale of those property.

CMCT’s most well-liked inventory is convertible into widespread shares on the possibility 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 saying 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 whole, 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 (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 worth dropped because of the pressured promoting, it created tax loss promoting and additional spiraling down the drain to $0.23/share the place it trades right now.  The brand new plan, to refinance on the property stage and repay the credit score facility is printed within the most up-to-date 10-Q:

Administration plans to handle any potential 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 means of acquiring refinancing for the Firm’s resort 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 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 ample 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 based mostly 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 can be the topic of the Sheraton Refinancing and the Los Angeles Refinancing and (4) the Firm’s plans and efforts up to now 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 concerning 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 Type 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 end result 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 journey out any actual property restoration.  CMCT does have a sequence of potential improvement websites, (by means of CIM) entry to co-investors for undertaking particular capital (so they will not want to boost it on the CMCT stage, 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 “inventive workplace” and multi-family.  The underlying asset worth of the corporate have not modified a lot since the popular conversion (doubtless solely improved barely as short-term charges come down and extra corporations name staff again into the workplace) and they will 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 believe 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 price of 5.8% based mostly on the last-twelve months of web 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 price for his or her workplace properties.

One other method, CMCT pays CIM Group a base administration payment based mostly on the NAV which is decided by a 3rd occasion, they used to reveal NAV, however I have not seen it referred to as out for year-end 2023.  However based mostly on the quarterly payment (0.25% of Internet Asset Worth Attributable to Widespread Stockholders) you possibly can 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.