CIM COMMERICAL TRUST CMCT
February 14, 2020 - 4:46pm EST by
broncos727
2020 2021
Price: 15.07 EPS 0 0
Shares Out. (in M): 15 P/E 0 0
Market Cap (in $M): 220 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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Description

We wrote up the thinly traded REIT CMCT one year ago as a return of capital “trade” idea led by a motivated, well managed sponsor, trading at a substantial discount to NAV.  We believe the shares today present an even more compelling risk/reward opportunity.  The opportunity now is substantially different in terms of time horizon (longer) and the ability to put more money to work (very liquid).  So I think entering this as a new idea is warranted and might be appreciated by patient value investors that like picking up $1.00 worth of real estate for .50 cents.

First, the postmortem on 2019 is as follows: 

Monetized 2/3’s of the portfolio at prices representing 98% of their estimated NAV.

Distributed $14/share to stockholders in Sept 2019 -- essentially returning 86% of the $16.25 share price of a year ago.

Leaving ‘remainco’ stub worth $4.80 per original share (1:3 reverse split) -- for a year end 2019 pro-forma total value of $18.80 per share (representing a 15.7% pre-tax IRR – no tax consequence detail yet available beyond company’s initial estimate that distribution is 70% cap gains/30% return of capital).

Importantly, the recapitalization event DID NOT accomplish CIM’s goal of meaningfully closing the ‘value gap’ discount to NAV – largely because:

The ‘remainco’ shares traded poorly post distribution (as we expected might happen given 72% of the total shares outstanding were distributed in-kind to institutions via liquidation of the CIM run partnership that owned the shares).   

Shares currently trade at a 50% discount to CIM’s most recently published (11/2018) NAV of $29.49 per share.  

So while our 2019 return was decent, our conviction on the going forward risk/return equation is stronger.  This is why:

Higher conviction in current CIM published NAV estimate of $29.49 -- given they successfully monetized $1 billion of assets in 2019 at 98% of NAV.

CIM executed perfectly on the monetization strategy – which was meant to create a ‘useable’ REIT – i.e., one with a useful equity currency for growth/scale – however the strategy failed (with the shares trading at effectively the same discount to NAV prior to the recap event.)

We think the current valuation creates greater pressure within CIM to figure out what to do with CMCT, considering it is somewhat small in comparison to CIM’s $30 Billion AUM operation.  Perhaps a logical step is to consider taking CMCT private or a complete liquidation as next steps.  On the last write up, there was a thoughtful message that said “Why does this company exist?”  Great question, maybe it shouldn’t!  I’d prefer it didn’t exist.  Liquidating or taking private would be a painless route to a nice IRR. 

Investors looking to quickly get acquainted with this idea should start here with this link where the company outlines their holdings and states a NAV per share of $29.49.

https://shareholders.cimcommercial.com/static-files/29ac294a-6a64-4b2e-8640-ff0945c569a1

Large Insider/Principal Buying -- In October 2019, CIM Group purchased 2,486,390 shares (16% of outstanding shares) from a group of seven of the institutional investors in the Urban Partners vehicle that owned a majority of the company prior to the distribution event. 

This represents a $47.3 million investment by the ownership group principals of CIM.  The purchase price in this private transaction was $19.1685 per share = 65% of NAV and a 30% premium to the then current trading price.   CIM’s principal stake is now 19%.  CIM Group’s 3 co-founders are directors.

Calpers, following the initial distribution owned close to 25% of the outstanding stock in CMCT.  They have been selling, but apparently don’t feel obliged to submit any sort of 13g that would help the general public assess the situation.  (We are not experts on this topic, but suspect they might be deficient in their filing obligations.  tisk tisk)  We believe that the selling by Calpers is creating an attractive entry point and a somewhat “all you can eat” buffet for value oriented investors.  We theorize that when Calpers gets done unloading, shares will reprice higher.  Not a promise, but just a hunch.

Based on repositioning/expansion currently well underway at certain remaining portfolio assets, NAV could grow to $36 per share at Y/E 2021.  This assumes no change in cap rates.  The current share price implies an EV cap rate of 6.5% on pro forma (post asset sales) 2019 NOI of $48M.

               

POTENTIAL PRO FORMA 2021 YE NAV of $36/share based on:

AUSTIN expansion (mid 2020 completion):  42,000 sq. ft add on to 183,885 sq. ft, 97.5% leased complex – assume 8% net return on $15 million cost = $1.2 million increase in annual NOI

SHERATON GRAND renovation (503 room hotel adjacent to Sacramento Convention Center which is undergoing a $340 million renovation/expansion):  The convention center project and CMCT’s Sheraton room renovations expected to be completed late 2020 – assume 15% net return on $26 million cost = $3.9 million increase in annual NOI

4750 WILSHIRE BLVD REPOSITIONING:  138,000 square ft @ current 23% occupancy ($48/sq. ft). Being renovated to a “We Work” type shared concept. Marketing to Technology, Creative, etc. community that serves Hollywood adjacent. Based on 92% occupancy @ $48/sq. ft (current lease rates) = $4 million rent lift (80% net to NOI) beginning early 2020

ANNUALIZED NOI IMPACT APPROXIMATELY $8 MILLION 

Added to $48 million 2019 base NOI = $56 million

@5.5% cap rate = Asset Value before Debt of $1.02 billion

Less $470 million of debt/preferred stock

NAV = $550 million / 15 million shares outstanding = roughly $36/share

This represents about 10% annual growth in NOI from 2019 levels.

 

Primary Oakland Growth Asset:  CIM’s published NAV calculation we estimate values the land at 2 Kaiser in Oakland (adjacent to the CIM 500K sq ft office property at 1 Kaiser) on Lake Merritt at just 1/2 of the true value.  It is fully entitled for a ‘next generation’ urban office campus of up to 850,000 sq. ft. and seeking build to suit anchor tenant(s), co-investors, or sale.  https://www.cimcommercial.com/real-estate/by-property/reinvestment?name=Beacon%20Tower&id=5506

 

1 Kaiser Plaza in Oakland is a bit tricky, and this situation might be causing some concern.  Kaiser Permanente currently occupies about 2/3rds of the 1 Kaiser Plaza building in Oakland.  Kaiser recently announced intentions to build their own campus and consolidate their operations at the new facility which will be called the Thrive Center.  So the writing is on the wall that Kaiser Permanente will be slowly moving out of Kaiser 1.  That is terrible news right?  Well…not necessarily.  Kaiser Permanente is currently paying about $40 per square foot.  New lease rates are approximately $60 per square foot.  Oakland is still hot and experiencing a decade long revitalization. Of course, this causes uncertainty on them being able to fill available occupancy up when Kaiser Permanente leaves.  It is also likely that meaningful capex will be required to attract new tenants.  Another option of course would be to sell 1 Kaiser Plaza, and let an ambitious real estate developer tackle the tenant conversion project.

Here is some of the salient language regarding Kaiser Permanente at 1 Kaiser:

*Prior to February 2023, the tenant may terminate up to 140,000 square feet of space in the aggregate (of which no more than 100,000 rentable square feet may be terminated with respect to the rentable square feet expiring in 2027) in exchange for a termination penalty. From and after February 28, 2023, with respect to the rentable square feet expiring in 2025, and February 28, 2025, with respect to rentable square feet expiring in 2027, the tenant has the right to terminate all or any portions of its lease with CMCT, effective as of any date specified by the tenant in a written notice given to CMCT at least 15 months prior to the termination, in each case in exchange for a termination penalty

RISKS:

Largest tenant Kaiser Health (at 1 Kaiser) represents 30% of total rent roll – 374K sq ft @$41.50.  Kaiser is consolidating seven locations into the new 1.6M sq ft Thrive Center -- which is expected to break ground in late 2020 and open in 2023.  They will be terminating* in stages their 1 Kaiser leases that expire 2025-2027.  These leases are 20% below market versus Oakland Class A CBD but will likely require meaningful capex for competitive positioning.

In this booming economy businesses have been moving to Oakland.  In a recession it is conceivable that businesses consolidate back to San Francisco.  Difficult to predict these future trends, obviously.

We suspect that CMCT wishes it was a bigger & better REIT and that they can envision some benefits that come with larger scale.  A secondary offering could be a substantial risk, but we are comforted by their recent substantial purchase at 19.16 – roughly 20% higher than the current price.  There is a risk that involves dilution, but in our experience management and board has said all the right things about delivering shareholder value.  Importantly, their actions have followed their words and they have done right by shareholders thus far.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

No known catalyst.  Calpers stops selling could be considered a small catalyst, I guess.  Full liquidation, take private, or merger into bigger REIT is the only thing that would really get this to NAV, and there is nothing like that being contemplated at the moment - at least that I know of. 

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