Hello, and welcome to the Creative Media & Community Trust Q4 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Steve Altebrando, Portfolio Oversight for CMCT. Please go ahead.

Good morning, everyone, and thank you for joining us. My name is Steve Altebrando, the Portfolio Oversight for CMCT. Also on the call, today is Shaul Kuba, our Chief Investment Officer; David Thompson, our Chief Executive Officer; and Barry Berlin, our Chief Financial Officer. This call is being webcast and will be temporarily archived on the Investor Relations section of our website, where you can also find our earnings release. Our earnings release includes a reconciliation of non-GAAP financial measures discussed during today's call. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. With that, I'll turn the call over to David Thompson.

Thanks, Steve, and thank you, everyone, for joining our call today. This morning, we announced our fourth quarter 2022 earnings. We're pleased to report that CMCT generated core FFO of $0.11. We continue to see a strong rebound in our hotel asset, and we also saw an improvement in our office NOI from the prior quarter. In addition, our office lease percentage increased in 2022, despite headwinds nationally for the office sector and the high number of lease expirations we had coming into the year. We believe this speaks to the quality of our portfolio and leasing team. We have quality assets in highly desirable markets and submarkets such as Beverly Hills, Culver City, Hollywood and Austin. Our office assets generally fall into the following categories: Ultra-prime location, like 9460 Wilshire and Beverly Hills, best-in-class, like one Kaiser in Oakland or Penfield in Austin or specialty office that we believe is more immune from work from home trends, like the medical office concentration we had in Los Angeles at 11600 and 11620 Wilshire, buildings that are located just minutes from the West L.A. VA Medical Center and UCLA Medical Center. As we continue into 2023, I would like to highlight a few key points about our strategy. First, we are executing on our previously announced plan to grow the multifamily side of our portfolio to achieve more balance between creative office and multifamily. We are seeking newer vintage, highly amenitized, premier multifamily assets and high barrier to entry markets. For example, in the first quarter of this year, we acquired two multifamily assets in the Bay Area and one in Los Angeles, totaling 696 units. Shaul will give more color on these exciting investments. Second, we made progress on our value-add and development pipeline. Most notably, we announced earlier this month that we closed a co-investment and construction loan at our 4750 Wilshire property in Los Angeles. The unleased portion of the building is now being converted to luxury residential apartments. We have a significant pipeline of multifamily development opportunities on land we already own. As we have previously mentioned, for value-add and development assets, we will look to co-invest to increase our diversification and supplement returns by generating fee income when advantageous. Third, we reduced our corporate overhead by 28% in 2022. This was driven by the permanent reduction in our management team. And fourth, we took steps to improve our liquidity and balance sheet. This is extremely important in the current environment where capital is becoming more scarce and expensive and as we consider future opportunities. I would now like to turn the call over to Shaul Kuba.

Thank you, David. I'd like to take the time to highlight some of our exciting reset acquisition and provide an update on the status of our development pipeline. As we discussed last quarter, we are focused on growing the multifamily side of our portfolio. As David described, we have focused our acquisition targets on new vintage, highly amenitized premier asset in high barrier to entry market. First, in Echo Park in Los Angeles, we acquired 1902 Park Avenue, a 75-unit apartment building in an off-market transaction. The building is adjacent to 1910 West Sunset, a creative office building we acquired last year from the same seller. We are excited to grow our footprint in Echo Park, a thriving walkable submarket with a dozen of building and entertainment option. Our basis in 1902 Park Avenue is highly attractive at approximately $300,000 per door which we believe is substantially below replacement cost for a building that was constructed in 2012. Next, in Auckland, we acquired the channel house, a 333-unit, 8-story apartment building and 1150 Clay, a 288-unit 16-story apartment building. Both assets are a premier Class A buildings that were completed in 2021. The assets are currently in lease-up, and we expect net operating income to significantly increase. At the end of 2022, the Channel House was 76% occupied and 1150 Clay was 77% occupied. Oakland is a submarket that saw significant supply growth from 2018 through 2022. However, going forward, the pipeline for new development is significantly below the average for the top 25 U.S. market. And given cost inflation, we estimate our basis is significantly below replacement costs. The Channel House is in the heart of Jack London Square, a waterfront community with dining, retail, view of San Francisco and easy access to both Downtown San Francisco and Oakland.…

Thanks, Shaul. I'll provide an update on our recently announced co-investment and our leasing activity. As David mentioned, in the first quarter, we closed on a co-investment with three international institutional investors for the conversion of 4750 Wilshire Boulevard in Los Angeles from an office building to a mix of ground level office space that is 100% leased today and 68 new luxury multifamily apartments. We also closed on a construction loan in the quarter, fully funding the project. The conversion of the unleased portion of the building into multifamily rentals began in March, and we expect the conversion to take about 18 months. We believe this is a highly attractive project as 4750 Wilshire is located in Hancock Park and affluent residential submarket at L.A., where housing is supply constrained. The co-investment on 4750 Wilshire will ultimately reduce our ownership to 20%. We expect to benefit from the expected value creation of the asset and we'll also earn a management fee as well as an opportunity to earn and promote. Turning to leasing. We leased approximately 38,000 square feet in the fourth quarter and another 31,000 square feet through the first two months of 2023. For the full year of 2022, we leased approximately 157,000 square feet and increased our lease percentage to 84.5% from 80.5% a year earlier. We had approximately 40,000 square feet of signed leases that have not yet commenced at year-end. We entered 2022 with nearly 15% of our leases expiring in 2022 and this year, it is a much more manageable 11%. And in total, we estimate we will renew over 70% of these leases. We have only one tenant expiration over the size of 10,000 square feet in 2023. With that, I'll turn it over to Barry.

Thank you, Steve. Moving on to financial highlights. Our segment net operating income was reduced by $400,000 to $11.7 million compared to $12.1 million in the prior year comparable period. By business segment, this change is broken out as a $1.9 million reduction in our Lending segment NOI, partially offset by an increase in our Hotel segment NOI of $1.3 million and around a $300,000 increase in our office segment NOI. Drilling deeper into our business segments, first, our Office segment NOI increased to $6.9 million from $6.6 million in the prior year comparable period, driven by an increase in the NOI for our same-store office properties, primarily due to a decrease in real estate tax expenses at an office property in Austin, Texas, partially offset by a decrease in rental revenues and an office property in San Francisco, California due to a decrease in occupancy. Our Office segment did continue to see improved activity and we signed approximately 38,000 square feet of leases during the quarter. Second, our Hotel segment NOI increased to $3.1 million from $1.8 million in the prior year comparable period. This was driven by improved occupancy, which went up to 72% from 70% and we saw improved ADR, which increased to $179 per room for around $154 per room. Third, our lending division NOI decreased by around $1.9 million to a more normalized $1.8 million in the fourth quarter of 2022. It is important to note that in each of the quarters of 2021, due to COVID-driven additional government support of our SBA 7(a) loan product, we had a significant bump in loan origination and loan sales, which had a significant market premiums. This drove NOI up to $3.6 million last year for the three months ended December 31, 2021 that increased government support did…

[Operator Instructions] Today's first question comes from Gaurav Mehta with E.F. Hutton.

First question I wanted to ask you was on your acquisitions. I was wondering if you could provide some color on the cap rate on these acquisitions? And are these fully stabilized on one of the assets you said, [leases], but is there any value-add opportunities in these acquisitions?

So if you look at our three multifamily acquisitions that we made, they're all in the process of -- well, at least the two Oakland assets are in the process of leasing up, so the in-place cap rate is not overly relevant, I would say, a target for a deal profile like that would be to get somewhere to around a 6% return on cost in the medium term, and more like a seven over the longer term. So that's really what we're targeting with those assets, but at the time of acquisition, they were about 75% occupied. When both of those buildings were open in 2021. And then for the Echo Park deal, which is from an occupancy standpoint, stabilized; however, the rents are significantly below market. So -- and it is a constraint -- housing-constrained area. So similarly, that would be an asset that we would target over about the medium term trying to get to about a 6% return on cost.

Okay. Second question on the balance sheet. Can you provide some color on the demand for your preferred stock? Should we expect similar demand that you saw last year? Are you seeing any changes?

We generally have been seeing a normalized month, roughly $10 million of inflows. So I think that's the best way to project going forward.

So $10 million of inflows every month?

Correct.

The next question comes from Craig Kucera with B. Riley Securities.

I want to circle back to the -- several of the acquisitions you did in this first quarter where you assumed debt. Can you give us some color on what the coupons are those and maybe the terms or anything else in that regard?

Yes, sure. So we did assume two mortgages which were part of the attractiveness of the deal actually because they were basically mortgages that are below market today. For Channel House, the spread -- they're both floaters, but Channel House was SOFR plus 336 and Clay was SOFR plus 350. And in terms of maturities, they all have extension options but really run through about mid-2025 plus extension options.

Okay. Great. And you had obviously a pretty significant change in the diluted share count related to the warrants. I guess, how should we think about that going forward? Is that going to be kind of included as part of your diluted share count going forward? Or is that really kind of price dependent? Or any color there would be helpful.

Yes. It actually is because of the share price, not the warrants. So the way the calculation works is you effectively -- you assume that the stock -- that the shares outstanding -- the preferred out -- shares outstanding will be converted into common. And that amount is based on the current stock price. So it's added to the share count, but it's a little bit of a quirky calculation because these price levels of the common stock, we're not interested in converting any preferred into common. That's why that calculation runs that way.

And that conversion is at your discretion versus the holder?

Correct. It's at our discretion.

Got it. And most of my questions were about sources and uses, which you covered. So that's it for me.

The next question comes from John Moran with Robotti & Co.

I was wondering if you can elaborate on your liquidity position as of March 31. So I think you said you had $25 million left on your line and -- but how much cash do you have on your balance sheet? And I guess I was just wanted to tie that in with asking about the repurchase plan, and it seems like the stock trading sloppy. It's, I don't know, down 75% since your 2019 restructuring transactions that's down 40% from the rights offering. And just you have the buyback in place and I guess the only reason not to execute on that at these levels would be liquidity. So anyway, just wondering if you could elaborate on liquidity at March 31 and what would be -- am I correct in -- that's an issue with respect to the buyback?

Barry, do you want to touch on the liquidity numbers or Steve, then we can talk a little bit more about the buyback in general.

I think for the cash available, I think, we're roughly around $15 million today plus the availability that you mentioned on the line.

And I think in terms of the buying back stock, again, we'll continue to look at and find opportunities where we think it's opportunistic for us to repurchase shares. Again, we want to balance that with the capital needs and opportunities that we think we're going to see in the market. And we've talked about a number of the things on the development side that we're looking at. So we want to balance that as well. And certainly, we have been active in the past. Affiliates were purchasing shares in 2021 and CMCT repurchased stock in second, third quarters of last year. So it's something we'll continue to take a look at.

The next question comes from Brendan McCarthy with Sidoti.

Yes. I was wondering if you could shed some light on the -- or I'm sorry, the 1450 Wilshire transition on any government roadblocks or rezoning issues? I guess, do you -- have you run into any rezoning issues with that with regards to office to multifamily?

Yes. So the short answer is no. I mean, we did have to get the property re-entitled from office to multifamily, but generally, what we found for that particular asset was the community was pretty supportive of that because they would, generally speaking, prefer residential over an office user. So then we got -- we received the entitlements last year and then it was just a matter of getting through the permit -- permitting. And then fortunately, we were able to start construction in March. So we're excited for that project should take about 18 months.

Got it. And one more question about the funding profile. Obviously, preferred is a large portion of the funding profile, but I was wondering if you could also shed some light on what you think the funding profile might look like two to four years down the road just in terms of capital structure?

Yes. Ideally, we would be to a size that's larger and certainly having more multifamily in the portfolio, which is a more stabilized source of cash flow. And then potentially, we could get to a point where we're using unsecured financing, which has some advantages, certainly additional flexibility for the Company. But near term, really, we would expect to have this combination of the preferred mortgages and our revolver that we would be utilizing.

Great. I guess one more quick question just around the mortgage financing aspect. Have you noticed with your banking relationships or other relationships, a significant tightening of lending in the recent environment? Or maybe you could comment on the recent lending environment?

Yes, certainly, it's gotten tighter. And we've felt the impact of that. I mean rates are getting higher, which means we're seeing higher cap rates, higher borrowing costs. I mean I think for us, we're are in good shape in terms of -- we just renewed the credit facility at the end of 2022. So that's good for three years, plus two one-year extensions. The mortgage we have really the only other significant mortgage we have is on one Kaiser, which is a CMBS fixed rate, not due until 2026. So from that side of the balance sheet, I think we're -- certainly, the environment has gotten tougher, and things have tightened up, but we're also in pretty good shape in terms of the portfolio and the underlying assets and where we have debt, again, particularly having just renewed the credit facility.

Next question is a follow-up from Gaurav Mehta with E.F. Hutton.

Wanted to follow up on the acquisition again and I just wanted to clarify, the rate on the mortgage debt, did you guys say SOFR plus 336 to 350?

That's correct.

And so that would imply like a mid-7% financing on these acquisitions, right?

That is correct as of today, but as you know, the forward curve implies the rate coming down pretty meaningfully, but yes, that's correct as of today.

Okay. And what's the dollar amount of these acquisitions? I think I saw the dollar amount for two of these acquisitions in your filing and didn't see the dollar for the third one?

Yes. So 1902 Park was about a $22.5 million deal, with CMCT, it's 50% -- has a 50% interest. So about CMCT equity is half of that. Yes, and Channel House is around 123 for our portion and Clay was about -- 143 for our portion, sorry, Jack London Square was about 123 for our portion.

The next question is also a follow-up from John Moran with Robotti& Co.

Yes, with respect to the multifamily deals that you did in the first quarter, is there any near-term prospect to bring in co-investors on those? And it's this market environment -- has it been disruptive on that into your business? I mean, do you expect it to be more difficult to get co-investors?

Those are deals where we could potentially look to co-invest. And part of the reasons that we would like the two Oakland deals was that there was -- when we saw where the pricing was coming in for really high-quality assets. And obviously, the Bay Area has some struggles, but that led to pricing being at a place that we thought was very attractive to be an acquirer. Yes. And as a reminder, in 2019, we sold a large amount of assets in the Bay Area. It was mostly office and parking when the market was really a thriving market. So at this point in the cycle, we thought it was attractive to reenter, but now on the multifamily side. But to your direct question, I think we would, over time, like to bring in co-investors. I think the private markets today are reacting just like others, just where there's a sense of uncertainty around commercial real estate in general. So it may not be immediate, but over time, we would like to bring in co-investors for those assets.

Do you feel like -- does the business plan makes sense without -- when I say the business plan, I mean funding something that your targeted return on cost is 6% or 7% and funding that with essentially preferred stock that cost that or more. I mean, is that -- and I understand that you're buying below replacement cost and hopefully a stabilized cap rate or exit price on those properties would be much higher, but without co-investors, does it make sense as a business plan to fund that type of acquisition with this preferred stock program. That probably is a little bit confusing to me.

I mean we think it certainly makes sense. I mean, when we look at deals like the Oakland assets, our view or our expectation of returns or target returns are in the low teens. So we certainly think, even without co-investors, it's a return that is very attractive for us. And then certainly, if you bring in co-investors, you push those returns materially higher through the management fees and potential promote as well. But even without it, [indiscernible] they're still attractive deals.

At this time there are no more lines in the queue. This concludes our question-and-answer session. The call has now concluded. Thank you for attending today's presentation. You may now disconnect.