CMCT Announces “Actions to Accelerate Focus Towards Premier Multifamily Assets”
Always good to restate your mission, despite SBA drama..
Today, CMCT restated its aim for a capital structure with 40% common equity, 30% preferred equity, and 30% debt. However, declining real estate values, particularly in the Bay Area, have reduced the common equity ratio. CMCT has attempted to sell the better assets and received an offer, but the buyer could not close. Given this disappointment and what CMCT sees in lower interest rates, the firm will focus on refinancing those specific assets. The plan involves securing property-level financing on multiple assets to repay corporate debt. Since corporate debt is backed by property buckets, timing, and lender backing will be essential elements.
Proceeds will be reinvested in “premier multifamily properties”. To improve the common equity ratio, CMCT is suspending its Series A1 Preferred Stock offering and redeeming approximately 4.8 million shares of preferred stock, with the redemption paid in common stock.
Additionally, CMCT is switching preferred stock dividends from monthly to quarterly while maintaining the third-quarter payouts as scheduled. The company believes these actions will “strengthen liquidity,” improve its balance sheet, and better position it for opportunities in the recovering real estate market.
CMCT declared a quarterly $0.04 per share dividend for common stockholders, payable in shares on October 8, 2024.
Let’s talk about SBA securitization and how little the company goes into detail.
First, if you have securitized the unguaranteed portion of an SBA loan for $56 million and repaid $8.5 million within the first six months, several possible reasons could explain this decision:
Prepayment of Loans in the portfolio, possible
Refinancing of the Loan Portfolio, hmm, less possible
Liquidity Management, getting ahead of payments? Odd but ok
Risk Mitigation…
For background, on January 1, 2023, the company adopted ASU 2016-13 (Current Expected Credit Losses or CECL) using the modified retrospective method, resulting in an adjustment of $619,000 to the equity section. For collateral-dependent loans, the company estimates losses based on the fair value of collateral when foreclosure is likely, or it uses a practical expedient if foreclosure is not probable. Adjustments to the CECL model are based on various factors, including loan type, collateral, and economic conditions.
The company calculates CECL using historical loan loss data and the Weighted Average Remaining Maturity method, referencing past write-offs and charge-offs. The level of write-offs in the past is unclear, but the firm says it assesses loans quarterly, assigning risk ratings from 1 to 5 (least risk to greatest risk). Newly originated loans are generally rated “2” (potential weaknesses) due to limited pay history or lack of management experience but are expected to improve to “1” over time. The numbers seem to bear this out. In December 2023, out of 169 loans, 120 were assigned a risk rating of 1, 48 a risk rating of 2, and one was a 3.
Whatever the reasoning, the reserves on the SBA portfolio have held steady at ~3.4 %, below the lower end of the average of 5%. With the payment of $8.5 million showing up in September with no explanation ( the investor call reportedly had no questions), it is difficult to ascertain if CMCT had excellent luck with origination and merely refining the portfolio.
However, this note was also in the annual report for 2023.
Lending Expenses: Lending expenses represent expenses from our lending subsidiaries, including interest, general and administrative expenses, and fees to related parties. Lending expenses increased by 80.1% to $7.9 million for the year ended December 31, 2023, compared to $4.4 million for the year ended December 31, 2022. The increase was primarily due to an increase in interest expense related to the issuance of new SBA 7(a) loan-backed notes in connection with the securitization that closed in March 2023.
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