Two REITs are unconventional, and one is just paddling along, all having a bad year.
Creative Media and Community Trust Corporation, and Hudson Pacific Properties go their own way, and Franklin Street sticks to its knitting.
Creative Media and Community Trust Corporation (CMCT) is a small office REIT with a market cap of $44.32 million. Its total return YTD currently sits at -44.25%, with the stock price dropping by 54% over the past year. CMCT’s primary strategy focuses on acquiring, operating, and developing office properties in urban markets like Los Angeles, Oakland, San Francisco, and one hotel in Sacramento.
In 2019, the company entered SBA lending, benefiting significantly when the government temporarily insured 90% of SBA loans, though this has since reverted to 75%. In early 2023, CMCT securitized the unguaranteed portion of its SBA 7(a) loans, issuing $54.1 million in notes and netting $43.3 million after fees and reserves. The interest on these notes is 8.13% (SOFR + 2.60%), while the variable SBA 7(a) loans have rates around 10.75%-12.75%, and fixed loans at 13.5%-14.5%, providing a solid spread for now. No news on the default rates, though.
However, due to additional debt, the company’s leverage skyrocketed, going from 5x to 13x in one quarter. This may be what triggered the firm to fall out of compliance with a revolver covenant that is 78% extended as of July, pushing the leverage ratio to 10.3x. CMCT is actively seeking alternative liquidity options, as the lender group has already approved two modifications. Without a clear plan, selling assets may be the only path to reduce debt, but without cash flow they may have to leave money on the table unable to make upgrades for better returns.
Franklin Street is in boring commercial office space. While conservative, the top-line revenue is not enough to cover the portfolio's expenses, giving the firm a total return year to date of -23.28%
It’s trying to move forward. On July 8, 2024, the Company sold a property located in Glen Allen. Virginia for a gross selling price of $31.0 million at a loss of approximately $13.2 million, recorded as an impairment as of June 30, 2024. On July 10, 2024, the Company used proceeds of $25.3 million, or 90% of the net proceeds from the disposition, to repay outstanding indebtedness. There's nothing really interesting to see here, moving along.
Then there is this, directly from the firm.
Hudson Pacific serves dynamic tech and media tenants in the global epicenters for these synergistic, converging and secular growth industries. The company's unique and high-barrier tech and media focus leverages a full-service, end-to-end value creation platform forged through deep strategic relationships and niche expertise across identifying, acquiring, developing and transforming properties into world-class amenitized, collaborative and sustainable office and studio space.
That’s a lot and involves a WeWork-esque ethos. To be clear, global epicenters mean America’s West Coast ( LA, SF, and Seattle) and one spot in Vancouver. The portfolio of Hudson Pacific is nichey. Maybe opportunistic choices or a principal’s particular interest. It’s office buildings, mixed-used ( ex., The Ferry Building), and production spaces for televisions and I guess movies. Its total return YTD is -51.71%. I don’t know a lot about the production of film and streaming content. However, I do know TV/Film/ Streaming businesses involve 13 different unions, from the actors to the people who hang the lights. Also, within the last five years, there has been significant disruption with work stoppages due to contract negotiations ( otherwise known as strikes.). The Hudson Pacific even addresses the most recent issue with the teamsters in its June 2024 results.
"In terms of our studios, after 18 months of strikes and negotiations, the recent ratification of the Teamsters’ contract clears the way for increased production activity. However, industry dynamics are very fluid, and as a result, we still lack visibility in regard to timing and direction of our studio operations. Importantly, we do not require production to return to anywhere near prior peak levels for our studio business to start to contribute meaningful value, in part due to the streamlining of our model these past few years, but it will take time.“
The next niche is AI tenants looking primarily for subleased built-out space. Since venture funds back AI, this seems to hand control to a third party, the VCs, rather than the tenants or landlords.
Granted, the returns on this REIT could be better. Its share price is down ~39% LTM, and it has suspended its dividend. These are significant assets looking for tenants at the whim of VCs and unions, but it's fun and different. I love TV and AI products, so this should be good, right?