None of CIM Urban GP or any of its affiliates, members, stockholders, partners, managers, officers, directors, employees, agents and representatives will have any liability in damages or otherwise to any limited partner, any investors in CIM REIT or CIM Urban, and CIM Urban will indemnify such persons from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, lawsuits, proceedings, costs, expenses and disbursements of any kind which may be imposed on, incurred by or asserted against such persons in any way relating to or arising out of any action or inaction on the part of such persons when acting on behalf of CIM Urban or any of its investments, except for those liabilities that result from such persons'persons’ fraud, gross negligence, willful misconduct or breach of the terms of the CIM Urban Partnership Agreement or any other agreement between such person and CIM Urban or its affiliates.
Investment Management Agreement
subsidiaries.
CIM Urban pays asset management fees to the Operator on a quarterly basis in arrears. ThePrior to 2022, the fee iswas calculated as a percentage of the daily average adjusted fair value of CIM Urban's assets:
| Daily Average Adjusted Fair | ||||||||
| Value of CIM Urban's Assets | Quarterly Fee | |||||||
| From Greater of | To and Including | Percentage | ||||||
| (in thousands) | ||||||||
| $ | — | $ | 500,000 | 0.2500% | ||||
| 500,000 | 1,000,000 | 0.2375% | ||||||
| 1,000,000 | 1,500,000 | 0.2250% | ||||||
| 1,500,000 | 4,000,000 | 0.2125% | ||||||
| 4,000,000 | 20,000,000 | 0.1000% | ||||||
2022. The Operator is responsible for the payment of all costs and expenses relating to the general operation of its management business, including administrative expenses, employment expenses and office expenses. All costs and expenses incurred by the Operator on behalf of CIM Urban are borne by CIM Urban. In addition, CIM Urban agreed to indemnify the Operator against losses, claims, damages or liabilities, and reimburse the Operator for its legal and other expenses, in each case incurred in connection with any action, proceeding or investigation arising out of or in connection with CIM Urban'sUrban’s business or affairs, except to the extent such losses or expenses result from fraud, gross negligence or willful misconduct of, or a breach of the terms of the Investment Management Agreement by the Operator.
Nothing in the Investment Management Agreement limits or restricts the right of any partner, officer or employee of the Operator to engage in any other business or to devote his time and attention in part to any other business. Nothing in the Investment Management Agreement limits or restricts the right of the Operator to engage in any other business or to render services of any kind to any other person.
The Investment Management Agreement will remain in effect until CIM Urban is dissolved or CIM Urban and the Operator otherwise mutually agree.
Master Services Agreement
In addition, pursuant to the terms of the Master Services Agreement, the Administrator may receive compensation and or reimbursement for performing certain services for CIM Commercial and its subsidiaries that are not covered by(other than the Base Service Fee. During the years ended December 31, 2019, 2018Services) for us and 2017, suchour subsidiaries. Such services performed by the Administrator and its affiliates includedmay include accounting, tax, reporting, internal audit, legal, compliance, risk management, IT, human resources, corporate communications, and from and after September 2018, operational and on-going support in connection with our registered public offering of units ("our Series A Preferred Units"), where each Series A Preferred Unit consisted of one share of Series A preferred stock,Stock, par value $0.001 per share (the "Series A Preferred Stock"), and one warrant to purchase 0.25 shares of Common Stock, subject to adjustment upon the occurrence of certain events specified in the related warrant agreement ("(“Series A Preferred Warrants"Stock”) and Series D Preferred Stock, par value $0.001 per share (“Series D Preferred Stock” and, together with the Series A Preferred Stock and
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Series L Preferred Stock, “Preferred Stock”). The Administrator'sAdministrator’s compensation for such services is based on the salaries and benefits of the employees of the Administrator and or its affiliates who performed thesesuch services (allocated based on the percentage of time spent on the affairs us and our subsidiaries).
Fee Waiver
On January 5, 2022, we and certain of CIM Commercialour subsidiaries entered into a Fee Waiver (the “Fee Waiver”) with the Operator and the Administrator with respect to fees that are payable to them. The Fee Waiver is effective retroactively to January 1, 2022 (the “Effective Date”). Pursuant to the Fee Waiver, the Administrator agrees to voluntarily waive any fees in excess of those set forth in the Fee Waiver, to the extent it would otherwise have been entitled to such additional compensation under the Master Service Agreement, and the Operator agrees to voluntarily waive any fees in excess of those set forth in the Fee Waiver, to the extent it would otherwise have been entitled to such additional compensation under the Investment Management Agreement.
1.Base Fee: A base asset management fee (the “Base Fee”) is payable quarterly in arrears to the Operator in an amount equal to an annual rate of 1% (or 0.25% per quarter) of the average of the “Net Asset Value Attributable to Common Stockholders” as of the first and last day of the applicable quarter. Net Asset Value Attributable to Common stockholders is defined as (a) the sum of the Company’s (1) investments in real estate at fair value, (2) cash, (3) loans receivable at fair value and (4) the book value of the other assets of the Company, excluding deferred costs and net of other liabilities at book value, less (b) the Company’s (i) debt at face value, (ii) outstanding preferred stock at stated value, and (iii) non-controlling interests at book value; provided, that, non-controlling interests in any UPREIT operating partnership relating to the Company shall not be excluded.
2.Incentive Fee: A revised incentive fee (the “Revised Incentive Fee”) is payable quarterly in arrears to the Administrator with respect to the quarterly core funds from operations in excess of a quarterly threshold equal to 1.75% (i.e., 7.00% on an annualized basis) of the Company’s “Adjusted Common Equity” (as defined below) for such quarter (“Excess Core FFO”) as follows: (i) no Revised Incentive Fee in any quarter in which the Excess Core FFO is $0; (ii) 100% of any Excess Core FFO up to an amount equal to the product of (x) the average of the Adjusted Common Equity as of the first and last day of the applicable quarter and (y) 0.4375%; and (iii) 20% of any Excess Core FFO thereafter. Revised Incentive Fees payable for any partial quarter will be appropriately prorated.
“Adjusted Common Equity” means Common Equity plus Excluded Depreciation and Amortization. “Common Equity” means Total Stockholders’ Equity minus Excluded Equity. “Total Stockholders’ Equity” means the amount reflected as total stockholders’ equity in accordance with GAAP on the consolidated balance sheet of the Company and its subsidiaries)subsidiaries as of the last day of a given quarter. “Excluded Equity” means the sum of all preferred securities of the Company and its subsidiaries classified as permanent equity in accordance with GAAP on the consolidated balance sheet of the Company and its subsidiaries as of the last day of a given quarter. “Excluded Depreciation and Amortization” means, for a given quarter, the amount of all accumulated depreciation and amortization of (i) the Company and its subsidiaries and (ii) to the extent allocable to the Company and its subsidiaries, the unconsolidated affiliates, in each case as of the last day of such quarter that corresponds to the periodic depreciation and amortization expense calculated in each case in accordance with GAAP that is a permitted add back to net income calculated in accordance with GAAP when calculating funds from operations.
3.Capital Gains Fee: A capital gains fee (the “Capital Gains Fee”) is payable quarterly in arrears to the Administrator in an amount equal to (i) 15% of the cumulative aggregate realized capital gains minus the cumulative aggregate realized capital losses (in each case since the Effective Date), minus (ii) the aggregate capital gains fees paid since the Effective Date. Realized capital gains and realized capital losses are calculated by subtracting from the sales price of a property: (a) any costs incurred to sell such property, and (b) the current gross value of the property (meaning the property’s original acquisition price plus any subsequent, non-reimbursed capital improvements thereon paid for by the Company).
Following the end of each quarter, the Administrator will deliver to the Company (i) a calculation of the cumulative fees earned by the Operator and the Administrator under the methodology prescribed by the Fee Waiver (the “Fee Waiver Methodology”) from the Effective Date through the end of such quarter and (ii) a calculation of the cumulative fees that would have been earned, in the absence of the Fee Waiver, by the Operator and the Administrator during such period under the Master Services Agreement and the Investment Management Agreement, without giving effect to the Fee Waiver (the “Pre-Fee Waiver Methodology”). If, in respect of any quarter, the aggregate fees that are payable under the Fee Waiver Methodology exceed the aggregate fees that would have been payable under the Pre-Fee Waiver Methodology for the equivalent period, such quarter is deemed an “Excess Quarter”. For any quarter following an Excess Quarter, the years ended December 31, 2019, 2018Company (upon the direction of the independent members of the Board) may, at its option and 2017, we expensed $2,577,000, $2,783,000upon written notice to Administrator, elect to calculate all fees due to the Administrator and $3,065,000, respectively, forthe Operator in accordance with the Pre-Fee Waiver Methodology from and after such services which are includedExcess Quarter. Any
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election by the Company to adopt the Pre-Fee Waiver Methodology is irrevocable, and all fees due to the Administrator and the Operator from and after such election will be calculated in asset management and other fees to related parties.accordance with the Pre-Fee Waiver Methodology.
Other Services
CIM Management, Inc. and certain of its affiliates (collectively, the "CIM“CIM Management Entities"Entities”), all affiliates of CIM REIT and CIM Group, provide property management, leasing, and development services to CIM Urban. The Urban pursuant to various agreements.
CIM Management Entities earned property management fees, which are included in rental and other property operating expenses, totaling $2,562,000, $4,365,000 and $5,034,000 for the years ended December 31, 2019, 2018 and 2017, respectively. CIM Urban also reimbursed the CIM Management Entities $5,852,000, $6,065,000 and $8,465,000 during the years ended December 31, 2019, 2018 and 2017, respectively, for onsite management costs incurred on behalfSBA Staffing, LLC, an affiliate of CIM Urban, which is included in rentalGroup (“CIM SBA”), provides personnel and other property operating expenses. The CIM Management Entities earned leasing commissionsresources to us pursuant to the terms of $658,000, $1,548,000 and $982,000 for the years ended December 31, 2019, 2018, and 2017, respectively, which were capitalized to deferred charges. In
From May 31, 2019 through January 27, 2020, CCO Capital served as the exclusive dealer manager for our public offering of units, each of which consisted of one share of Series A Preferred Stock and one warrant to purchase 0.25 shares of Common Stock (“Series A Preferred Units”). Our offering of Series A Preferred Units was terminated at the end of January 2020.
LendingSegment
Through our loans originated under the Small Business Administration's ("SBA"Administration (“SBA”)’s 7(a) GuaranteedSmall Business Loan Program ("(“SBA 7(a) Program"Program”), we are a national lender that primarily originates loans to small businesses. We identify loan origination opportunities through personal contacts, internet referrals, attendance at trade shows and meetings, direct mailings, advertisements in trade publications and other marketing methods. We also generate loans through referrals from real estate and loan brokers, franchise representatives, existing borrowers, lawyers and accountants.
In addition, to our retainedas an SBA 7(a) portfolio described above,licensee, we service $179,193,000originated loans as an authorized lender under the Paycheck Protection Program (“PPP”), which was enacted during the year ended December 31, 2020 and completed during 2021. While originations under the PPP have ended we still had PPP loans outstanding as of aggregateDecember 31, 2021.
The PPP provides lenders who originated loans under the program with a 100% guaranty of repayment (provided certain conditions are met) and provides small businesses with uncollateralized and unguaranteed loans at an interest rate of 1.00%. Loans originated under the PPP will be fully forgiven, subject to certain limitations, when used by the borrower for payroll costs, interest on mortgages, rent, and utilities. For those loans that are forgiven, the SBA will remit 100% of the remaining outstanding principal plus accrued interest to us. For those loans whose borrowers do not meet the criteria required for forgiveness, the borrower is required to repay the remaining obligation. Upon a borrower default of any remaining balance due, if any, the SBA will remit the remaining balance due to us. The loans that we originated under the PPP have a two-year term if originated prior to June 5, 2020 and have a five-year term if originated after June 5, 2020. We obtained all funds to originate loans under the PPP from the Federal Reserve on a basis that correlated to the outstanding principal balance remainingdue from our borrowers pursuant to the PPP on secondary market loan sales. a dollar-for-dollar basis with a cost of funds of 0.35%.
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Seasonality
Our revenues and expenses for our hotel property are subject to seasonality during the year. Generally, our hotel revenues are greater in the first and second quarters than the third and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in revenues, segment net operating income, net income and cash provided by operating activities. Additionally, our operating results willhave been and are expected to continue to be adversely affected by our ongoing renovationsthe effects of the guest rooms, food and beverage amenities, public areas, meeting rooms and other amenities at the hotel during 2020, as well as the temporary closure of the nearby Sacramento Convention Center until its expected reopening in November 2020.novel coronavirus (“COVID-19”). In addition, the hotel industry is cyclical and demand generally follows, on a lagged basis, key macroeconomic factors.
Tenant Concentration
Human Capital
We are operated by affiliates of CIM Group and, 2017, respectively.
Four of such employees are in our lending segment while one employee spends a substantial portion of the time that he devotes to us on matters relating to the lending segment. We have entered into the Master Services Agreement with the Administrator, an affiliate of CIM Group, pursuant to which the Administrator has agreed to provide, or arrange for other service providers to provide, management and administration services to us and our subsidiaries.
Offices
We are headquartered in Dallas, Texas.
Available Information
The public can access free of charge through the "Shareholders"“Shareholders” section of our corporate website, www.cimcommercial.com, www.creativemediacommunity.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8‑K, and amendments to those reports filed with or furnished to the Securities and Exchange Commission (the “SEC”) as soon as reasonably practicable after such material is filed with or furnished to the SEC. The information on our corporate website is not part of this Annual Report on Form 10-K. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding our filings.
We have adopted a written code of ethics that applies to all of our directors, officers and employees, of the Company, the Operator and the Administrator, including our principal executive officer and senior financial officer, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated thereunder. The code of ethics, which we call our Code of Business Conduct and Ethics, is available on our corporate website, www.cimcommercial.com,www.creativemediacommunity.com, in the section entitled “Shareholders—Corporate Overview—Corporate Governance.” In the event that we make changes in, or provide waivers from, the provisions of such code of ethics that the SEC requires us to disclose, we intend to disclose these events on our corporate website in such section. In the Corporate Governance section of our corporate website, we have also posted our Audit Committee Charter, as well as our Governance Principles.
Item 1A. Risk Factors
Risks Related to Our Business
•Uninsured losses or losses in excess of our insurance coverage could materially adversely affect our financial condition and cash flows, and there can be no assurance as to future costs and the scope of coverage that may be available under insurance policies.
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Risks Related to Conflicts of Interest
•Neither the Master Services Agreement nor the Investment Management Agreement may be terminated by us (except in limited circumstances for cause in the case of the Master Services Agreement) and the Master Services Agreement may be assigned by the Administrator in certain circumstances without our consent, either or both of which may have a material adverse effect on us.
•The Administrator and Operator are entitled to receive fees for the services they provide regardless of our performance, which may reduce their incentive to devote time and resources to our portfolio.
•The Operator may undertake transactions that are motivated, in whole or in part, by a desire to increase its compensation.
•Certain of our directors and executive officers may face conflicts of interest related to positions they hold with the Operator, the Administrator, CIM Group and their affiliates, which could result in decisions that are not in the best interest of our stockholders.
•The business of CIM Urban is managed by Urban GP Administrator and we agreed in the Master Services Agreement to appoint an affiliate of CIM Group as the manager of the general partner of CIM Urban; in addition, the general partner of CIM Urban can be removed from that position under certain circumstances as provided in the CIM Urban Partnership Agreement.
Risks Related to Our CorporateOrganizational Structure
•Certain provisions of the Maryland General Corporation Law (the "MGCL"“MGCL”) could inhibit changes in control.
•The power of the Board of Directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.
•The MGCL or our charter may limit the ability of our stockholders or us to recover on a claim against a director or officer who negligently causes us to incur losses.
•The liability of the Administrator and the Operator to us under the Master Services Agreement and the Investment Management Agreement, respectively, is limited and we and CIM Urban have agreed to indemnify the Administrator and the Operator, respectively, against certain liabilities. As a result, we could experience poor performance or losses for which neither the Administrator nor the Operator would be liable.
Risks Related to Real Estate Assets
•Our operating performance is subject to risks associated with the real estate industry.
•A significant portion of our properties, by aggregate net operating income and square feet, are located in California. We are dependent on the California real estate market and economy, and are therefore susceptible to risks of events in the California market that could adversely affect our business, such as adverse market conditions, changes in local laws or regulations and natural disasters.
•Tenant concentration increases the risk that cash flow could be interrupted.
•If a major tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which could have a material adverse effect on our financial condition and ability to pay distributions to our stockholders.
•We may be unable to renew leases or lease vacant office space.
•A significant portion of our net operating income is expected to come from our hotel and, as a result, our operating performance is subject to the cyclical nature of the lodging industry.
hotel.The outbreak of a highly infectious, contagious or widespread disease, such as COVID-19, could reducecan (and has) result in reductions in travel and adversely affect demand for our hotel.hotels.
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•Income from our long-term leases is an important source of our cash flow from operations and is subject to risks related to increases in expenses and inflation.
•Real estate-related taxes may increase, and if these increases are not passed on to tenants, our income will be reduced.
•We are required to pay property taxes for our properties, which can increase as property tax rates increase or as properties are assessed or reassessed by taxing authorities. In California, pursuant to an existing state law commonly referred to as Proposition 13, all or portions of a property are reassessed to market value only at the time of “change in ownership” or completion of “new construction,” and thereafter, annual property tax increases are limited to 2% of previously assessed values. As a result, Proposition 13 generally results in significant below-market assessed values over time. From time to time, including recently, lawmakers and political coalitions have initiated efforts to repeal or amend Proposition 13. If successful in the future, these proposals could substantially increase the assessed values and property taxes for our properties in California. Although some tenant leases may permit us to pass through such tax increases to the tenants for payment, renewal leases or future leases may not be negotiated on the same basis. Tax increases not passed through to tenants could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
•Supply chain disruption and increase costs in labor and materials may be potentially liable for investigation and cleanup costs, penalties and damages under environmental laws.
•Our real estate business is conducted. For example, companies may be less willing to enter into real property leases in general or may seek leases with shorter terms because the apparent benefits to their balance sheets may have been reduced or eliminated given the changes in accounting treatment. This impact in turn could make it more difficult for us to enter into leases on terms we find favorable.
Risks Related to Debt Financing
•We have incurred significant indebtedness and may incur significant additional indebtedness on a consolidated basis.
•We intend to rely in part on external sources of capital to fund future capital needs and, if we encounter difficulty in obtaining such capital, we may not be able to meet maturing obligations or make additional acquisitions.
•Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
•We may not be able to generate sufficient cash flow to meet our debt service obligations.
•Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions on our Common Stock or Preferred Stock.
Risks Related to Our Lending Operations
•Our lending operationsexposeus to a high degree of risk associated with real estate.estate.
•Our loans secured by real estate and our real estate owned ("REO"(“REO”) properties, if any, are typically illiquid and their values may decrease.
•Our lending operations have an industry concentration, which may negatively impact our financial condition and results of operations.
U.S. Federal Income and Other Tax Risks
•REIT annual distribution requirements may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our objectives and reduce our stockholders'stockholders’ overall return.
•Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash flows.
Risks Related to Our Common Stock and Preferred Stock
•We may issue shares of our Common Stock at prices below the then-current NAV per share of our Common Stock, which could materially reduce our NAV per share of our Common Stock.
•The existing mechanism for the dual‑listing of securities on Nasdaq and the TASE may be eliminated or otherwise altered such that we may be subject to additional regulatory burden and additional costs.
•Our NAV is an estimate of the fair value of our assets and may not necessarily reflect realizable value.
Stockholders should carefully consider the risks described in this section and the other information included in this Annual Report on Form 10-K in evaluating the Company and our business. The information in this section should be read in conjunction with Part II, “Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes in Part II, “Item 8—Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. If any of the risks described in this section actually occur, our business, financial condition and results of operations could be materially and adversely affected, actual results could differ materially from those reflected in forward-looking statements or from our historical results and stockholders may lose all or part of their investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. This discussion of risk factors includes many forward-looking statements. For cautions about relying on forward-looking statements, please refer to the section entitled “Forward-Looking Statements” immediately prior to “Item 1—Business” of this Annual Report on Form 10-K.
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Risks Related to Our Business
Our future success depends on the performance of the Administrator and the Operator, their respective key personnel and their access to the investment professionals of CIM Group. We may not find suitable replacements if such key personnel or investment professionals leave the employment of the Administrator, the Operator or other applicable affiliates of CIM Group or if such key personnel or investment professionals otherwise become unavailable to us.
We rely on the Administrator to provide management and administration services to us, and CIM Urban relies completely on the Operator to provide CIM Urban with certain services.
Our executive officers also serve as officers or employees of the Administrator and or the Operator or other applicable affiliates of CIM Group. The Administrator and the Operator have significant discretion as to the implementation of acquisitions and operating policies and strategies on behalf of us and CIM Urban. Accordingly, we believe that our success depends to a significant extent upon the efforts, experience, diligence, skill and network of business contacts of the officers and key personnel of the Administrator, the Operator and the other applicable affiliates of CIM Group. The departure of any of these officers or key personnel could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
We also depend on access to, and the diligence, skill and network of, business contacts of the professionals within CIM Group and the information and deal flow generated by its investment professionals in the course of their acquisitions and onsite property management and leasing activities. The departure of any of these individuals, or of a significant number of the investment professionals or principals of CIM Group, could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock. We cannot guarantee that we will continue to have access to CIM Group’s investment professionals or its information and deal flow.
If we seek to internalize the management functions provided pursuant to the Master Services Agreement and the Investment Management Agreement, we could incur substantial costs and lose certain key personnel.
The Board of Directors may determine that it is in our best interest to become self-managed by internalizing the functions performed by the Administrator and or the Operator and to terminate the Master Services Agreement and or the Investment Management Agreement, respectively. However, we do not have the unilateral right to terminate the Master Services Agreement and CIM Urban does not have the unilateral right to terminate the Investment Management Agreement, and neither the Administrator nor the Operator would be obligated to enter into an internalization transaction with us. There is no assurance that a mutually acceptable agreement with these entities as to the terms of the internalization could be reached.
The costs that would be incurred by us in any such internalization transaction are uncertain and could be substantial. Inadequate management of an internalization transaction could cause us to incur excess costs or suffer deficiencies in our disclosure controls and procedures or our internal control over financial reporting. An internalization transaction may divert management's attention from effectively managing our assets. Further, following any internalization of our management functions, certain key employees may remain employees of the Administrator and the Operator or their respective affiliates instead of becoming our employees, especially if the Administrator and the Operator are not acquired by us.
Uninsured losses or losses in excess of our insurance coverage could materially adversely affect our financial condition and cash flows, and there can be no assurance as to future costs and the scope of coverage that may be available under insurance policies.
We carry commercial liability, special form/all risk and business interruption insurance on all of the properties in our portfolio. In addition, we carry directors’ and officers’ insurance. While we select policy specifications and insured limits that we believe are appropriate and adequate given the relative risk of loss, the cost of the coverage, and industry practice, there can be no assurance that we will not experience a loss that is uninsured or that exceeds policy limits.
Our business operations in California and Texas are susceptible to, and could be significantly affected by, adverse weather conditions and natural disasters such as earthquakes, tsunamis, hurricanes, wind, blizzards, floods, landslides, drought and fires. These adverse weather conditions and natural disasters could cause significant damage to the properties in our portfolio, the risk of which is enhanced by the concentration of our properties, by aggregate net operating income and square feet, in California. Our insurance may not be adequate to cover business interruption or losses resulting from adverse weather or natural disasters. We carry earthquake insurance on our properties in California in an amount and with deductibles and limitations that we deem to be appropriate. However, the amount of our earthquake insurance coverage may not be sufficient to
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cover losses from earthquakes in California. Furthermore, we may not carry insurance for certain losses, such as those caused by war or certain environmental conditions, such as mold or asbestos.
As a result of the factors described above, we may not have sufficient coverage against all losses that we may experience for any reason.
If we experience a loss that is uninsured or that exceeds policy limits, we could incur significant costs and lose the capital deployed in the damaged properties as well as the anticipated future cash flows from those properties. Further, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the properties were irreparable. In addition, our properties may not be able to be rebuilt to their existing height or size at their existing location under current land-use laws and policies. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications and otherwise may have to upgrade such property to meet current code requirements. Any of the factors described above could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and or damage to our business relationships, all of which could negatively impact our financial results.
We face cybersecurity risks and risks associated with security breaches or disruptions, such as cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to emails, social engineering and phishing schemes or persons inside our organization, the Operator and or Administrator. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusions, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The occurrence of a cyber incident may result in disrupted operations, misstated or unreliable financial data, misappropriation of assets, compromise or corruption of confidential information collected in the course of conducting our business, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation, regulatory enforcement, damage to our tenant and stockholder relationships, material harm to our financial condition, cash flows and the market price of our securities or other adverse effects. Our Operator’s and Administrator’s IT networks and related systems are essential to the operations of our business and our ability to perform day-to-day operations (including managing our building systems). Our Operator and Administrator have implemented processes, procedures and internal controls to help mitigate cyber incidents, but these measures do not guarantee that a cyber incident involving our Operator or Administrator will not occur or that attempted security breaches or disruptions would not be successful or damaging. A cyber incident involving our Operator’s or Administrator’s IT networks and related systems could materially adversely impact our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Our Operator, Administrator and their respective affiliates, in the course of providing onsite property management, leasing, accounting and or services to us, collect and retain certain personal information provided by our tenants and vendors. Our Operator, Administrator and their respective affiliates rely on computer systems to process transactions and manage our business. We can provide no assurance that the data security measures designed to protect confidential information on such systems established by our Operator, Administrator and their respective affiliates will be able to prevent unauthorized access to such personal information. There can be no assurance that their efforts to maintain the security and integrity of the information collected and their computer systems will be effective or that attempted security breaches or disruptions will not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and, in some cases, are designed not be detected and, in fact, may not be detected. Accordingly, our Operator, Administrator and their respective affiliates may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results.
An effective system of internal control over financial reporting is necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. As part of our ongoing monitoring of internal controls, we may discover material weaknesses or significant deficiencies in our internal controls that we believe require remediation. If we discover such weaknesses, we will make efforts to improve our internal controls in a timely manner. Any system of internal controls, however well designed and operated, is based in part on certain assumptions and can only provide reasonable, not absolute, assurance that the objectives of the system are met. Any failure to maintain effective internal controls, or implement any necessary improvements in a timely manner, could have a material adverse effect on our business, financial condition,
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results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock, or cause us to not meet our reporting obligations, which could affect our ability to maintain our listings of Common Stock and Series L Preferred Stock on Nasdaq and the TASE. Ineffective internal controls could also cause holders of our securities to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our securities.
The outbreak of COVID-19 negatively affected and will likely continue to negatively affect our business, financial condition, results of operations and cash flows.
The spread of COVID-19 in the United States and the resulting restrictions on and cancellations of travel, meetings and social gatherings has impacted, and is expected to continue to impact, the operations of our hotel in Sacramento, California. The pandemic and related restrictions depressed the net operating income of our hotel through 2021 and, based on current expectations, it is highly likely that the net operating income of our hotel will continue to be depressed for the first half of 2022. As a result, contributions by the hotel to our funds from operations are expected to be diminished when compared to comparable periods prior to COVID-19.
Loans originated by us under the SBA 7(a) Program consist primarily of loans to borrowers in the limited service hospitality sector. In 2020 and 2021, our borrowers experienced significant reductions in cash flow as the travel and leisure industry decline caused by COVID-19 has severely impacted limited service hospitality properties. The overwhelming majority of our borrowers received relief under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), but the governmental fiscal and monetary policies implemented in the face of the pandemic have begun to wind-down or in some cases have ceased. The travel and leisure industry has started to recover from the effects of COVID-19 in 2022. However, depending on the pace of recovery, we may continue to have additional increases in our loan loss reserves and ultimately an increase in loan losses, and such losses may be material.
COVID-19, or any future pandemic, could also have material and adverse effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors:
•a complete or partial closure of, or other operational issues at, one or more of our properties resulting from government or tenant action;
•reduced economic activity severely impacting our tenants' businesses, financial condition and liquidity or causing one or more of our tenants to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations;
•difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis or our tenants' ability to fund their business operations and meet their obligations to us;
•any impairment in value of our tangible or intangible assets that could be recorded as a result of weaker economic conditions;
•a general decline in business activity and demand for real estate transactions, which could adversely affect our ability or desire to grow our portfolio of properties; and
•negative impacts to the credit quality of our tenants and any related impact to tenant rent collections.
The extent to which the lingering effects of COVID-19 will continue to impact the Company’s operations and those of its tenants and business partners will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including whether there are any new outbreaks of the virus or new variants. Nevertheless, COVID-19 presents uncertainty and risk with respect to the Company's business, financial condition, results of operations and cash flows. Management will continue to monitor the impact of COVID-19 to the Company’s business, financial condition, results of operations, cash flow, and occupancy.
The COVID-19 pandemic has had, and may continue to have, significant impacts on workplace practices and those changes, or other office space utilization trends, could impact our business.
We believe closures of businesses and stay in place orders and the resulting remote working arrangements for non-essential personnel in response to the COVID-19 pandemic has resulted in long-term changed work practices that could negatively impact us and our business. For example, the increased adoption of and familiarity with remote work practices, and the recent increase in tenants seeking to sublease their leased space, has resulted in decreased demand for office space. Further, prior to the onset of the COVID-19 pandemic, telecommuting, flexible work schedules, open workspaces and teleconferencing had become increasingly common and there was an increasing trend among some businesses to utilize shared office space and co-working spaces. As a result, there has been a general trend in office real estate for tenants to decrease the space they occupy
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per employee. Our tenants may elect to not renew their leases, or to renew them for less space than they currently occupy, which could increase vacancy, place downward pressure on occupancy, rental rates and income and property valuation. The need to reconfigure leased office space, either in response to the COVID-19 pandemic, to new tenants’ needs, to modify utilization or for other reasons, may impact space requirements and also may require us to spend increased amounts for tenant improvements. If substantial reconfiguration of the tenant’s space is required, the tenant may find it more advantageous to relocate than to renew its lease and renovate the existing space. All of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flow our or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Risks Related to Conflicts of Interest
Neither the Master Services Agreement nor the Investment Management Agreement may be terminated by us (except in limited circumstances for cause in the case of the Master Services Agreement) and the Master Services Agreement may be assigned by the Administrator in certain circumstances without our consent, either or both of which may have a material adverse effect on us.
We and our lending subsidiaries are parties to the Master Services Agreement pursuant to which the Administrator provides, or arranges for other service providers to provide, management and administrative services to us and all of our direct and indirect subsidiaries. We are obligated to pay the Administrator the Revised Incentive Fee (see “Item 1—Business—Master Services Agreement”) and market rate transaction fees for transactional and other services that the Administrator elects to provide to us. Pursuant to the terms of the Master Services Agreement, the Administrator has the right to provide any transactional services to us that we would otherwise engage a third-party to provide.
The Master Services Agreement renews automatically each year. The Administrator may assign the Master Services Agreement without our consent to one of its affiliates or an entity that is a successor through merger or acquisition of the business of the Administrator. We generally may terminate the Master Services Agreement only in the event of a material breach, fraud, gross negligence or willful misconduct by or, in certain limited circumstances, a change of control of the Administrator that our independent directors determine to be materially detrimental to us and our subsidiaries as a whole. We do not have the right to terminate the Master Services Agreement solely for the poor performance of our operations. In addition, CIM Urban does not have the right to terminate the Investment Management Agreement under any circumstances.
Moreover, any removal of Urban GP Administrator as manager of CIM Urban GP pursuant to the Master Services Agreement or the CIM Urban Partnership Agreement would not affect the rights of the Administrator under the Master Services Agreement or the Operator under the Investment Management Agreement. Accordingly, the Administrator would continue to provide the Base Services and receive any Revised Incentive Fee, and the Administrator or the applicable service provider would continue to provide the transactional services and receive related transaction fees, under the Master Services Agreement, and the Operator would continue to receive the management fee under the Investment Management Agreement.
The Administrator and Operator are entitled to receive fees for the services they provide regardless of our performance, which may reduce their incentive to devote time and resources to our portfolio.
Pursuant to the Master Services Agreement, the Administrator is entitled to receive additional fees for the provision of certain transactional and other services at fair market rates approved by our independent directors. Additionally, the Operator is entitled to receive an asset management fee based upon our net asset value attributable to common stockholders. See “Item 1—Business—Investment Management Agreement.” The Administrator’s and the Operator’s entitlement to substantial non-performance based compensation might reduce their incentive to devote time and effort to seeking profitable opportunities for our portfolio.
We may be obligated to pay the Operator quarterly incentive compensation even if we incur a net loss during a particular quarter.
The Operator is entitled to incentive compensation based on our FFO, which rewards our Operator if our quarterly pre-incentive fee FFO exceeds 1.75% (7.0% annualized) of the Adjusted Common Equity. Our pre-incentive fee FFO for a particular quarter for incentive compensation purposes excludes the effect of any unrealized gains, losses, or other items during that quarter that do not affect realized net income, even if these adjustments result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay the Operator incentive compensation for a fiscal quarter even if we incur a net loss for that quarter as determined in accordance with GAAP.
The Operator may undertake transactions that are motivated, in whole or in part, by a desire to increase its compensation.
The Operator is entitled to receive an asset management fee based upon our net asset value attributable to common stockholders, which may provide an incentive for the Operator to deploy our capital to assets that are riskier than we would
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otherwise acquire, regardless of the anticipated long-term performance of such assets. The Operator may also recommend the disposition of assets that are beneficial to CIM Urban’s operations in order to fund such acquisitions. For a discussion of the broad discretion that may be exercised by the Operator in our business, see “—Each of the Administrator and Operator provides services to us under broad mandates, and our Board of Directors may not necessarily be involved in each acquisition, disposition or financing decision made by the Administrator or Operator” below.
Each of the Administrator and Operator provides services to us under broad mandates, and our Board of Directors may not necessarily be involved in each acquisition, dispositionor financing decision made by the Administrator or Operator.
Each of the Administrator, under the Master Services Agreement, and the Operator, under the Investment Management Agreement, has broad discretion and authority over our day-to-day operations and deployment of our capital in assets. While our Board of Directors periodically reviews the performance of our businesses, our Board of Directors does not review all activities conducted by the Administrator and the Operator, and may not review certain proposed acquisitions, dispositions or the implementation of other strategic initiatives before they occur. In addition, in reviewing our business operations, our directors may rely on information provided to them by the Administrator or the Operator, as the case may be. The Administrator or the Operator may cause us to enter into significant transactions or undertake significant activities that may be difficult or impossible to unwind, exit or otherwise remediate. Each of the Administrator and the Operator has great latitude in the implementation of our strategies, including determining the types of assets that are appropriate for us. The decisions of the Administrator and the Operator could therefore result in losses or returns that are substantially below our expectations, which could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
The Operator, the Administrator and their respective affiliates engage in real estate activities that could compete with us and our subsidiaries, which could result in decisions that are not in the best interests of our stockholders.
The Investment Management Agreement with the Operator and the Master Services Agreement with the Administrator do not prevent the Operator or the Administrator, as applicable, and their respective affiliates from operating additional real estate assets or participating in other real estate opportunities, some of which could compete with us and our subsidiaries. The Operator, the Administrator and their respective affiliates operate real estate assets and participate in additional real estate activities having objectives that overlap with our own, and may thus face conflicts in the operation and allocation of real estate opportunities between us, on the one hand, and such other real estate operations and activities, on the other hand. Allocation of real estate opportunities is at the discretion of the Operator and or the Administrator and there is no guarantee that this allocation will be made in the best interest of our stockholders.
There may be conflicts of interest in allocating real estate opportunities to CIM Urban and other funds, vehicles and ventures operated by the Operator. For example, the Operator serves as the operator of private funds formed to deploy capital in real estate and real estate-related assets located in metropolitan areas that CIM Group has already qualified. There may be a significant overlap in the assets and strategies between us and such funds, and many of the same investment personnel will provide services to both entities. Further, the Operator and its affiliates may in the future operate funds, vehicles and ventures that have overlapping objectives with CIM Urban and therefore may compete with CIM Urban for opportunities. The ability of the Operator, the Administrator and their officers and employees to engage in other business activities, including the operation of other vehicles operated by CIM Group or its affiliates, may reduce the time the Operator and the Administrator spend managing our activities.
Certain of our directors and executive officers may face conflicts of interest related to positions they hold with the Operator, the Administrator, CIM Group and their affiliates, which could result in decisions that are not in the best interest of our stockholders.
Some of our directors and executive officers are also part-owners, officers and or directors of the Operator, the Administrator, CIM Group and or their respective affiliates. As a result, such directors and executive officers may owe fiduciary duties to these various other entities and their equity owners that may from time to time conflict with the duties such persons owe to us. Further, these multiple responsibilities may create conflicts of interest for these individuals if they are presented with opportunities that may benefit us and our other affiliates. These individuals may be incentivized to allocate opportunities to other entities rather than to us. Their loyalties to other affiliated entities could result in actions or inactions that are detrimental to our business, strategy and opportunities.
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The business of CIM Urban is managed by Urban GP Administrator and we agreed in the Master Services Agreement to appoint an affiliate of CIM Group as the manager of the general partner of CIM Urban, and the general partner of CIM Urban may only be removed from such position under limited circumstances as provided in the CIM Urban Partnership Agreement.
Pursuant to the Master Services Agreement, we agreed to appoint an affiliate of CIM Group as the manager of the general partner of CIM Urban. While currently that designated entity, Urban GP Administrator, is an affiliate of CIM Group, there can be no assurances that a different entity would not be appointed the manager of the general partner of CIM Urban in the future. Moreover, we may only remove the Urban GP Administrator as the manager of CIM Urban GP for “cause” (as defined in the Master Services Agreement). Removal for “cause” also requires the approval of the holders of at least 66 2/3% of our outstanding shares of Common Stock. Upon removal, a replacement manager will be appointed by the independent directors.
Subject to the limitations set forth in the governing documents of CIM Urban and CIM Urban GP, Urban GP Administrator is given the power and authority under the Master Services Agreement to manage, to direct the management, business and affairs of and to make all decisions to be made by or on behalf of (1) CIM Urban GP and (2) CIM Urban. Subject to the other terms of the CIM Urban Partnership Agreement, CIM Urban GP has broad discretion over the operations of CIM Urban. Accordingly, while we own indirectly all of the partnership interests in CIM Urban, except as set forth in the Master Services Agreement and the rights specifically reserved to limited partners by the CIM Urban Partnership Agreement and applicable law, we will have no part in the management and control of CIM Urban.
Risks Related to Our Organizational Structure
Provisions of our charter and bylaws and the MGCL may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price.
Certain provisions of the MGCL, if applied to us, and our charter and bylaws could have the effect of inhibiting a third-party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our Common Stock.
Maryland Takeover Statutes. The Maryland Business Combination Act could restrict the power of third parties who acquire, or seek to acquire, control of us without the approval of our Board of Directors to complete mergers and other business combinations even if such transaction would be beneficial to stockholders. “Business combinations” between such a third-party acquirer or its affiliate and us are prohibited for five years after the most recent date on which the acquirer becomes an “interested stockholder.” An “interested stockholder” is defined as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding stock. If our Board of Directors approved in advance the transaction that would otherwise give rise to the acquirer attaining such status, the acquirer would not become an interested stockholder and, as a result, it could enter into a business combination with us. Our Board of Directors may, however, provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by it. Even after the lapse of the five-year prohibition period, any business combination with an interested stockholder must be recommended by our Board of Directors and approved by the affirmative vote of at least:
•80% of the votes entitled to be cast by stockholders; and
•two-thirds of the votes entitled to be cast by stockholders other than the interested stockholder and affiliates and associates thereof.
The super-majority vote requirements do not apply if, among other considerations, the transaction complies with a minimum price and form of consideration requirements prescribed by the statute. The statute permits various exemptions from its provisions, including business combinations that are exempted by the Board of Directors prior to the time that an interested stockholder becomes an interested stockholder. Our Board of Directors has, by resolution, elected to opt out of this provision of the MGCL. However, our Board of Directors may by resolution elect to repeal the foregoing opt out from the business combination provision of the MGCL.
The Maryland Control Share Acquisition Act provides that a holder of control shares of a Maryland corporation acquired in a control share acquisition has no voting rights with respect to the control shares except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers or by employees who are directors of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock that, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or
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direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:
•one-tenth or more but less than one-third;
•one-third or more but less than a majority; or
•a majority or more of all voting power.
Control shares do not include shares the acquiror is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A control share acquisition means the acquisition of issued and outstanding control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition may compel the Board of Directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiror does not deliver an acquiring person statement as required by the statute, then the corporation may, subject to certain limitations and conditions, redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of any meeting of stockholders at which the voting rights of the shares are considered and not approved or, if no meeting is held, as of the date of the last control share acquisition by the acquiror. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to exercise or direct the exercise of a majority of the voting power, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to (a) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) acquisitions approved or exempted by the charter or bylaws of the corporation. We have elected to opt out of this provision of the MGCL, pursuant to a provision in our bylaws. However, our Board of Directors may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Title 3, Subtitle 8, of the MGCL permits the Board of Directors of a Maryland corporation with at least three independent directors and a class of stock registered under the Securities Exchange Act of 1934, as amended (such as the Company), without stockholder approval and notwithstanding any contrary provision in its charter or bylaws, to implement certain takeover defenses, including: (i) a classified board; (ii) a two-thirds vote requirement to remove a director; (iii) limiting the filling of any vacancy on the Board of Directors to only a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum; (iv) providing the board with the sole power to fix the number of directors; and (v) requiring the holders of up to a majority of voting stock to call a special meeting of stockholders. Our charter provides that, except as may be provided by our Board of Directors in setting the terms of any class or series of stock, we elect to be subject to the provisions of Subtitle 8 relating to the filling of vacancies on our Board of Directors. Through provisions in our charter and bylaws unrelated to Subtitle 8, we already (1) require a two-thirds vote for the removal of any director from the Board of Directors, (2) vest in the Board of Directors the exclusive power to fix the number of directorships, subject to limitations set forth in our charter and bylaws, and (3) require, unless called by the chairman of our Board of Directors, our president, our chief executive officer or our Board of Directors, the request of stockholders entitled to cast not less than a majority of all votes entitled to be cast on a matter at such meeting to call a special meeting. We have not elected to classify our Board of Directors.
Advance notice bylaw. Our bylaws contain advance notice procedures for the introduction by a stockholder of new business and the nomination of directors by a stockholder. These provisions could, in certain circumstances, discourage proxy contests and make it more difficult for you and other stockholders to elect stockholder-nominated directors and to propose and, consequently, approve stockholder proposals opposed by management.
Our charter, bylaws, the partnership agreement for CIM Urban and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our Common Stock or otherwise be in the best interest of our stockholders.
The Operator may change its acquisition process, or elect not to follow it, without stockholder consent at any time, which may adversely affect returns on our assets.
While we are principally focused on Class A and creative office assets in vibrant and improving metropolitan communities throughout the United States (including improving and developing such assets), we may also participate more
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actively in other CIM Group real estate strategies and product types, including, but not limited to, multi-family residential and or real estate debt, in order to broaden our participation in CIM Group’s platform and capabilities for the benefit of all classes of stockholders. This may include, without limitation, engaging in real estate development activities as well as investing in other product types directly, side-by-side with one or more funds of CIM Group, through direct deployment of capital in a CIM Group real estate or debt fund, or deploying capital in or originating loans that are secured directly or indirectly by properties primarily located in Qualified Communities that meet our strategy. Such loans may include limited and or non-recourse junior (mezzanine, B-note or 2nd lien) and senior acquisition, bridge or repositioning loans. Stockholders will not have any approval rights with respect to any expansion or change in strategies or future composition of our assets. Our Operator determines our policies regarding deployment of capital into real estate assets, financing, growth and debt capitalization. Our Operator may change these and other policies without a vote of our stockholders. In addition, there can be no assurance that the Operator will follow its acquisition process in relation to the identification and acquisition or origination of prospective assets. As a result, the nature of the composition of our assets could change without the consent of our stockholders. Changes in the Operator’s acquisition process and or philosophy may result in, among other things, inferior due diligence and transaction standards, which may adversely affect the performance of our assets. If we are unsuccessful in expanding into new real estate activities or our changes in strategies or future deployment of our capital turn out to be unsuccessful, it could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
The power of the Board of Directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.
Our organizational documents permit our Board of Directors to revoke or otherwise terminate our REIT election, without the approval of our stockholders, if the Board of Directors determines that it is no longer in our best interest to continue to qualify as a REIT. In such a case, we would become subject to U.S. federal, state and local income tax on our net taxable income and we would no longer be required to distribute most of our net taxable income to our stockholders, which could have adverse consequences on the total return to our holders of Common Stock.
The MGCL or our charter may limit the ability of our stockholders or us to recover on a claim against a director or officer who negligently causes us to incur losses.
The MGCL provides that a director has no liability in such capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. A director who performs his or her duties in accordance with the foregoing standards should not be liable to us or any other person for failure to discharge his or her obligations as a director.
In addition, our charter provides that our directors and officers will not be liable to us or our stockholders for monetary damages unless the director or officer actually received an improper benefit or profit in money, property or services, or is adjudged to be liable to us or our stockholders based on a finding that his or her action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. Our charter and bylaws also require us, to the maximum extent permitted by Maryland law, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any individual who is a present or former director or officer and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity or any individual who, while a director or officer and at our request, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity. With the approval of our Board of Directors, we may provide such indemnification and advance for expenses to any individual who served a predecessor of the Company in any of the capacities described above and any employee or agent of the Company or a predecessor of the Company, including our Administrator and its affiliates.
We also are permitted to purchase and we currently maintain insurance or provide similar protection on behalf of any directors, officers, employees and agents, including our Administrator and its affiliates, against any liability asserted which was incurred in any such capacity with us or arising out of such status. This may result in us having to expend significant funds, which could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
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The liability of the Administrator and the Operator to us under the Master Services Agreement and the Investment Management Agreement, respectively, is limited and we and CIM Urban have agreed to indemnify the Administrator and the Operator, respectively, against certain liabilities. As a result, we could experience poor performance or losses for which neither the Administrator nor the Operator would be liable.
Pursuant to the Master Services Agreement, the Administrator has no responsibility other than to provide its services in good faith and will not be responsible for any action of our Board of Directors that follows or declines to follow the Administrator’s advice or recommendations. Under the terms of the Master Services Agreement, none of the Administrator or any of its affiliates providing services under the Master Services Agreement will be liable to us, any subsidiary of ours party to the Master Services Agreement, any governing body (including any director or officer), stockholder or partner of any such entity for acts or omissions made pursuant to or in accordance with the Master Services Agreement, other than acts or omissions constituting fraud, willful misconduct, gross negligence or violation of certain laws or any other intentional or criminal wrongdoing or breach of the Master Services Agreement. Moreover, the aggregate liability of any such entities and persons pursuant to the Master Services Agreement is capped at the aggregate amount of the Base Service Fee and any transaction fees previously paid to the Administrator in the two most recent calendar years. In addition, we have agreed to indemnify the Administrator and any of its affiliates providing services under the Master Services Agreement, any affiliates of the Administrator and any directors, officers, stockholders, agents, subcontractors, contractors, delegates, members, partners, shareholders, employees and other representatives of each of them from and against all actions, lawsuits, investigations, proceedings or claims except to the extent resulting from such person’s fraud, willful misconduct, gross negligence or violation of certain laws or any other intentional or criminal wrongdoing or breach of the Master Services Agreement.
Pursuant to the Investment Management Agreement, the Operator is not liable to CIM Urban, CIM Urban GP or any manager or director of CIM Urban GP for, and CIM Urban has agreed to indemnify the Operator against any losses, claims, damages or liabilities to which it may become subject in connection with, among other things, (1) any act or omission performed or omitted by it or for any costs, damages or liabilities arising therefrom, in the absence of fraud, gross negligence, willful misconduct or a breach of the Investment Management Agreement or (2) any losses due to the negligence of any employees, brokers, or other agents of CIM Urban.
Risks Related to Real Estate Assets
Our operating performance is subject to risks associated with the real estate industry.
Real estate assets are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease cash available for distributions, as well as the value of our properties. These events include, but are not limited to:
•adverse changes in economic and socioeconomic conditions (including as a result of COVID-19 and the emergence of new variants of the virus);
•vacancies or our inability to rent space on favorable terms;
•adverse changes in financial conditions of buyers, sellers and tenants of properties;
•inability to collect rent from tenants;
•competition from real estate investors with significant capital, including but not limited to real estate operating companies, publicly-traded REITs and institutional investment funds;
•reductions in the level of demand for office and hotel space and changes in the relative popularity of properties;
•increases in the supply of office and hotel space;
•fluctuations in interest rates and the availability of credit, which could adversely affect our ability, or the ability of buyers and tenants of properties, to obtain financing on favorable terms or at all;
•dependence on third parties to provide leasing, brokerage, onsite property management and other services with respect to certain of our assets;
•increases in expenses, including insurance costs, labor costs, utility prices, real estate assessments and other taxes and costs of compliance with laws, regulations and governmental policies, and our inability to pass on some or all of these increases to our tenants; and
•changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning, real estate tax, federal and state laws, governmental fiscal policies and the ADA.
The outbreak of COVID-19 that began in the fourth quarter of 2019 led to an economic slowdown. During periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of
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these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If we cannot operate our properties so as to meet our financial expectations, our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock may be negatively impacted.
There can be no assurance that we will achieve our economic objectives.
A significant portion of our properties, by aggregate net operating income and square feet, are located in California. We are dependent on the California real estate market and economy, and are therefore susceptible to risks of events in the California market that could adversely affect our business, such as adverse market conditions, changes in local laws or regulations and natural disasters.
Because our properties in California represent a significant portion of our portfolio by aggregate net operating income and square feet, we are exposed to greater economic risks than if we owned a more geographically diverse portfolio. We are susceptible to adverse developments in the California economic and regulatory environments (such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation and other factors) as well as natural disasters that occur in these areas (such as earthquakes, floods, fires and other events). In addition, the State of California is regarded as more litigious and more highly regulated and taxed than many states, which may reduce demand for office and hotel space in California. Any adverse developments in the economy or real estate markets in California, or any decrease in demand for office and hotel space resulting from the California regulatory or business environments, could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Capital and credit market conditions may adversely affect demand for our properties and the overall availability and cost of credit.
In periods when the capital and credit markets experience significant volatility, demand for our properties and the overall availability and cost of credit may be adversely affected. No assurances can be given that the capital and credit market conditions will not have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
In addition, we could be adversely affected by significant volatility in the capital and credit markets as follows:
•the tenants in our office properties may experience a deterioration in their sales or other revenue, or experience a constraint on the availability of credit necessary to fund operations, which in turn may adversely impact those tenants’ ability to pay contractual base rents and tenant recoveries. Some tenants may terminate their occupancy due to an inability to operate profitably for an extended period of time, impacting our ability to maintain occupancy levels; and
•constraints on the availability of credit to tenants, necessary to purchase and install improvements, fixtures and equipment and to fund business expenses, could impact our ability to procure new tenants for spaces currently vacant in existing office properties or properties under development.
Tenant concentration increases the risk that cash flow could be interrupted.
We are, and expect that we will continue to be, subject to a degree of tenant concentration at certain of our properties and or across multiple properties. Kaiser, which occupies space in one of our Oakland, California properties, accounted for 30.9% of our annualized rental income for the year ended December 31, 2021. In the event that a tenant occupying a significant portion of one or more of our properties or whose rental income represents a significant portion of the rental revenue at such property or properties were to experience financial weakness or file bankruptcy, it could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
If a major tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which could have a material adverse effect on our financial condition and ability to pay distributions to our stockholders.
The bankruptcy or insolvency of our tenants may adversely affect the income produced by our properties. Under bankruptcy law, a tenant cannot be evicted solely because of its bankruptcy and has the option to assume or reject any unexpired lease. If the tenant rejects the lease, any resulting claim we have for breach of the lease (other than to the extent of any collateral securing the claim) will be treated as a general unsecured claim. Our claim against the bankrupt tenant for unpaid and future rent will be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant that rejects its lease would pay in full amounts it owes us under the lease. Even if
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a lease is assumed and brought current, we still run the risk that a tenant could condition lease assumption on a restructuring of certain terms, including rent, that would have an adverse impact on us. Any shortfall resulting from the bankruptcy of one or more of our tenants could adversely affect our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
In addition, the financial failure of, or other default by, one or more of the tenants to whom we have exposure could have an adverse effect on the results of our operations. While we evaluate the creditworthiness of our tenants by reviewing available financial and other pertinent information, there can be no assurance that any tenant will be able to make timely rental payments or avoid defaulting under its lease. If any of our tenants’ businesses experience significant adverse changes, they may fail to make rental payments when due, exercise early termination rights (to the extent such rights are available to the tenant) or declare bankruptcy. A default by a significant tenant or multiple tenants could cause a material reduction in our revenues and operating cash flows. In addition, if a tenant defaults, we may incur substantial costs in protecting our asset.
We have assumed, and in the future may assume, liabilities in connection with our property acquisitions, including unknown liabilities.
In connection with the acquisition of properties, we may assume existing liabilities, some of which may have been unknown or unquantifiable at the time of the acquisition of assets. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of tenants or other persons dealing with the sellers prior to our acquisition of the properties, tax liabilities, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. If the magnitude of such unknown liabilities is high, either singly or in the aggregate, it could adversely affect our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
We may be adversely affected by trends in the office real estate industry.
Telecommuting, flexible work schedules, open workspaces and teleconferencing are becoming more common. These practices enable businesses to reduce their space requirements. There is also an increasing trend among some businesses to utilize shared office space and co-working spaces. A continuation of the movement towards these practices could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations.
We may be unable to renew leases or lease vacant office space.
As of December 31, 2021, 20.1% of the rentable square footage of our office portfolio was available for lease, and 14.7% of the occupied square footage of such office properties was scheduled to expire in 2022. The local economic environment may make the renewal of these leases more difficult, or renewal may occur at rental rates equal to or below existing rental rates. As a result, portions of our office properties may remain vacant for extended periods of time. In addition, we may have to offer substantial rent abatements, tenant improvements, concessions, early termination rights or below-market renewal options to attract new tenants or retain existing tenants. The factors described above could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
A significant portion of our net operating income is expected to come from our hotel and, as a result, our operating performance is subject to the cyclical nature of the lodging industry.
The performance of the lodging industry has historically been closely linked to the performance of the general economy and, specifically, growth in U.S. gross domestic product. Fluctuations in lodging demand and, therefore, hotel operating performance, are caused largely by general economic and local market conditions, which subsequently affect levels of business and leisure travel. For instance, increased fuel costs, natural disasters or disruptive global political events, including terrorist activity and war, are a few factors that could affect an individual’s willingness to travel.
In addition to general economic conditions, lodging supply is an important factor that can affect the lodging industry’s performance. Industry overbuilding and the introduction of new concepts and products such as Airbnb®, Homeaway® and VRBO® have the potential to further exacerbate the negative impact of an economic recession. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. Further, the success of our hotel property depends largely on the property operator’s ability to adapt to dominant trends, competitive pressures and consolidation, as well as disruptions such as consumer spending patterns, changing demographics and the availability of labor.
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An adverse change in lodging fundamentals could result in returns that are substantially below our expectations or result in losses, which could adversely affect our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
The outbreak of a highly infectious, contagious or widespread disease, such as COVID-19, could reduce travel and adversely affect demand for our hotel.
Our hotel operations are sensitive to the willingness and ability of our guests to travel. The outbreak of highly infectious, contagious or widespread diseases or global health emergencies will likely cause decreases in both discretionary and business travel and reduce the number of guests that visit our hotel. The degree of such a decrease will likely be worsened in the event such a disease causes a disruption in air or other forms of travel used by guests of our hotel. In the event a person having such a disease visits or works at our hotel, the operations at our hotel will likely be disrupted.
The spread of COVID-19 in the United States and the resulting restrictions on and cancellations of travel, meetings and social gatherings has impacted the operations of our hotel in Sacramento, California. The pandemic and related restrictions depressed the net operating income of our hotel in 2021 and, based on current expectations, it is highly likely that the net operating income of our hotel will continue to be depressed for the first half of 2022.
The seasonality of the lodging industry may cause quarterly fluctuations in our revenues.
The lodging industry is seasonal in nature, which may cause quarterly fluctuations in our revenues, occupancy levels, room rates, operating expenses and cash flows. Our quarterly earnings may be adversely affected by factors outside our control, including timing of holidays, weather conditions, poor economic factors and competition in the area of our hotel. We can provide no assurances that our cash flows will be sufficient to offset any shortfalls that occur as a result of these fluctuations. As a result, we may have to enter into short-term borrowings in certain quarters in order to make distributions to our stockholders, and we can provide no assurances that such borrowings will be available on favorable terms, if at all. Consequently, volatility in our financial performance resulting from the seasonality of the lodging industry could adversely affect our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
The increasing use of online travel intermediaries by consumers may adversely affect our profitability.
Some of our hotel rooms are booked through online travel intermediaries, including, but not limited to, Travelocity.com, Expedia.com and Priceline.com. As online bookings increase, these intermediaries may demand higher commissions, reduced room rates or other significant contract concessions. Moreover, some of these online travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These intermediaries hope that consumers will develop brand loyalties to their reservations systems rather than to particular hotels. Although most of the business for our hotel is expected to be derived from consumer direct and traditional hotel channels, such as travel agencies, corporate accounts, meeting planners and recognized wholesale operators, if the amount of sales made through online intermediaries increases significantly, room revenues may be lower than expected, which could adversely affect our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Increased use of technology may reduce the need for business-related travel.
The increased use of teleconference and video-conference technology by businesses could result in decreased business travel as companies increase the use of technologies that allow multiple parties from different locations to participate at meetings without traveling to a centralized meeting location. To the extent that such technologies play an increased role in day-to-day business and the necessity for business-related travel decreases, hotel room demand may decrease, which could adversely affect our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
We are subject to risks associated with the employment of hotel personnel, particularly with respect to unionized labor.
Our third-party manager is responsible for hiring and maintaining the labor force at our hotel. As owner of our hotel, we are responsible for and subject to many of the costs and risks generally associated with the hotel labor force, particularly with respect to unionized labor. From time to time, hotel operations may be disrupted as a result of strikes, lockouts, public demonstrations or other negative actions and publicity. We also may incur increased legal costs and indirect labor costs as a result of contract disputes or other events. The resolution of labor disputes or re-negotiated labor contracts could lead to
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increased labor costs, either by increases in wages or benefits or by changes in work rules that raise hotel operating costs. We do not have the ability to affect the outcome of these negotiations.
We may be unable to deploy capital in a way that grows our business and, even if consummated, we may fail to successfully integrate and operate acquired properties.
We plan to deploy capital in additional real estate assets as opportunities arise. Our ability to do so on favorable terms and or successfully integrate and operate them is subject to the following significant risks:
•we may be unable to deploy capital in additional real estate assets because of competition from real estate investors with better access to less expensive capital, including real estate operating companies, publicly-traded REITs and investment funds;
•we may acquire properties that are not accretive to our results upon acquisition, and we may not successfully manage and lease those properties to meet our expectations;
•competition from other potential acquirers may significantly increase purchase prices;
•acquired properties may be located in new markets where we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures;
•we may be unable to generate sufficient cash from operations or obtain the necessary debt or equity financing to consummate a transaction on favorable terms or at all;
•we may need to spend more money than anticipated to make necessary improvements or renovations to acquired properties;
•we may spend significant time and money on potential transactions that we do not consummate;
•we may be unable to quickly and efficiently integrate new acquisitions into our existing operations;
•we may suffer higher than expected vacancy rates and or lower than expected rental rates; and
•we may acquire properties without any recourse, or with only limited recourse, for liabilities against the former owners of the properties.
If we cannot complete real estate transactions on favorable terms, or operate acquired assets to meet our goals or expectations, our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock could be materially adversely affected.
We may be unable to successfully expand our operations into new markets.
The risks described in the immediately preceding risk factor that are applicable to our ability to acquire and successfully integrate and operate properties in the markets in which our properties are located are also applicable to our ability to acquire and successfully integrate and operate properties in new markets. In addition to these risks, we may not possess the same level of familiarity with the dynamics and market conditions of certain new markets that we may enter, which could adversely affect our ability to expand into those markets. We may be unable to build a significant market share or achieve a desired return on our assets in new markets. If we are unsuccessful in expanding into new markets, it could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Certain of our properties were subject to impairment charges prior to their sales, and any of our properties may be subject to impairment charges in the future.
We routinely evaluate our assets for impairment indicators (we recorded no impairment of long-lived assets for the years ended December 31, 2021 and 2020). The judgment regarding the existence and magnitude of impairment indicators is based on factors such as market conditions, tenant performance and lease structure. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. If we determine that an impairment has occurred, we will be required to make a downward adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded. Negative developments in the real estate market may cause management to reevaluate the business and macro-economic assumptions used in its impairment analysis. Changes in management’s assumptions based on actual results may have a material impact on the Company’s financial statements.
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We may obtain only limited warranties when we purchase a property and typically have only limited recourse in the event our due diligence did not identify any issues that lower the value of our property.
The seller of a property often sells such property in “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that survive for only a limited period after the closing and with a cap on recoverable damages. In the event we purchase a property with a limited warranty, there will be an increased risk that we will lose some or all of our capital in the property.
We may be unable to sell a property if or when we decide to do so, including as a result of uncertain market conditions.
Real estate assets are, in general, relatively illiquid and may become even more illiquid during periods of economic downturn. As a result, we may not be able to sell our properties quickly or on favorable terms in response to changes in the economy or other conditions when it otherwise may be prudent to do so. In addition, certain significant expenditures generally do not change in response to economic or other conditions, including debt service obligations, real estate taxes, and operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced earnings. Therefore, we may be unable to adjust our portfolio promptly in response to economic, market or other conditions, which could adversely affect our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Some of our leases may not include periodic rental increases, or the rental increases may be less than the fair market rate at a future point in time. In either case, the value of the leased property to a potential purchaser may not increase over time, which may restrict our ability to sell that property, or if we are able to sell that property, may result in a sale price less than the price that we paid to purchase the property or the price that could be obtained if the rental income was at the then-current market rate.
We expect to hold our various real properties until such time as we decide that a sale or other disposition is appropriate given our business objectives. Our ability to dispose of properties on advantageous terms or at all depends on certain factors beyond our control, including competition from other sellers and the availability of attractive financing for potential buyers of our properties. We cannot predict the various market conditions affecting real estate assets which will exist at any particular time in the future. Due to the uncertainty of market conditions which may affect the disposition of our properties, we cannot assure our stockholders that we will be able to sell such properties at a profit or at all in the future. Accordingly, the extent to which our stockholders will receive cash distributions and realize potential appreciation on our real estate assets will depend upon fluctuating market conditions. Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements.
We may be unable to secure funds for our future long-term liquidity needs.
Our long-term liquidity needs will consist primarily of funds necessary for acquisitions of assets, development or repositioning of properties, capital expenditures, refinancing of indebtedness, SBA 7(a) loan originations, paying distributions on our Preferred Stock or any other preferred stock we may issue, any future repurchase and or redemption of our Preferred Stock (if we choose, or are required, to pay the redemption price in cash instead of in shares of our Common Stock), and distributions on our Common Stock. We may not have sufficient funds on hand or may not be able to obtain additional financing to cover all of these long-term cash requirements. The nature of our business, and the requirements imposed by REIT rules that we distribute a substantial majority of our REIT taxable income on an annual basis in the form of dividends, may cause us to have substantial liquidity needs over the long-term. We will seek to satisfy our long-term liquidity needs through one or more of the following methods: (i) offerings of shares of Common Stock, Preferred Stock or other equity and or debt securities of the Company; (ii) credit facilities and term loans; (iii) the addition of senior recourse or non-recourse debt using target acquisitions as well as existing assets as collateral; (iv) the sale of existing assets; and or (v) cash flows from operations. These sources of funding may not be available on attractive terms or at all. If we cannot obtain additional funding for our long-term liquidity needs, our assets may generate lower cash flow or decline in value, or both, which may cause us to sell assets at a time when we would not otherwise do so and could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Income from our long-term leases is an important source of our cash flow from operations and is subject to risks related to increases in expenses and inflation.
We are exposed to risks related to increases in market lease rates and inflation, as income from long-term leases is an important source of our cash flow from operations. Leases of long-term duration or which include renewal options that specify
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a maximum rate increase may result in below-market lease rates over time if we do not accurately estimate inflation or market lease rates. Provisions of our leases designed to mitigate the risk of inflation and unexpected increases in market lease rates, such as periodic rental increases, may not adequately protect us from the impact of inflation or unexpected increases in market lease rates. If we are subject to below-market lease rates on a significant number of our properties pursuant to long-term leases and our operating and other expenses are increasing faster than anticipated, our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock could be materially adversely affected.
We may finance properties with lock-out provisions, which may prohibit us from selling a property or may require us to maintain specified debt levels for a period of years on some properties.
A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out provisions may include terms that provide strong financial disincentives for borrowers to prepay their outstanding loan balance. If a property is subject to a lock-out provision, we may be materially restricted from or delayed in selling or otherwise disposing of or refinancing such property. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our securities relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change of control even though that disposition or change of control might be in the best interests of our stockholders.
Increased operating expenses could reduce cash flow from operations and funds available to deploy capital or make distributions.
Our properties are subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are payable (or are being paid) in an amount that is insufficient to cover operating expenses that are our responsibility under the lease, we could be required to expend funds in excess of such rents with respect to that property for operating expenses. Our properties are subject to increases in tax rates, utility costs, insurance costs, repairs and maintenance costs, administrative costs and other operating and ownership expenses. Our property leases may not require the tenants to pay all or a portion of these expenses, in which event we may be responsible for these costs. If we are unable to lease properties on terms that require the tenants to pay all or some of the properties’ operating expenses, if our tenants fail to pay these expenses as required or if expenses we are required to pay exceed our expectations, we could have less funds available for future acquisitions or cash available for distributions to our stockholders.
The market environment may adversely affect our operating results, financial condition and ability to pay distributions to our stockholders.
Any deterioration of domestic or international financial markets could impact the availability of credit or contribute to rising costs of obtaining credit and therefore, could have the potential to adversely affect the value of our assets, the availability or the terms of financing, our ability to make principal and interest payments on, or refinance, any indebtedness and or, for our leased properties, the ability of our tenants to enter into new leasing transactions or satisfy their obligations, including the payment of rent, under existing leases. The market environment also could affect our operating results and financial condition as follows:
•Debt Markets—The debt market is sensitive to the macro environment, such as Federal Reserve policy, market sentiment, or regulatory factors affecting the banking and commercial mortgage backed securities industries. Should overall borrowing costs increase, due to either increases in index rates or increases in lender spreads, our operations may generate lower returns.
•Real Estate Markets—While incremental demand growth has helped to reduce vacancy rates and support modest rental growth in recent years, and while improving fundamentals have resulted in gains in property values, in many markets property values, occupancy and rental rates continue to be below those previously experienced before the most recent economic downturn. If recent improvements in the economy reverse course, the properties we acquire could substantially decrease in value after we purchase them. Consequently, we may not be able to recover the carrying amount of our properties, which may require us to recognize an impairment charge or record a loss on sale in our earnings.
Real estate-related taxes may increase, and if these increases are not passed on to tenants, our income will be reduced.
We are required to pay property taxes for our properties, which can increase as property tax rates increase or as properties are assessed or reassessed by taxing authorities. In California, pursuant to an existing state law commonly referred to
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as Proposition 13, all or portions of a property are reassessed to market value only at the time of “change in ownership” or completion of “new construction,” and thereafter, annual property tax increases are limited to 2% of previously assessed values. As a result, Proposition 13 generally results in significant below-market assessed values over time. From time to time, lawmakers and political coalitions have initiated efforts to repeal or amend Proposition 13, including by introducing Proposition 15 on the California ballot in November 2020, which measure was not approved by voters. If successful in the future, these proposals could substantially increase the assessed values and property taxes for our properties in California. Although some tenant leases may permit us to pass through such tax increases to the tenants for payment, renewal leases or future leases may not be negotiated on the same basis. Tax increases not passed through to tenants could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
We face risks associated with development, redevelopment, repositioning or construction of real estate projects.
We expect to engage in development, redevelopment, repositioning or construction of real estate projects, including, without limitation, deploying capital in unimproved real properties, and will therefore face significant risks relating to such activities. We must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate or we may pay too much for a property, our return on our assets could suffer. We may abandon any of these activities after we begin to explore them and as a result we may lose deposits or fail to recover expenses already incurred. We may be unable to proceed with these activities because we cannot obtain financing on favorable terms or at all. We may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon or substantially alter our plan for a project. We may incur construction costs for a development project that exceed our original estimates due to increases in interest rates, which is the economic environment that we expect to face in 2022, increased materials, labor, leasing or other costs, material shortages or supply chain delays, all of which are more likely in the current inflationary environment, or unanticipated technical difficulties, which could make completion of the project less profitable because market rents may not increase sufficiently to compensate for the increase in construction costs. We may even suspend development projects after construction has begun due to changes in economic conditions or other factors, and this may result in the write-off of costs, payment of additional costs or increases in overall costs when the development project is restarted. In addition, we will be subject to normal lease-up risks relating to newly constructed projects.
We face significant competition.
Our office portfolio competes with a number of developers, owners and operators of office real estate, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and may not be able to replace them, and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. As a result of any of the foregoing factors, our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock may be materially adversely affected.
Our hotel property competes for guests primarily with other hotels in the immediate vicinity of our hotel and secondarily with other hotels in the geographic market of our hotel. An increase in the number of competitive hotels in these areas could have a material adverse effect on the occupancy, ADR and RevPAR of our hotel.
War and Terrorismcould harm our operating results.
The strength and profitability of our business depends on demand for and the value of our properties. The war between Russia and Ukraine and the resulting economic sanctions imposed by many countries on Russia have led to disruption, instability and volatility in global markets and industries and are expected to have a negative impact on the global economy. Disruption, instability, volatility and decline in global economic activity, whether caused by acts of war, other acts of aggression or terrorism, in each case regardless where it occurs, could in turn harm the demand for and the value of our properties.
In addition, the public perception that certain locations are at greater risk for attack, such as major airports, ports, and rail facilities, may decrease the demand for and the value of our properties near these sites. A decrease in demand could make it difficult for us to renew or re-lease our properties at these sites at lease rates equal to or above historical rates. Terrorist attacks could have an adverse impact on our business even if they are not directed at our properties.
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Previous terrorist attacks and subsequent terrorist alerts have adversely affected the U.S. travel and hospitality industries since 2001, often disproportionately compared to the effect on the overall economy. The extent of the impact that actual or threatened terrorist attacks in the United States or elsewhere could have on domestic and international travel and our business in particular cannot be determined, but any such attacks or the threat of such attacks could have a material adverse effect on travel and hotel demand and our ability to finance our hospitality business.
In addition, the terrorist attacks of September 11, 2001 have substantially affected the availability and price of insurance coverage for certain types of damages or occurrences, and our insurance policies for terrorism include large deductibles and co-payments. Although we maintain terrorism insurance coverage on our portfolio, the amount of our terrorism insurance coverage may not be sufficient to cover losses inflicted by terrorism and therefore could expose us to significant losses and have a negative impact on our operations.
In connection with the ownership and operation of real estate assets, we may be liable for costs and damages related to environmental matters.
Environmental laws regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under some of these laws, an owner or operator of real estate may be liable for costs related to soil or groundwater contamination on or migrating to or from its property. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the disposal site.
These laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the hazardous or toxic substances that caused the contamination. The presence of, or contamination resulting from, any of these substances, or the failure to properly remediate them, may adversely affect our ability to sell or rent our property, to borrow using the property as collateral or create lender’s liability for us. In addition, third parties exposed to hazardous or toxic substances may sue for personal injury damages and or property damages. For example, some laws impose liability for release of or exposure to asbestos-containing materials. As a result, in connection with our former, current or future ownership, operation, and development of real estate assets, or our role as a lender for loans secured directly or indirectly by real estate properties, we may be potentially liable for investigation and cleanup costs, penalties and damages under environmental laws.
Although many of our properties have been subjected to preliminary environmental assessments, known as Phase I assessments, by independent environmental consultants that identify certain liabilities, Phase I assessments are limited in scope, and may not include or identify all potential environmental liabilities or risks associated with a property. Unless required by applicable law, we may decide not to further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments.
Further, these or other environmental studies may not identify all potential environmental liabilities or accurately assess whether we will incur material environmental liabilities in the future. If we do incur material environmental liabilities in the future, our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock could be materially adversely affected.
Our real estate business is subject to risks from climate change.
Our real estate business is subject to risks associated with climate change. Climate change could trigger extreme weather and changes in precipitation, temperature, and air quality, all of which may result in physical damage to, or a decrease in demand for, our properties located in the areas affected by these conditions. Further, the assessment of the potential impact of climate change has impacted the activities of government authorities, the pattern of consumer behavior, and other areas that impact the business environment in the United States, including, but not limited to, energy-efficiency measures, water use measures, and land-use practices. The promulgation of policies, laws or regulations relating to climate change by governmental authorities in the U.S. and the markets in which the Company owns real estate may require the Company to invest additional capital in our properties.
Most of our properties are located in California. To the extent that climate change impacts changes in weather patterns, our markets could experience increases in extreme weather. For example, many of our properties are located in areas have been impacted by drought and, as such, face the risk of increased water costs and potential fines and/or penalties for high consumption. There can be no assurances that we will successfully mitigate the risk of increased water costs and potential fines and/or penalties for high consumption.
Climate change may also have indirect effects on our business by increasing the cost of, or decreasing the availability of, property insurance on terms we find acceptable or at all, or by increasing the cost of energy (or water, as described above). There can be no assurance that climate change will not have a material adverse effect on our financial condition or results of operations.
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Compliance with the ADA and fire, safety and other regulations may require us to make unanticipated expenditures that could significantly reduce the cash available for distributions on our Common Stock or Preferred Stock.
Our properties are subject to regulation under federal laws, such as the ADA, pursuant to which all public accommodations must meet federal requirements related to access and use by disabled persons. Although we believe that our properties substantially comply with present requirements of the ADA, we have not conducted an audit or investigation of all of our properties to determine our compliance. If one or more of our properties or future properties are not in compliance with the ADA, we might be required to take remedial action, which would require us to incur additional costs to bring the property into compliance. Noncompliance with the ADA could also result in imposition of fines or an award of damages to private litigants.
Additional federal, state and local laws also may require modifications to our properties or restrict our ability to renovate our properties. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation.
In addition, our properties are subject to various federal, state and local regulatory requirements, such as state and local earthquake, fire and life safety requirements. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. If we were to fail to comply with these various requirements, we might incur governmental fines or private damage awards. If we incur substantial costs to comply with the ADA or any other regulatory requirements, our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock could be materially adversely affected.
Inflation may adversely affect our real estate operations
Inflation increased substantially in 2021. The consumer price index for February 2022 rose 7.9% from a year ago, the highest level since January 1982. Inflation is expected to further accelerate for the rest of 2022 as a result of the sharp spike in energy costs caused by the war that broke out between Russia and Ukraine. Inflation is expected to cause our construction costs, maintenances costs, operating expenses and interest expenses to rise, which in turn could materially adversely affect our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Supply chain disruption and increased costs in labor and materials may adversely affect our real estate operations
The construction and building industry, similar to many other industries, have been experiencing worldwide supply chain disruptions due to a multitude of factors that are beyond our control, including, without limitation, the war between Russia and Ukraine and the residual economic effects of COVID-19. Materials, parts and labor have also increased in cost over the past year or more, sometimes significantly and over a short period of time. This could impact our ability to timely deliver spaces to tenants, complete tenant buildout or complete redevelopment or development projects; we may incur costs in the process that exceeds our original estimates due to increased costs for materials or labor or other costs that are unexpected. All of these occurrences could affect our ability to achieve the expected value of a lease, redevelopment or development, thereby adversely affecting our profitability.
Our participation in co-investments may subject us to risks that otherwise may not be present in other real estate assets.
We have entered into one and expect to continue to enter into co-investments with respect to a portion of the properties we acquire. Co-investments involve risks generally not otherwise present with an investment in other real estate assets, such as the following:
•the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
•the risk that a co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies, objectives or status as a REIT;
•the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under the applicable mortgage loan financing documents, which may constitute an event of default under all of the applicable mortgage loan financing documents, result in a foreclosure and the loss of all or a substantial portion of the investment made by the co-owner, or allow the bankruptcy court to reject the agreements entered into by the co-owners owning interests in the property;
•the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of current or prospective tenants and may otherwise adversely affect the operation and maintenance of the
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property, and could cause a default under the applicable mortgage loan financing documents and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;
•the risk that a co-owner could breach agreements related to the property, which may cause a default under, and possibly result in personal liability in connection with, any mortgage loan financing documents applicable to the property result in a foreclosure or otherwise adversely affect the property and the co-investment;
•the risk that we could have limited control and rights, with management decisions made entirely by a third party; and
•the possibility that we will not have the right to sell the property at a time that otherwise could result in the property being sold for its maximum value.
In the event that our interests become adverse to those of the other co-owners, we may not have the contractual right to purchase the co-investment interests from the other co-owners. Even if we are given the opportunity to purchase such co-investment interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-investment interests from the co-owners.
We might want to sell our co-investment interests in a given property or other investment at a time when the other co-owners in such property or investment do not desire to sell their interests. Therefore, because we anticipate that it will be much more difficult to find a willing buyer for our co-investment interests in an investment than it would be to find a buyer for a property we owned outright, we may not be able to sell our co-investment interest in a property at the time we would like to sell.
Our manager faces conflicts of interest relating to joint ventures or other co-investment arrangements that we may enter into with CIM or its affiliates, which could result in a disproportionate benefit to CIM or its affiliates.
We have entered and expect to continue to enter into joint ventures or co-investments (including co-investment transactions) with CIM, its affiliates or vehicles managed or operated by CIM for the acquisition, development or redevelopment of real estate-related assets. Since personnel of CIM involved in managing and operating our business are also involved in the business and operations of CIM, its affiliates and other vehicles managed or operated by CIM, CIM may face conflicts of interest in determining which real estate program should enter into any particular joint venture or co-investment. These persons also may have a conflict in structuring the terms of the relationship between us and any affiliated co-venturer or co-owner, as well as conflicts of interests in managing the joint venture, which may result in the co-venturer or co-owner receiving benefits greater than the benefits that we receive.
In the event we enter into joint venture or other co-investments with CIM, its affiliates or vehicles managed or operated by CIM, the Administrator may have a conflict of interest when determining when and whether to buy or sell a particular property, or to make or dispose of another real estate-related asset. In the event we enter into a joint venture or other co-investments with CIM, its affiliates or vehicles managed or operated by CIM that has a term shorter than ours, the joint venture may be required to sell its properties earlier than we may desire to sell the properties. Even if the terms of any joint venture or other co-investments between us and CIM, its affiliates or vehicle operated or managed by CIM grants us the right of first refusal to buy such properties, we may not have sufficient funds or borrowing capacity to exercise our right of first refusal under these circumstances.
Risks Related to Debt Financing
We have incurred significant indebtedness and may incur significant additional indebtedness on a consolidated basis.
We have incurred significant indebtedness and may incur significant additional indebtedness to fund future acquisitions, development activities and operational needs. The degree of leverage could make us more vulnerable to a downturn in business or the economy generally.
Payments of principal and interest on our borrowings may leave us with insufficient cash resources to operate our properties and or pay distributions on our Common Stock or Preferred Stock. The incurrence of substantial outstanding indebtedness, and the limitations imposed by our debt agreements, could have significant other adverse consequences, including the following:
•our cash flows may be insufficient to meet our required principal and interest payments;
•we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our liquidity for acquisitions or operations;
•we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our existing indebtedness;
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•we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;
•we may violate restrictive covenants in our debt documents, which would entitle the lenders to accelerate our debt obligations;
•we may default on our obligations and the lenders or mortgagees may foreclose on our properties and take possession of any collateral that secures their loans; and
•our default under any of our indebtedness with cross-default provisions could result in a default on other indebtedness.
If any one of these events occurs, our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock may be materially adversely affected. In addition, any foreclosure on our properties could create taxable income without the accompanying cash proceeds, which could adversely affect our ability to meet the REIT distribution requirements imposed by the Internal Revenue Code of 1986, as amended (the “Code”).
We intend to rely in part on external sources of capital to fund future capital needs and, if we encounter difficulty in obtaining such capital, we may not be able to meet maturing obligations or make additional acquisitions.
In order to qualify and maintain our qualification as a REIT under the Code, we are required, among other things, to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. Because of this dividend requirement, we may not be able to fund from cash retained from operations all of our future capital needs, including capital needed to refinance maturing obligations or make new acquisitions.
The capital and credit markets have experienced extreme volatility and disruption as a result of the global outbreak of COVID-19. We believe that such volatility and disruption are likely to continue into the foreseeable future. Market volatility and disruption could hinder our ability to obtain new debt financing or refinance our maturing debt on favorable terms or at all or to raise debt and equity capital. Our access to capital will depend upon a number of factors, including:
•general market conditions;
•government action or regulation, including changes in tax law;
•the market’s perception of our future growth potential;
•the extent of stockholder interest;
•analyst reports about us and the REIT industry;
•the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;
•our financial performance and that of our tenants;
•our current debt levels;
•our current and expected future earnings; and
•our cash flow and cash distributions, including our ability to satisfy the dividend requirements applicable to REITs.
If we are unable to obtain needed capital on satisfactory terms or at all, we may not be able to meet our obligations and commitments as they mature or make any new acquisitions.
High interest rates may make it difficult for us to finance or refinance assets, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.
The Federal Reserve has indicated that it was on track to raise interest rates in the middle of March 2022 to, among other things, control inflation. Market participants believe that the Federal Reserve will continue with additional interest rate increases in 2022. We run the risk of being unable to finance or refinance our assets on favorable terms or at all. If interest rates are high, when we desire to mortgage our assets or when existing loans come due and the assets need to be refinanced, we may not be able to, or may choose not to, finance the assets and we would be required to use cash to purchase or repay outstanding obligations. Our inability to use debt to finance or refinance our assets could reduce the number of assets we can acquire, which could reduce our operating cash flow and the amount of cash distributions we can make on our Common Stock or Preferred Stock. Higher costs of capital also could negatively impact our operating cash flow and returns on our assets.
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Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
We have incurred indebtedness, and in the future may incur additional indebtedness, that bears interest at a variable rate. An increasing interest rate environment, which is the economic environment that the Company expects to face in 2022, will result in increases in the variable rate component of our indebtedness. As of December 31, 2021, we have $60.0 million outstanding under the 2018 revolving credit facility, $7.7 million outstanding under the SBA 7(a) loan-backed notes and $27.1 million outstanding under our junior subordinated notes, all of which bear interest at a variable rate. We have not hedged our interest rate with respect to variable rate indebtedness. As a result, increases in interest rates will increase the amounts payable under such indebtedness, which will reduce our operating cash flows and could materially adversely affect our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock. In addition, if our existing indebtedness matures or otherwise becomes payable during a period of rising interest rates, we could be required to liquidate one or more of our assets at times that may prevent realization of the maximum return on such assets.
We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness, and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash. To a certain extent, our cash flow is subject to general economic, industry, financial, competitive, operating, legislative, regulatory and other factors, many of which are beyond our control.
We cannot assure our stockholders that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs.
Additionally, if we incur additional indebtedness in connection with any future deployment of capital or development projects or for any other purpose, our debt service obligations could increase. We may need to refinance all or a portion of our indebtedness before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:
•our financial condition and market conditions at the time;
•restrictions in the agreements governing our indebtedness;
•general economic and capital market conditions;
•the availability of credit from banks or other lenders; and
•our results of operations.
As a result, we may not be able to refinance our indebtedness on commercially reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancing or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to enable us to meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity, or delaying any strategic acquisitions and alliances or capital expenditures, any of which could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions on our Common Stock or Preferred Stock.
In connection with providing us financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property or discontinue insurance coverage. These or other limitations imposed by a lender may adversely affect our flexibility and limit our ability to pay distributions on our Common Stock or Preferred Stock.
Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.
We may finance some of our property acquisitions using interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan. If the
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mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon payments will reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans.
Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the loan on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT. Any of these results would have a significant, negative impact on the value of our securities.
Wemayin the futureenterinto hedging transactions that could expose us to contingent liabilities in the future andmaterially adversely impact our financial condition and results of operations.
Subject to maintaining our qualification as a REIT, we may in the future enter into hedging transactions that could require us to fund cash payments in certain circumstances (e.g., the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument), which could in turn result in economic losses to us.
In addition, certain of the hedging instruments that we may enter into could involve additional risks if they are not traded on regulated exchanges, guaranteed by an exchange or our clearing house, or regulated by any U.S. or foreign governmental authorities. It cannot be assured that a liquid secondary market will exist for hedging instruments that we may enter into in the future, and we may be required to maintain a position until exercise or expiration, which could result in significant losses.
We intend to record any derivative and hedging transactions we enter into in accordance with GAAP. However, we may choose not to pursue, or fail to qualify for, hedge accounting treatment relating to such derivative instruments. As a result, our operating results may suffer because losses, if any, on these derivative instruments may not be offset by a change in the fair value of the related hedged transaction or item. Any losses sustained as a result of our hedging transactions would be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
We may be adversely affected by the potential discontinuation of the London Interbank Offered Rate (“LIBOR”).
In July 2017, the Financial Conduct Authority in the United Kingdom (the “FCA”), which regulates LIBOR, announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after December 31, 2021. On March 5, 2021, the FCA announced that the 1-week and 2-month U.S. dollar LIBOR settings will cease publication after December 31, 2021 and the overnight 1, 3, 6 and 12 months U.S. dollar LIBOR settings will cease publication after June 30, 2023. However, the FCA has indicated it will not compel panel banks to continue to contribute to LIBOR after the end of 2021 and the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have encouraged banks to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate no later than December 31, 2021. To identify a successor rate for U.S. dollar LIBOR, the Alternative Reference Rates Committee (“ARRC”), a U.S.-based group convened by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York, was formed. On July 29, 2021, the ARRC formally recommended the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR for use in derivatives and other financial contracts currently indexed to LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. The ARRC has proposed a paced market transition plan to SOFR from LIBOR. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities. Although SOFR is the ARRC’s recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR. The transition from LIBOR to SOFR or other alternative reference rates may also introduce operational risks in our accounting, financial reporting, loan servicing, liability management and other aspects of our business. However, we cannot reasonably estimate the impact of the transition at this time. Although there have been a few issuances utilizing SOFR or the Sterling Over Night Index Average, an alternative reference rate that is based on transactions, it is unknown whether these alternative reference rates will attain market acceptance as replacements for LIBOR.
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When LIBOR is discontinued, the interest rate for any of our indebtedness that is indexed to LIBOR at the time of discontinuation will be based on a replacement rate or an alternate base rate as specified in the applicable documentation governing such indebtedness or as otherwise agreed by us and the applicable lender. Such an event would not affect our ability to borrow or maintain already outstanding borrowings, but the replacement rate or alternate base rate could be higher or more volatile than LIBOR prior to its discontinuance. For instance, as of December 31, 2021, we had $60.0 million of outstanding indebtedness that was indexed to LIBOR under our revolving credit facility, which allows us to borrow up to $209.5 million, subject to a borrowing base calculation. Additionally, as of December 31, 2021, we had $27.1 million of junior subordinated notes and $7.7 million of SBA 7(a) loan-backed notes that were indexed to LIBOR. The full impact of the expected transition away from LIBOR is unclear, but these changes could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Risks Related to Our Lending Operations
Our lending operationsexposeus to a high degree of risk associated with real estate.
The performance and value of our loans depends upon many factors beyond our control. The ultimate performance and value of our loans are subject to risks associated with the ownership and operation of the properties which collateralize our loans, including the property owner’s ability to operate the property with sufficient cash flow to meet debt service requirements. The performance and value of the properties collateralizing our loans may be adversely affected by:
•changes in national or regional economic conditions;
•changes in real estate market conditions due to changes in national, regional or local economic conditions or property market characteristics;
•competition from other properties;
•changes in interest rates and the condition of the debt and equity capital markets;
•the ongoing need for capital repairs and improvements;
•increases in real estate tax rates and other operating expenses (including utilities);
•adverse changes in governmental rules and fiscal policies; acts of God, including earthquakes, hurricanes, fires and other natural disasters; pandemic outbreaks and other global health emergencies (including as a result of the outbreak of COVID-19 that began in the fourth quarter of 2019); disruptive global political events, including terrorist activity and war (including the war between Russia and Ukraine, which has led to disruption, instability and volatility in global markets and industries); or a decrease in the availability of or an increase in the cost of insurance;
•adverse changes in zoning laws;
•the impact of environmental legislation and compliance with environmental laws; and
•other factors that are beyond our control or the control of the commercial property owners.
In the event that any of the properties underlying our loans experience any of the foregoing events or occurrences, the value of, and return on, such loans may be negatively impacted, which in turn could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
There are significant risksrelated to loans originated under the SBA 7(a) Program.
Many of the borrowers under our SBA 7(a) Program are privately-owned businesses. There is typically no publicly available information about these businesses; therefore, we must rely on our own due diligence to obtain information in connection with our decisions. Our borrowers may not meet net income, cash flow and other coverage tests typically imposed by banks. A borrower’s ability to repay its loan may be adversely impacted by numerous factors, including a downturn in its industry or other negative local or macro-economic conditions. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in the collateral for the loan. In addition, small businesses typically depend on the management talents and efforts of one person or a small group of people for their success. The loss of services of one or more of these persons could have an adverse impact on the operations of the small business. Small companies are typically more vulnerable to customer preferences, market conditions and economic downturns and often need additional capital to maintain the business, expand or compete. These factors may have an impact on the ultimate recovery of our loans receivable from such businesses. Loans to small businesses, therefore, involve a high degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative. The factors described above could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
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Our loans secured by real estate and our REO properties are typically illiquid and their values may decrease.
Our loans secured by real estate and our real estate acquired through foreclosure are typically illiquid. Therefore, we may be unable to vary our portfolio promptly in response to changing economic, financial and investment conditions. As a result, the fair market value of these assets may decrease in the future and losses may result. The illiquid nature of our loans may adversely affect our ability to dispose of such loans at times when it may be advantageous or necessary for us to liquidate such assets, which in turn could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Our lending operations have an industry concentration, which may negatively impact our financial condition and results of operations.
A majority of our revenue from the lending operations is generated from loans collateralized by hospitality properties. As of December 31, 2021, our loans subject to credit risk were 99.8% concentrated in the hospitality industry. Any factors that negatively impact the hospitality industry, including the outbreak of COVID-19 that began in the fourth quarter of 2019, recessions, severe weather events (such as hurricanes, blizzards, floods, etc.), depressed commercial real estate markets, travel restrictions, bankruptcies or other political or geopolitical events or the introduction of new concepts and products such as Airbnb®, Homeaway® and VRBO®, could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Establishing loan loss reserves entails significant judgment and may negatively impact our results of operations.
We have a quarterly review process to identify and evaluate potential exposure to loan losses. The determination of whether significant doubt exists and whether a loan loss reserve is necessary requires judgment and consideration of the facts and circumstances existing at the evaluation date. Additionally, further changes to the facts and circumstances of the individual borrowers, the limited service hospitality industry and the economy may require the establishment of additional loan loss reserves and the effect to our results of operations would be adverse. If our judgments underlying the establishment of our loan loss reserves are not correct, our results of operations may be negatively impacted.
Whenever our borrowers experience significant operating difficulties and we are forced to liquidate the collateral underlying the loans, losses may be relatively substantial and could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Our SBA 7(a) Program loans are subject to delinquency, foreclosure and loss, any or all of which could result in losses.
Our loans originated pursuant to the SBA 7(a) Program are collateralized by income-producing properties and typically have personal guarantees. These loans are predominantly to operators of limited service hospitality properties. As a result, these operators are subject to risks associated with the hospitality industry, including the outbreak of COVID-19 that began in the fourth quarter of 2019, recessions, severe weather events, depressed commercial real estate markets, travel restrictions, bankruptcies or other political or geopolitical events.
Our SBA 7(a) loans that have real estate as collateral are subject to risks of delinquency and foreclosure. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of and or cash flow from the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of and or cash flow from an income-producing property can be affected by, among other things, tenant mix, success of tenant businesses, onsite property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expenses or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.
In the event of a loan default, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral multiplied by our percentage ownership and the unguaranteed portion of the principal and accrued interest on the loan. In the event of the bankruptcy of the borrower, the loan to such borrower will be deemed collateralized only to the extent of the value of the underlying property at the time of the bankruptcy (as determined by the bankruptcy court). In
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addition to losses related to collateral deficiencies, during the foreclosure process we may incur costs related to the protection of our collateral including unpaid real estate taxes, legal fees, franchise fees, insurance and operating shortfalls to the extent the property is being operated by a court-appointed receiver.
Foreclosure and bankruptcy are complex and sometimes lengthy processes that are subject to federal and state laws and regulations. An action to foreclose on a property is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. In the event of a default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due under the note. Further, borrowers have the option of seeking federal bankruptcy protection which could delay the foreclosure process. In conjunction with the bankruptcy process, the terms of the loan agreements may be modified. Typically, delays in the foreclosure process will have a negative impact on our results of operations and or financial condition due to direct and indirect costs incurred and possible deterioration of the value of the collateral. After foreclosure has been completed, a lack of funds or capital may force us to sell the underlying property resulting in a lower recovery even though developing the property prior to a sale could result in a higher recovery.
As a result of the factors described above, defaults on SBA 7(a) Program loans could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Curtailment of our ability to utilize the SBA 7(a) Program by thefederal government could adversely affect our results of operations.
We are dependent upon the federal government to maintain the SBA 7(a) Program. There can be no assurance that the program will be maintained or that loans will continue to be guaranteed at current levels. In addition, there can be no assurance that our SBA lending subsidiary, First Western SBLC, Inc. (“First Western”) will be able to maintain its status as a “Preferred Lender” under PLP (as defined below) or that we can maintain our SBA 7(a) license.
If we cannot continue originating and selling government guaranteed loans at current levels of profitability, we could experience a decrease in future servicing spreads and earned premiums. From time-to-time the SBA has reached its internal budgeted limits and ceased to guarantee loans for a stated period of time. In addition, the SBA may change its rules regarding loans or Congress may adopt legislation or fail to approve a budget that would have the effect of discontinuing, reducing availability of funds for, or changing loan programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. If these changes occur, the volume of loans to small businesses that now qualify for government guaranteed loans could decline, as could the profitability of these loans.
First Western has been granted national preferred lender program (“PLP”) status and originates, sells and services small business loans and is authorized to place SBA guarantees on loans without seeking prior SBA review and approval. Being a national lender, PLP status allows First Western to expedite loans since First Western is not required to present applications to the SBA for concurrent review and approval. The loss of PLP status could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
We operate in a competitive market for real estate opportunities and future competition for commercial real estate collateralized loans may limit our ability to originate or dispose of our target loans and could also affect the yield of these loans.
We are in competition with a number of entities for the types of commercial real estate collateralized loans that we may originate. These entities include, among others, debt funds, specialty finance companies, savings and loan associations, banks and financial institutions. Some of these competitors may be substantially larger and have considerably greater financial, technical and marketing resources than we do. Some of these competitors may also have a lower cost of funds and access to funding sources that may not be available to us currently. In addition, many of our competitors may not be subject to operating constraints associated with REIT qualification or maintenance of exclusions from registration under the Investment Company Act. Furthermore, competition may further limit our ability to generate desired returns. Due to this competition, we may not be able to take advantage of attractive opportunities from time to time, and can offer no assurance that we will be able to identify and deploy our capital in a manner consistent with our objective. We cannot guarantee that the competitive pressures we face will not have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
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We may be subject to lender liability claims.
In recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or our other creditors or stockholders. There can be no assurance that that such claims will not arise or that we will not be subject to significant liability if a claim of this type did arise.
U.S. Federal Income and Other Tax Risks
Failure to qualify and maintain our qualification as a REIT would have significant adverse consequences to us and the value of our securities.
We believe that we are organized and qualify as a REIT and intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot guarantee that we are qualified as such, or that we will remain qualified as such in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification.
If we fail to qualify as a REIT, we could face serious tax consequences that could substantially reduce our funds available for payment of distributions to our stockholders for each of the years involved because:
•we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;
•we also could be subject to increased state and local taxes; and
•unless we are entitled to relief under statutory provisions, we could not elect to be subject to be taxed as a REIT for four taxable years following the year during which we are disqualified.
Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to stockholders. As a result of these factors, our failure to qualify as a REIT could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock. If we fail to qualify as a REIT for federal income tax purposes and are able to avail ourselves of one or more of the relief provisions under the Code in order to maintain our REIT status, we might nevertheless be required to pay certain penalty taxes for each such failure.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the preferential rates continue to apply to regular corporate qualified dividends, investors that are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our securities. However, under the Tax Cuts and Jobs Act of 2017 (the “Tax Cuts and Jobs Act”) for taxable years prior to 2026, non-corporate U.S. stockholders of REITs may deduct up to 20% of any “qualified REIT dividends.” A qualified REIT dividend is defined as any dividend from a REIT that is not a capital gain dividend or a dividend attributable to dividend income from U.S. corporations or certain non-U.S. corporations. A non-corporate U.S. stockholder’s ability to claim a deduction equal to 20% of qualified REIT dividends received may be limited by the stockholder’s particular circumstances.
Our ownership of and relationship with our taxable REIT subsidiaries will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.
Subject to certain restrictions, a REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”). A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by the REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. A TRS
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generally will pay income tax at regular corporate rates on any taxable income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.
Our TRSs are subject to normal corporate income taxes. We continuously monitor the value of our investments in TRSs for the purpose of ensuring compliance with the rule that no more than 20% of the value of our assets may consist of TRS stock and securities (which is applied at the end of each calendar quarter). The aggregate value of our TRS stock and securities was less than 20% of the value of our total assets (including our TRS stock and securities) as of December 31, 2021. In addition, we scrutinize all of our transactions with our TRSs for the purpose of ensuring that they are entered into on arm’s-length terms in order to avoid incurring the 100% excise tax described above. There are no distribution requirements applicable to the TRSs and after-tax earnings may be retained. There can be no assurance, however, that we will be able to comply with the 20% limitation on ownership of TRS stock and securities on an ongoing basis so as to maintain REIT status or to avoid application of the 100% excise tax imposed on certain non-arm’s-length transactions.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability or reduce our operating flexibility, including changes resulting from the recently passed Tax Cuts and Jobs Act.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our capital stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure our stockholders that any such changes will not adversely affect our taxation and our ability to continue to qualify as a REIT or the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their tax advisors with respect to the impact of recent legislation on their investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares or on our ability to continue to qualify as a REIT. Even changes that do not impose greater taxes on us could potentially result in adverse consequences to our stockholders. Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation (such as a decrease in corporate tax rates) would result in a REIT having fewer tax advantages, and it could decrease the attractiveness of the REIT structure relative to companies that are not organized as REITs. As a result, our charter provides our Board of Directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our Board of Directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interests of our stockholders.
In addition, the Tax Cuts and Jobs Act makes significant changes to the U.S. federal income tax rules for taxation of individuals and businesses, generally effective for taxable years beginning after December 31, 2017. In addition to reducing corporate and individual tax rates, the Tax Cuts and Jobs Act eliminates or restricts various deductions. Many of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The Tax Cuts and Jobs Act makes numerous large and small changes to the tax rules that do not affect the REIT qualification rules directly but may otherwise affect us or our stockholders and could impact the geographic markets in which we operate as well as our tenants in ways, both positive and negative, that are difficult to anticipate. For example, the limitation in the Tax Cuts and Jobs Act on the deductibility of certain state and local taxes may make operating in jurisdictions that impose such taxes at higher rates less desirable than operating in jurisdictions imposing such taxes at lower rates.
While the changes in the Tax Cuts and Jobs Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Code may have unanticipated effects on us or our stockholders. Moreover, certain provisions of the Tax Cuts and Jobs Act give rise to issues needing clarification and unintended consequences that will have to be revisited in subsequent tax legislation or administrative guidance. At this point, it is not clear if or when Congress or the Internal Revenue Service will resolve these issues.
In certain circumstances, we may be subject to certain federal, state and local taxes as a REIT, which would reduce ourcash available for distribution to our stockholders.
Even if we qualify and maintain our status as a REIT, we may be subject to certain federal, state and local taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Code) will be subject to a 100% excise tax, and some state and local jurisdictions may tax some or all of our income because not all states and localities treat REITs the same as they are treated for federal income tax purposes. Any federal, state or local taxes we pay will reduce our cash available for distribution to our stockholders. Moreover, as discussed above, our TRSs are generally subject to corporate income taxes and excise taxes in certain cases. Additionally, if we are not able to make
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sufficient distributions to eliminate our REIT taxable income, we may be subject to tax as a corporation on our undistributed REIT taxable income. We may also decide to retain income we earn from the sale or other dispositions of our properties and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability.
REIT annual distribution requirements may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our objectives and reduce our stockholders’ overall return.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to U.S. federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which dividends we pay with respect to any calendar year are less than the sum of (i) 85% of our ordinary income, (ii) 95% of our capital gain net income and (iii) 100% of our undistributed income from prior years.
Further, to maintain our qualification as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities, qualified real estate assets and stock of a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, qualified real estate assets and stock of a TRS) can consist of the securities of any one issuer, no more than 20% of the value of our total assets can be represented by securities of one or more TRSs and no more than 25% of the value of our total assets can be represented by certain debt securities of publicly offered REITs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences.
The foregoing requirements could cause us to distribute amounts that otherwise would be spent on deploying capital in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these dividends or make taxable stock dividends. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings, it is possible that we might not always be able to do so.
Non-U.S. stockholders may be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax upon the disposition of our shares.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of shares of our capital stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a “U.S. real property interest” (“USRPI”) under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). Shares of our capital stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by non-U.S. stockholders. We believe that we are a domestically-controlled qualified investment entity. However, because our capital stock is and will be freely transferable (other than restrictions on ownership and transfer that are intended to, among other purposes, assist us in maintaining our qualification as a REIT for federal income tax purposes as described in the risk factor “The share transfer and ownership restrictions applicable to REITs and contained in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities”), no assurance can be given that we are or will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges shares of our capital stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (i) the class of shares of capital stock sold or exchanged is “regularly traded,” as defined by applicable U.S. Treasury regulations, on an established securities market, and (ii) such non-U.S. stockholder owned, actually or constructively, 10% or less of the outstanding shares of such class of capital stock at all times during the shorter of the five-year period ending on the date of the sale and the period that such non-U.S. stockholder owned such shares. If the class of shares of capital stock sold or exchanged is not “regularly traded,” gain arising from such sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (A) on the date the shares were acquired by the non-U.S. stockholder, such shares did not have a fair market value greater than the fair market value on that date of 5% of the “regularly traded” class
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of our outstanding shares of capital stock with the lowest fair market value, and (B) the test in clause (A) is also satisfied as of the date of any subsequent acquisition by such non-U.S. stockholder of additional shares of the same non-“regularly traded” class of our capital stock, including all such shares owned as of such date by such non-U.S. stockholder. Complex constructive ownership rules apply for purposes of determining the amount of shares held by a non-U.S. stockholder for these purposes.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets or to offset certain other positions, if properly identified under applicable U.S. Treasury regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of one or both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS.
Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash flows.
We will be required to pay some state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially. If the property taxes we pay increase and if any such increase is not reimbursable under the terms of our lease, then our cash flows will be impacted, which in turn could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
REIT stockholders can receive taxable income without cash distributions.
Under certain circumstances, REITs are permitted to pay required dividends in shares of their stock rather than in cash. If we were to avail ourselves of that option, our stockholders could be required to pay taxes on such stock distributions without the benefit of cash distributions to pay the resulting taxes.
The share transfer and ownership restrictions applicable to REITs and contained in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to continue to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help ensure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and advisable to preserve our qualification as a REIT. Unless exempted by the Board of Directors, for as long as we continue to qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 6.25% (in value or in number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of capital stock and more than 6.25% (in value or in number of shares, whichever is more restrictive) of our Common Stock. The Board of Directors, in its sole discretion and upon receipt of certain representations and undertakings, may exempt a person (prospectively or retrospectively) from the ownership limits. However, the Board of Directors may not, among other limitations, grant an exemption from these ownership restrictions to any proposed transferee whose ownership, direct or indirect, in excess of the 6.25% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transfer and ownership will not apply, however, if the Board of Directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our capital stock or otherwise be in the best interest of our stockholders.
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Risks Related to Our Common Stock and Preferred Stock
There is no public market for our Series A Preferred Stock or Series D Preferred Stock, and we do not expect any such market to develop.
There is no public market for the Series A Preferred Stock or Series D Preferred Stock, and we currently have no plan to list any of these securities on a securities exchange or to include any of these shares for quotation on any national securities market. Additionally, our charter contains restrictions on the ownership and transfer of our securities, and these restrictions may inhibit your ability to sell the Series A Preferred Stock or Series D Preferred Stock promptly or at all. If you are able to sell shares of Series A Preferred Stock or Series D Preferred Stock, you may only be able to sell them at a substantial discount from the price you paid. Therefore, you should purchase the Series A Preferred Stock and Series D Preferred Stock only as a long term investment.
Neither the Series A Preferred Stock nor the Series D Preferred Stock has been rated.
We have not obtained, and currently do not intend to obtain, a rating for the Series A Preferred Stock or Series D Preferred Stock, and it is likely that neither the Series A Preferred Stock nor Series D Preferred Stock will ever be rated. No assurance can be given, however, that one or more rating agencies will not independently determine to issue such a rating or that that we will not elect in the future to obtain such a rating. Such a rating, if issued, may adversely affect the market price and or liquidity of the Series A Preferred Stock or Series D Preferred Stock. Ratings only reflect the views of the rating agency or agencies issuing the ratings and such ratings could be revised downward, placed on negative outlook or withdrawn entirely at the discretion of the issuing rating agency if, in its judgment, circumstances so warrant. While ratings do not reflect market prices or the suitability of a security for a particular investor, such downward revision or withdrawal of a rating could have an adverse effect on the market price and or liquidity of the Series A Preferred Stock or Series D Preferred Stock.
We may issue shares of our Common Stock at prices below the then-current NAV per share of our Common Stock, which could materially reduce our NAV per share of our Common Stock.
Any sale or other issuance of shares of our Common Stock by us at a price below the then-current NAV per share will result in an immediate reduction of our NAV per share. This reduction would occur as a result of a proportionately greater decrease in a stockholder’s interest in our earnings and assets than the increase in our assets resulting from such issuance. For example, if we issue a number of shares of Common Stock equal to 5% of our then-outstanding shares at a 2% discount from NAV, a holder of our Common Stock who does not participate in that offering to the extent of its proportionate interest in the Company will suffer NAV dilution of up to 0.1%, or $1 per $1,000 of NAV. As described in “Item 1. Business—Investment
Changes in market conditions could adversely affect the market prices of our Common Stock and Series L Preferred Stock.
The market value of our Common Stock and Series L Preferred Stock, as with other publicly traded equity securities, will depend on various market conditions, which may change from time to time. In addition to the economic environment and future volatility in the securities and credit markets in general, the market conditions described in the risk factor "We“We intend to rely in part on external sources of capital to fund future capital needs and, if we encounter difficulty in obtaining such capital, we may not be able to meet maturing obligations or make additional acquisitions"acquisitions” may affect the value of our Common Stock. In addition, increases in market interest rates may lead investors to demand a higher annual yield from our distributions in relation to the price of our securities.
The market value of our Common Stock is based, among other things, upon the market'smarket’s perception of our growth potential and our current and potential future earnings and cash dividends and our capital structure. Consequently, our Common Stock or our Series L Preferred Stock may trade at prices that are higher or lower than our NAV per share of Common Stock or the stated value of the Series L Preferred Stock of $28.37 (the "Series“Series L Preferred Stock Stated Value"Value”), subject to adjustment. If our future earnings or cash distributions are less than expected, the market prices of our Common Stock or Series L Preferred Stock could decline.
Further, increases in interest rates, which is widely expected to occur in 2022, may result in a decline in the market price of our Common Stock and Series L Preferred Stock. We believe that one of the factors that will influence the market price of our Common Stock or the Series L Preferred Stock will be the distribution yield on the Common Stock or the Series L Preferred Stock, as the case may be (as a percentage of the market price of our Common Stock or Series L Preferred Stock, as the case may be) relative to market interest rates.
An increase in market interest rates may lead potential purchasers of our Common Stock and Series L Preferred Stock to seek a higher annual dividend rate from other investments. Potential purchasers of our Common Stock or Series L Preferred Stock may expect a higher distribution rate on their investment. Higher market interest rates would not, however, result in more funds for us to pay distributions and, to the contrary, would likely increase our borrowing costs and potentially decrease funds
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available for distributions, and higher interest rates will not change the distribution rate on our Series L Preferred Stock. Thus, higher market interest rates could cause the market price of our Common Stock and Series L Preferred Stock to decline.
Our Common Stock ranks, with respect to dividends, junior to our Series A Preferred Stock, Series D Preferred Stock and, except to the extent of the Initial Dividend (as defined below), our Series L Preferred Stock.
The rights of the holders of shares of our Common Stock to receive dividends rank junior to those of the holders of shares of our Series A Preferred Stock, Series D Preferred Stock and, except to the extent of the Initial Dividend, the Series L Preferred Stock.
The “Initial Dividend” for a given fiscal year is a minimum annual amount of dividends on the Common Stock that is announced by us at the end of the prior fiscal year, provided that we are under no obligation to pay any portion of the Initial Dividend unless and until our Board of Directors authorizes and we declare any such dividend. While there are no limitations on the maximum amount of the Initial Dividend that can be paid in a particular year, it is our intention that we will not announce an Initial Dividend for any given year that, based on the information then reasonably available to us at the time of announcement, we believe will cause us to be unable to make a future distribution on our Series L Preferred Stock or on any other outstanding share of preferred stock.
On December 20, 2019, our Board of Directors29, 2021, we announced an Initial Dividend on shares of our Common Stock for fiscal year 20202022 in the aggregate amount of $4,380,644.70.$7,010,799. We must declare and pay dividends on our Common Stock equal to the Initial Dividend prior to declaring and paying any distributions on our Series L Preferred Stock.
Unless full cumulative dividends on shares of our Series A Preferred Stock and Series D Preferred Stock for all past dividend periods have been declared and paid (or set apart for payment), we will not declare or pay dividends with respect to any shares of our Common Stock for any period.
Our Common Stock ranks, with respect to rights upon liquidation, dissolution or winding up of the Company, junior to the Series A Preferred Stock, Series D Preferred Stock and, other than to a limited extent, the Series L Preferred Stock.
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of Preferred Stock are entitled to receive a liquidation preference equal to the applicable stated values of such shares, plus all accrued but unpaid dividends on such shares, prior and in preference to any distribution to the holders of shares of our Common Stock. The stated value of the Series A Preferred Stock is $25.00 per share, subject to adjustment (the “Series A Preferred Stock Stated Value”), the stated value of the Series D Preferred Stock is $25.00 per share, subject to adjustment (the “Series D Preferred Stock Stated Value”), and the Series L Preferred Stock Stated Value is $28.37, subject to adjustment. However, notwithstanding the foregoing, holders of our Common Stock are entitled to receive, prior to our payment to holders of Series L Preferred Stock of any accrued and unpaid distributions on the Series L Preferred Stock, an amount equal to the amount of any unpaid Initial Dividend.
Holders of our securities may be required to recognize taxable income in excess of any cash or other distributions received from us, and non-U.S. stockholders could be subject to withholding tax on such amounts.
The agreement governing our warrants to purchase 0.25 shares of Common Stock, subject to adjustment upon the occurrence of certain events specified in such agreement (“Series A Preferred Warrant AgreementWarrants”), provides that adjustments may be made to the exercise price or the number of shares of Common Stock issuable upon exercise of the Series A Preferred Warrants. In certain cases, such an adjustment could result in the recognition of a taxable dividend to holders of Common Stock, Series A Preferred Stock or Series A Preferred Warrants even if such holders do not receive any cash or other distribution from us.
The redemption price of shares of Preferred Stock may be paid, in our sole discretion in cash or in shares of Common Stock, which ranks junior to our Preferred Stock (other than to the Series L Preferred Stock to the extent of the Initial Dividend).
We have the right, at our option and in our sole discretion, to pay the redemption price of shares of Preferred Stock, whether redeemed at our option or at the option of a holder, in cash or in shares of Common Stock. The redemption price of shares of our Series A Preferred Stock and Series D Preferred Stock may be paid, in our sole discretion, in cash in U.S. dollars (“USD”) or in equal value through the issuance of shares of Common Stock, based on the volume‑weighted average price of our Common Stock for the 20 trading days prior to the redemption. The redemption price of shares of our Series L Preferred Stock may be paid, in our sole discretion, (1) in cash in ILS,Israeli New Shekels (“ILS”), at the then-current exchange rate determined in accordance with the Articles Supplementary defining the terms of the Series L Preferred Stock, (2) in equal value through the issuance of shares of Common Stock, with such value of Common Stock to be deemed the lower of (a) our NAV per share of our Common Stock as most recently published by the Company as of the effective date of redemption and (b) the volume-weighted average price of our Common Stock, determined in accordance with the Articles Supplementary defining the
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terms of the Series L Preferred
Stock, or (3) in a combination of cash, in ILS, and our Common Stock, based on the conversion mechanisms set forth in (a) and (b), respectively.
The rights of the holders of shares of our Common Stock as to distributions rank junior to the rights of the holders of shares of our Series A Preferred Stock, Series D Preferred Stock and, except to the extent of the Initial Dividend, our Series L Preferred Stock. Unless full cumulative dividends on shares of our Preferred Stock for all past dividend periods have been declared and paid (or set apart for payment), we will not declare or pay dividends with respect to any shares of our Common Stock for any period.
The rights of the holders of shares of our Common Stock upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company also rank junior to the rights of the holders of Series A Preferred Stock and Series D Preferred Stock and, to the extent of the Series L Preferred Stock Stated Value, holders of Series L Preferred Stock. However, holders of our Common Stock are entitled to receive a distribution equal to the aggregate amount of any unpaid Initial Dividend prior to our payment of any accrued and unpaid dividends on shares of Series L Preferred Stock.
We have the option to redeem shares of Preferred Stock under certain circumstances without the consent of their holders.
From and after the fifth anniversary of the date of original issuance of any share of our Preferred Stock, we have the right (but not the obligation) to redeem such share at a redemption price equal to 100% of the stated value of such share, plus any accrued but unpaid dividends in respect of such share as of the effective date of the redemption. However, if for any given quarter the conditions specified in the Articles Supplementary defining the terms of the Series L Preferred Stock are not met, or we are in arrears on dividends in respect of the Series L Preferred Stock, we will not be able to exercise our redemption right in respect of the Series L Preferred Stock.
We may suffer from delays in deploying capital, which could adversely affect our ability to pay distributions to our stockholders and the value of our securities.
We could suffer from delays in deploying capital, particularly if the capital we raise (including in our current equity offerings described in “Item 7—Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources and Uses of Funds”) outpaces our Operator’s ability to identify acquisitions and or close on them. Such delays, which may be caused by a number of factors, including competition in the market for the same real estate opportunities, may adversely affect our ability to pay distributions to our stockholders and or the value of their overall returns on investment in our securities.
The cash distributions received by holders of our Preferred Stock and Common Stock may be less frequent or lower in amount than expected by such holders.
Our Board of Directors will determine the amount and timing of distributions on our Preferred Stock and Common Stock. In making this determination, our Board of Directors will consider all relevant factors, including the amount of cash resources available for distributions, capital spending plans, cash flow, financial position, applicable requirements of the MGCL and any applicable contractual restrictions. We cannot assure you that we will be able to consistently generate sufficient available cash flow to fund distributions on our Preferred Stock and Common Stock, nor can we assure you that sufficient cash will be available to make distributions on our Preferred Stock and Common Stock (in each case, even to the extent of the Initial Dividend). While holders of Preferred Stock are entitled to receive, if, as and when authorized by our Board of Directors and declared by us out of legally available funds, cumulative cash dividends on each share of Preferred Stock at a specified rate, we cannot predict with certainty the timing of the payment of such distributions and we may be unable to pay or maintain such distributions over time.
Our ability to redeem shares of our Preferred Stock, or to pay distributions on our Preferred Stock and Common Stock, may be limited by Maryland law.
Under applicable Maryland law, a corporation may redeem, or pay distributions on, stock as long as, after giving effect to the redemption or distribution, the corporation is able to pay its debts as they become due in the usual course (the equity solvency test) and its total assets exceed the sum of its total liabilities plus, unless its charter permits otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of the redemption or distribution, to satisfy the preferential rights upon dissolution of stockholders when preferential rights on dissolution are superior to those whose stock is being redeemed or on which the distributions are being paid (the balance sheet solvency test). If the Company is insolvent at any time we are required to redeem any shares of our Preferred Stock, or at any time we are required to make a distribution on our Preferred Stock or Common Stock, the Company may not be able to effect such redemption or distribution.
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Holders of our securities are subject to inflation risk.
Inflation is the reduction in the purchasing power of money resulting from the increase in the price of goods and services. Inflation risk is the risk that the inflation-adjusted, or “real,” value of an investment in our Common Stock and Preferred Stock, or the income from that investment, will be worth less in the future. As discussed under “Inflation may adversely affect our Real Estate Operations,” the United States is currently experiencing a high level of inflation. As inflation occurs, the real value of our Common Stock and Preferred Stock and distributions payable on such shares may decline because the rate of distribution will remain the same.
Stock).
The transfer and ownership restrictions applicable to our securities may impair the ability of stockholders to receive shares of our Common Stock upon exercise of the Series A Preferred Warrants and, if the Company elects to pay the redemption price in shares of Common Stock, upon redemption of the Preferred Stock.
Our charter contains restrictions on ownership and transfer of the Preferred Stock and Common Stock that are intended to assist us in maintaining our qualification as a REIT for federal income tax purposes as described in the risk factor “The share transfer and ownership restrictions applicable to REITs and contained in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities."” Additionally, the Warrant Agreementagreement governing the Series A Preferred Warrants provides that such Series A Preferred Warrants may not be exercised to the extent such exercise would result in the holder'sholder’s beneficial or constructive ownership of more than 6.25%, in number or value, whichever is more restrictive, of our outstanding shares of Common Stock immediately after giving effect to the issuance of such shares. These restrictions may impair the ability of stockholders to receive shares of our Common Stock upon exercise of the Series A Preferred Warrants and, if the Company elects to pay the redemption price in shares of Common Stock, upon redemption of the Preferred Stock.
The terms of our Preferred Stock do not contain any financial covenants, other than, with respect to the Series L Preferred Stock, a limited restriction on our ability to issue shares of preferred stock.
Other than as described below, the terms of our Preferred Stock do not limit our ability to incur indebtedness or make distributions or contain any other restrictive financial covenants. The Preferred Stock ranks subordinate to all of our existing and future debt and liabilities. Our future debt agreements may restrict our ability to pay distributions to preferred stockholders or to redeem shares of preferred stock in the event of a default under such debt agreements or in other circumstances. In addition, (i) while the Series A Preferred Stock and Series D Preferred Stock rank senior to our Common Stock with respect to payment of dividends and distributions upon liquidation, dissolution or winding-up, we are allowed to pay dividends on our Common Stock so long as we are current in the payment of dividends on shares of our Series A Preferred Stock and Series D Preferred Stock, and (ii) while the Series L Preferred Stock ranks senior to our Common Stock with respect to payment of distributions, except to the extent of the Initial Dividend, and amounts payable upon our liquidation, dissolution or winding-up, to the extent of the Series L Preferred Stock Stated Value, we are allowed to pay dividends on our Common Stock so long as we are current in the payment of the dividends on shares of our Preferred Stock. Further, the terms of our Series A Preferred Stock and Series D Preferred Stock do not restrict our ability to repurchase shares of our Common Stock so long as we are current in the payment of dividends on shares of our Series A Preferred Stock and Series D Preferred Stock. Such dividends on or repurchases of our Common Stock may reduce the amount of cash on hand to pay the redemption price of our Series A Preferred Stock or Series D Preferred Stock in cash (if we so choose).
Until November 21, 2022, we are prohibited from issuing any shares of preferred stock ranking senior to or on parity with the Series L Preferred Stock with respect to the payment of dividends, other distributions, liquidation, and or dissolution or winding up of the Company unless the Series L Preferred Stock Minimum Fixed Charge Coverage Ratio, calculated in accordance with the Articles Supplementary describing the Series L Preferred Stock, is equal to or greater than 1.25:1.00. Our good faith determination of an applicable Series L Preferred Stock Minimum Fixed Charge Coverage Ratio is binding absent manifest error for purposes of this restriction. AtAs of December 31, 2019,2021, we were in compliance with the Series L Preferred Stock Minimum Fixed Charge Coverage Ratio. In order to maintain our compliance with the Minimum Fixed Charge Coverage Ratio, duringwe issued to the Operator 203,349 shares of Common Stock and 287,199 shares of Series A Preferred Stock, and to the Administrator 11,273 shares of Series A Preferred Stock, in lieu of cash management fees payable to such entities for fees related to the year ending December 31, 2020 and issued an aggregate of 270,209 shares of Series A Preferred stock as payment, in lieu of cash, for all asset management fees owed to the first and second quartersOperator in respect of 2020,fees incurred during the year ended December 31, 2021. It is likely that we will subjectpay the remainder of asset management fees owed to applicable laws and regulations under Nasdaq and the TASE and the agreement of the Operator with respect to the year ended December 31, 2021 in shares of Series A Preferred stock and or the Administrator, it is likely that we will seek to pay some or allpart of the asset management fees payable to the Base Service Fee and or reimbursements underOperator during the Master Services Agreement in respect of such quarteryear ended December 31, 2022 in shares of Common Stock. The Company may seek to do so for the third and fourth quartersSeries A Preferred Stock.
45
Holders of our Preferred Stock have no voting rights with respect to such shares.
The terms of our Preferred Stock do not entitle holders to voting rights. Our Common Stock is currently the only class of our capital stock that carries any voting rights. Unless and until a holder of our Preferred Stock acquires shares of Common Stock upon the redemption of such shares, such holder will have no rights with respect to the shares of our Common Stock issuable upon redemption of our Preferred Stock. If, at our discretion, a holder of our Preferred Stock is issued shares of our Common Stock upon redemption, such holder will be entitled to exercise the rights of holders of our Common Stock only as to matters for which the record date occurs after the effective date of redemption.
The ownership percentage in the Company of a holder may become diluted if we issue new shares of Common Stock or other securities, and issuances of additional preferred stock or other securities by us may further subordinate the rights of the holders of our Preferred Stock or Common Stock (which holders of Preferred Stock may become upon receipt of redemption payments in shares of Common Stock). Additionally, future issuances of Common Stock, including shares issued in exchange for consideration, upon redemption of Preferred Stock or upon exercise of any Series A Preferred Warrants, may cause the market price of our Common Stock to drop significantly, even if our business is doing well.
Our Board of Directors is authorized, without stockholder approval, to cause us to issue additional shares of Common Stock or to raise capital through the issuance of shares of preferred stock and equity or debt securities convertible into Common Stock, preferred stock, options, warrants and other rights, on such terms and for such consideration as our Board of Directors in its sole discretion may determine. Any such issuance could result in dilution of the equity of our stockholders. In addition, our Board of Directors may, in its sole discretion, authorize us to issue Common Stock or other equity or debt securities to persons from whom we purchase properties, as part or all of the purchase price of the property, or from whom we receive services (including the Operator or the Administrator), as part or all of the payment for such services. Our Board of Directors, in its sole discretion, may determine the price of any Common Stock or other equity or debt securities issued in consideration of such properties or services provided, or to be provided, to us.
We may make redemption payments under the terms of our Preferred Stock in shares of our Common Stock. Although the dollar amounts of such payments are unknown, the number of shares of our Common Stock to be issued in connection with such payments may fluctuate based on the price of our Common Stock. Any sales or perceived sales in the public market of shares of our Common Stock issuable upon such redemption payments could adversely affect prevailing market prices of shares of our Common Stock. The existence of our Preferred Stock may encourage short selling by market participants because the possibility that redemption payments will be made in shares of our Common Stock could depress the market price of shares of our Common Stock. Further, any such issuance could result in dilution of the equity of our stockholders.
Our charter also authorizes our Board of Directors, without stockholder approval, to classify or reclassify any unissued shares of Common Stock and preferred stock into other classes or series of stock and to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that are authorized by the charter to be issued. Our Board of Directors may, without stockholder approval, designate and issue one or more classes or series of preferred stock in addition to our Preferred Stock and equity or debt securities convertible into preferred stock and to set the voting powers, conversion or other rights, preferences, restrictions, limitations as to dividends or other distributions and qualifications or terms or conditions of redemption of each class or series of shares so issued. If any additional preferred stock is publicly offered, the terms and conditions of such preferred stock (or other equity or debt securities convertible into preferred stock) will be set forth in a registration statement registering the issuance of such preferred stock or equity or debt securities convertible into preferred stock. Because our Board of Directors has the power to establish the preferences and rights of each class or series of preferred stock, it may afford the holders of any class or series of preferred stock preferences, powers, and rights senior to the rights of holders of our Preferred Stock or Common Stock. If we ever create and issue additional preferred stock or equity or debt securities convertible into preferred stock with a distribution preference over our Preferred Stock or Common Stock, payment of any distribution preferences of such new outstanding preferred stock would reduce the amount of funds available for the payment of distributions on our Preferred Stock and Common Stock, as applicable. Further, holders of preferred stock are normally entitled to receive a preference payment if we liquidate, dissolve, or wind up before any payment is made to the holders of our Common Stock, likely reducing the amount the holders of our Common Stock would otherwise receive upon such an occurrence. In addition, under certain circumstances, the issuance of additional preferred stock may delay, prevent, render more difficult or tend to discourage, a merger, tender offer, or proxy contest, the assumption of control by a holder of a large block of our securities, or the removal of incumbent management.
No stockholders have rights to buy additional shares of stock or other securities if we issue new shares of stock or other securities. We may issue Common Stock, convertible debt or preferred stock pursuant to subsequent public offerings or private placements. Investors in our Common Stock who do not participate in any future stock issuances will experience dilution in the percentage of the issued and outstanding stock they own. In addition, depending on the terms and pricing of any
46
future offerings and the value of our assets, such investors may experience dilution in the book value and fair market value of, and the amount of distributions paid on, their shares of Common Stock, if any.
The listing of our Common Stock and Series L Preferred Stock on more than one stock exchange may result in price variations that could adversely affect liquidity of the market for our Common Stock and or Series L Preferred Stock.
Our Common Stock and Series L Preferred Stock are listed on Nasdaq and the TASE. The dual‑listing of our Common Stock and Series L Preferred Stock may result in price variations of our securities between the two exchanges due to a number of factors. First, trading in our securities on these markets takes place in different currencies (USD on Nasdaq and ILS on the TASE). In addition, the exchanges are open for trade at different times of the day and on different days. For example, Nasdaq opens generally during U.S. business hours, Monday through Friday, while the TASE opens generally during Israeli business hours, Sunday through Thursday. The two exchanges also observe different public holidays. Differences in the trading schedules, as well as volatility in the exchange rate of the two currencies, among other factors, may result in different trading prices for our Common Stock and Series L Preferred Stock on the two exchanges. Any decrease in the trading price of our Common Stock and Series L Preferred Stock in one market could cause a decrease in the trading price of such security on the other market.
The dual-listing may adversely affect liquidity and trading prices for our Common Stock and Series L Preferred Stock on one or both of the exchanges as a result of circumstances that may be outside of our control. For example, transfers by holders of our securities from trading on one exchange to the other could result in increases or decreases in liquidity and or trading prices on either or both of the exchanges. In addition, holders could seek to sell or buy our Series L Preferred Stock or Common Stock to take advantage of any price differences between the two markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both the prices of and volumes of our Series L Preferred Stock and Common Stock available for trading on either exchange.
The existing mechanism for the dual‑listing of securities on Nasdaq and the TASE may be eliminated or otherwise altered such that we may be subject to additional regulatory burden and additional costs.
The existing Israeli regulatory regime provides a mechanism for the dual‑listing of securities traded on Nasdaq and the TASE that does not impose any significant regulatory burden or significant costs on us. If this dual‑listing regime is eliminated or otherwise altered such that we are unable or unwilling to comply with the regulatory requirements, we may incur additional costs and we may consider delisting of our Series L Preferred Stock and or Common Stock from the TASE.
Our NAV is an estimate of the fair value of our properties and real estate-related assets and may not necessarily reflect realizable value.
The determination of estimated NAV involves a number of subjective assumptions, estimates and judgments that may not be accurate or complete. Neither the Financial Industry Regulatory Authority nor the SEC provides rules on the methodology we must use to determine our estimated NAV per share. We believe there is no established practice among public REITs for calculating estimated NAV. Different firms using different property-specific, general real estate, capital markets, economic and other assumptions, estimates and judgments could derive an estimated NAV that is significantly different from our estimated NAV.
Our estimated NAV, as determined by us from time to time, is calculated by relying in part on appraisals of our real estate assets and the assets of our lending segment. However, valuations of these assets do not necessarily represent the price at which a willing buyer would purchase such assets; therefore, there can be no assurance that we would realize the values underlying our estimated NAVs if we were to sell our assets and distribute the net proceeds to our stockholders. The values of our assets and liabilities, and therefore our NAV, are likely to fluctuate over time based on changes in value, investment activities, capital activities, indebtedness levels, and other various activities.
General Risk Factors
We may be unable to pay or maintain cash distributions or increase distributions to stockholders over time.
Several factors may affect the availability and timing of cash distributions to our stockholders. Distributions are based primarily on anticipated cash flow from operations over time. The amount of cash available for distributions is affected by many factors, including the performance of our existing assets, including the selection of tenants and the amount of rental income, our operating expense levels, opportunities for acquisition identified by our Operator, the availability of financing arrangements as well as many other variables. We may not always be in a position to pay distributions to our stockholders and the amount of any distributions we do make may not increase over time. In addition, our actual results may differ significantly from the assumptions used by our Board of Directors in establishing our distribution policy. There also is a risk that we may not have sufficient cash flow from operations to fund distributions required to qualify as a REIT or maintain our REIT status.
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We have paid, and may in the future pay, some or all of our distributions to stockholders from sources other than cash flow from operations, including borrowings, proceeds from asset sales or the sale of our securities, which may reduce the amount of capital we ultimately deploy in our real estate operations and may negatively impact the value of our Common Stock.
To the extent that cash flow from operations has been or is insufficient to fully cover our distributions to our stockholders, we have paid, and may in the future pay, some or all of our distributions from sources other than cash flow from operations. Such sources may include borrowings, proceeds from asset sales or the sale of our securities. We have no limits on the amounts we may use to pay distributions from sources other than cash flow from operations. The payment of distributions from sources other than cash provided by operating activities mayreduce the amount of proceeds available for acquisitions and operations or cause us to incur additional interest expense as a result of borrowed funds. This may negatively impact the market price of our Common Stock.
Distributions at any point in time may not reflect the current performance of our properties or our current operating cash flow.
We may make distributions from any source, including the sources described in the risk factor above. Because the amount we pay in distributions may exceed our earnings and our cash flow from operations, distributions may not reflect the current performance of our properties or our current operating cash flow.
Changes in accounting standards may adversely impact our financial condition and or results of operations.
We are subject to the rules and regulations of the U.S. Financial Accounting Standards Board (the “FASB”) related to generally accepted accounting principles in the United States (“GAAP”). Various changes to GAAP are constantly being considered, some of which could materially impact our reported financial condition and or results of operations. Also, to the extent publicly traded companies in the United States would be required in the future to prepare financial statements in accordance with International Financial Reporting Standards instead of the current GAAP, this change in accounting standards could materially affect our financial condition or results of operations.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
As of December 31, 2019,2021, our real estate portfolio consisted of 1114 assets, all of which were fee-simple properties. As of December 31, 2019,2021, our 911 office properties, (including one development site, which is being used as a parking lot), totaling approximately 1.3 million rentable square feet, were 86.7%77.7% occupied, our one development site being used as a parking lot and our one hotel with an ancillary parking garage, which has a total of 503 rooms, had RevPAR of $127.09$73.23 for the year ended December 31, 2019.
| Annualized | |||||||||||||||||||
| Rent Per | |||||||||||||||||||
| Rentable | Annualized | Occupied | |||||||||||||||||
| Square | % | % | Rent (2) | Square | |||||||||||||||
| Property | Market | Feet | Occupied | Leased (1) | (in thousands) | Foot | |||||||||||||
| 1 Kaiser Plaza | Oakland, CA | 540,175 | 96.6 | % | 96.6 | % | $ | 22,323 | $ | 42.78 | |||||||||
| 11620 Wilshire Boulevard | Los Angeles, CA | 195,357 | 92.6 | % | 94.0 | % | 8,007 | 44.26 | |||||||||||
| 3601 S Congress Avenue (3) | Austin, TX | 183,885 | 96.1 | % | 96.1 | % | 6,565 | 37.15 | |||||||||||
| 4750 Wilshire Boulevard | Los Angeles, CA | 141,310 | 21.5 | % | 21.5 | % | 1,456 | 47.92 | |||||||||||
| 9460 Wilshire Boulevard | Los Angeles, CA | 97,037 | 86.6 | % | 86.6 | % | 8,469 | 100.78 | |||||||||||
| 11600 Wilshire Boulevard | Los Angeles, CA | 56,697 | 92.9 | % | 92.9 | % | 2,885 | 54.77 | |||||||||||
| Lindblade Media Center (4) | Los Angeles, CA | 32,428 | 100.0 | % | 100.0 | % | 1,674 | 51.62 | |||||||||||
| 1130 Howard Street | San Francisco, CA | 21,194 | 100.0 | % | 100.0 | % | 1,614 | 76.15 | |||||||||||
| 2 Kaiser Plaza Parking Lot (5) | Oakland, CA | N/A | N/A | N/A | N/A | N/A | |||||||||||||
| Total Office | 1,268,083 | 86.7 | % | 87.0 | % | $ | 52,993 | $ | 48.18 | ||||||||||
2021.
Office Portfolio Detail by Property,Classification, Address, Market, and Submarket as of December 31, 20192021
| Annualized | |||||||||||||||||
| Rentable | Annualized | Rent Per | |||||||||||||||
| Square | % | % | Rent (2) | Occupied | |||||||||||||
| Location | Feet | Occupied | Leased (1) | (in thousands) | Square Foot | ||||||||||||
| Northern California | |||||||||||||||||
| Oakland, CA | |||||||||||||||||
| Lake Merritt | |||||||||||||||||
| 1 Kaiser Plaza | 540,175 | 96.6 | % | 96.6 | % | $ | 22,323 | $ | 42.78 | ||||||||
| 2 Kaiser Plaza Parking Lot (3) | N/A | N/A | N/A | N/A | N/A | ||||||||||||
| Total Lake Merritt | 540,175 | 96.6 | % | 96.6 | % | 22,323 | 42.78 | ||||||||||
| Total Oakland, CA | 540,175 | 96.6 | % | 96.6 | % | 22,323 | 42.78 | ||||||||||
| San Francisco, CA | |||||||||||||||||
| South of Market | |||||||||||||||||
| 1130 Howard Street | 21,194 | 100.0 | % | 100.0 | % | 1,614 | 76.15 | ||||||||||
| Total San Francisco, CA | 21,194 | 100.0 | % | 100.0 | % | 1,614 | 76.15 | ||||||||||
| Total Northern California | 561,369 | 96.7 | % | 96.7 | % | $ | 23,937 | $ | 44.10 | ||||||||
| Southern California | |||||||||||||||||
| Los Angeles, CA | |||||||||||||||||
| West Los Angeles | |||||||||||||||||
| 11620 Wilshire Boulevard | 195,357 | 92.6 | % | 94.0 | % | $ | 8,007 | $ | 44.26 | ||||||||
| 11600 Wilshire Boulevard | 56,697 | 92.9 | % | 92.9 | % | 2,885 | 54.77 | ||||||||||
| Lindblade Media Center (4) | 32,428 | 100.0 | % | 100.0 | % | 1,674 | 51.62 | ||||||||||
| Total West Los Angeles | 284,482 | 93.5 | % | 94.5 | % | 12,566 | 47.24 | ||||||||||
| Mid-Wilshire | |||||||||||||||||
| 4750 Wilshire Boulevard | 141,310 | 21.5 | % | 21.5 | % | 1,456 | 47.92 | ||||||||||
| Beverly Hills | |||||||||||||||||
| 9460 Wilshire Boulevard | 97,037 | 86.6 | % | 86.6 | % | 8,469 | 100.78 | ||||||||||
| Total Los Angeles, CA | 522,829 | 72.8 | % | 73.3 | % | 22,491 | 59.09 | ||||||||||
| Total Southern California | 522,829 | 72.8 | % | 73.3 | % | $ | 22,491 | $ | 59.09 | ||||||||
| Southwest | |||||||||||||||||
| Austin, TX | |||||||||||||||||
| South | |||||||||||||||||
| 3601 S Congress Avenue (5) | 183,885 | 96.1 | % | 96.1 | % | $ | 6,565 | $ | 37.15 | ||||||||
| Total Southwest | 183,885 | 96.1 | % | 96.1 | % | $ | 6,565 | $ | 37.15 | ||||||||
| Total Office | 1,268,083 | 86.7 | % | 87.0 | % | $ | 52,993 | $ | 48.18 | ||||||||
| Classification / Market / Address | Sub-Market | Rentable Square Feet | % Occupied | % Leased (1) | Annualized Rent (in thousands) | Annualized Rent Per Occupied Square Foot | ||||||||||||||||||||||||||||||||
| Stabilized Portfolio | ||||||||||||||||||||||||||||||||||||||
| Oakland, CA | ||||||||||||||||||||||||||||||||||||||
| 1 Kaiser Plaza | Lake Merritt | 537,811 | 86.5 | % | 86.5 | % | $ | 22,210 | $ | 47.75 | ||||||||||||||||||||||||||||
| San Francisco, CA | ||||||||||||||||||||||||||||||||||||||
| 1130 Howard Street | South of Market | 21,194 | 100.0 | % | 100.0 | % | 1,819 | 85.83 | ||||||||||||||||||||||||||||||
| Los Angeles, CA | ||||||||||||||||||||||||||||||||||||||
| 11620 Wilshire Boulevard | West Los Angeles | 196,227 | 80.3 | % | 80.3 | % | 7,813 | 49.61 | ||||||||||||||||||||||||||||||
| 11600 Wilshire Boulevard | West Los Angeles | 57,737 | 86.3 | % | 88.2 | % | 2,741 | 55.02 | ||||||||||||||||||||||||||||||
8944 Lindblade Street (3) | West Los Angeles | 7,980 | 100.0 | % | 100.0 | % | 525 | 65.79 | ||||||||||||||||||||||||||||||
8960 & 8966 Washington Boulevard (3) | West Los Angeles | 24,448 | 100.0 | % | 100.0 | % | 1,405 | 57.47 | ||||||||||||||||||||||||||||||
| 1037 N Sycamore Avenue | Hollywood | 4,900 | — | % | — | % | — | — | ||||||||||||||||||||||||||||||
| Austin, TX | ||||||||||||||||||||||||||||||||||||||
3601 S Congress Avenue (4) | South | 227,853 | 86.9 | % | 96.6 | % | 8,735 | 44.13 | ||||||||||||||||||||||||||||||
| 1021 E 7th Street | East | 11,180 | 100.0 | % | 100.0 | % | 563 | 50.36 | ||||||||||||||||||||||||||||||
| Total Stabilized Portfolio | 1,089,330 | 85.9 | % | 88.0 | % | 45,811 | 48.98 | |||||||||||||||||||||||||||||||
| Value Add Properties | ||||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | ||||||||||||||||||||||||||||||||||||||
| 4750 Wilshire Boulevard | Mid-Wilshire | 140,332 | 21.6 | % | 21.6 | % | 1,500 | 49.45 | ||||||||||||||||||||||||||||||
| 9460 Wilshire Boulevard | Beverly Hills | 97,745 | 67.2 | % | 72.6 | % | 6,900 | 105.06 | ||||||||||||||||||||||||||||||
| Total Value Add Properties | 238,077 | 40.3 | % | 42.5 | % | 8,400 | 87.55 | |||||||||||||||||||||||||||||||
| Development Pipeline Properties | ||||||||||||||||||||||||||||||||||||||
| Oakland, CA | ||||||||||||||||||||||||||||||||||||||
2 Kaiser Plaza (2) | Lake Merritt | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| Total Development Pipeline Properties | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Total Office Portfolio | 1,327,407 | 77.7 | % | 79.9 | % | $ | 54,211 | $ | 52.57 | |||||||||||||||||||||||||||||
(1)Based on leases signed as of December 31, 2021.
(2)2 Kaiser Plaza Parking Lot is a 44,642 square foot parcel of land currently being used as a surface parking lot. We are entitled to develop an office building with a maximum of 800,000 rentable square feet. Alternatively, we are also evaluating a multifamily development, which can be constructed by right.
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(3)The three buildings making up 8960 & 8966 Washington Boulevard and 8944 Lindblade Street were formerly known as Lindblade Media Center.
(4)3601 S Congress Avenue consists of twelve buildings.
Hotel Portfolio Summary as of December 31, 20192021
| Revenue Per | Revenue Per | |||||||||||||||||||||||||||||||||||||
| % | Available | % | Available | |||||||||||||||||||||||||||||||||||
| Property | Market | Rooms | Occupied (1) | Room (2) | Property | Market | Rooms | Occupied (1) | Room | |||||||||||||||||||||||||||||
| Sheraton Grand Hotel (3) | Sacramento, CA | 503 | 78.2 | % | $ | 127.09 | ||||||||||||||||||||||||||||||||
Sheraton Grand Hotel (2) | Sheraton Grand Hotel (2) | Sacramento, CA | 503 | 53.6 | % | $ | 73.23 | |||||||||||||||||||||||||||||||
| Total Hotel (1 Property) | 503 | 78.2 | % | $ | 127.09 | Total Hotel (1 Property) | 503 | 53.6 | % | $ | 73.23 | |||||||||||||||||||||||||||
Other Ancillary Property within Hotel Portfolio
| Rentable | Annualized | ||||||||||||||
| Square | % | % | Rent (Parking | ||||||||||||
| Feet | Occupied | Leased | and Retail) (5) | ||||||||||||
| Property | Market | (Retail) | (Retail) | (Retail) (4) | (in thousands) | ||||||||||
Sheraton Grand Hotel Parking Garage & Retail (6) | Sacramento, CA | 9,453 | 100.0 | % | 100.0 | % | $ | 2,976 | |||||||
| Total Ancillary Hotel (1 Property) | 9,453 | 100.0 | % | 100.0 | % | $ | 2,976 | ||||||||
| Rentable | Annualized | |||||||||||||||||||||||||||||||
| Square | % | % | Rent (Parking | |||||||||||||||||||||||||||||
| Feet | Occupied | Leased | and Retail) | |||||||||||||||||||||||||||||
| Property | Market | (Retail) | (Retail) | (Retail) (3) | (in thousands) | |||||||||||||||||||||||||||
| Sheraton Grand Hotel Parking Garage & Retail | Sacramento, CA | 9,453 | 100.0 | % | 100.0 | % | $ | 625 | ||||||||||||||||||||||||
| Total Ancillary Property (1 Property) | 9,453 | 100.0 | % | 100.0 | % | $ | 625 | |||||||||||||||||||||||||
(1)Represents trailing 12-month occupancy |
| Credit | |||||||||||||||||||
| Rating | % of | ||||||||||||||||||
| (S&P / | Annualized | % of | Rentable | Rentable | |||||||||||||||
| Moody's / | Lease | Rent (1) | Annualized | Square | Square | ||||||||||||||
| Tenant | Property | Fitch) | Expiration | (in thousands) | Rent | Feet | Feet | ||||||||||||
| Kaiser Foundation Health Plan, Inc. | 1 Kaiser Plaza | AA- / - / AA- | 2025 - 2027 (2) | $ | 15,536 | 29.3 | % | 373,938 | 29.5 | % | |||||||||
| MUFG Union Bank, N.A. | 9460 Wilshire Boulevard | A / Aa2 / A | 2029 | 3,482 | 6.6 | % | 27,569 | 2.2 | % | ||||||||||
| 3 Arts Entertainment, Inc. | 9460 Wilshire Boulevard | - / - / - | 2026 | 2,094 | 4.0 | % | 27,112 | 2.1 | % | ||||||||||
| CIM Group, L.P. | Various | - / - / - | 2020-2030 | 1,857 | 3.5 | % | 42,765 | 3.4 | % | ||||||||||
| Homeaway, Inc. | 3601 S Congress Avenue | - / - / - | 2020 | 1,641 | 3.1 | % | 42,545 | 3.4 | % | ||||||||||
| Total for Top Five Tenants | 24,610 | 46.5 | % | 513,929 | 40.6 | % | |||||||||||||
| All Other Tenants | 28,383 | 53.5 | % | 585,878 | 46.1 | % | |||||||||||||
| Vacant | — | — | % | 168,276 | 13.3 | % | |||||||||||||
| Total Office | $ | 52,993 | 100.0 | % | 1,268,083 | 100.0 | % | ||||||||||||
| Annualized | % of | Rentable | |||||||||||
| Rent (1) | Annualized | Square | % of Rentable | ||||||||||
| NAICS Code | (in thousands) | Rent | Feet | Square Feet | |||||||||
| Health Care and Social Assistance | $ | 20,994 | 39.6 | % | 481,036 | 37.9 | % | ||||||
| Professional, Scientific, and Technical Services | 9,926 | 18.7 | % | 210,798 | 16.6 | % | |||||||
| Finance and Insurance | 5,574 | 10.5 | % | 60,648 | 4.8 | % | |||||||
| Real Estate and Rental and Leasing | 5,491 | 10.4 | % | 111,565 | 8.8 | % | |||||||
| Arts, Entertainment, and Recreation | 2,998 | 5.7 | % | 45,610 | 3.6 | % | |||||||
| Accommodation and Food Services | 1,926 | 3.6 | % | 47,139 | 3.7 | % | |||||||
| Public Administration | 1,115 | 2.1 | % | 26,378 | 2.1 | % | |||||||
| Information | 1,027 | 1.9 | % | 17,003 | 1.3 | % | |||||||
| Manufacturing | 973 | 1.8 | % | 31,363 | 2.5 | % | |||||||
| Retail Trade | 584 | 1.1 | % | 16,552 | 1.3 | % | |||||||
| Administrative and Support and Waste Management and Remediation Services | 524 | 1.0 | % | 10,590 | 0.8 | % | |||||||
| Other Services (except Public Administration) | 424 | 0.8 | % | 7,774 | 0.6 | % | |||||||
| Management of Companies and Enterprises | 416 | 0.8 | % | 9,671 | 0.8 | % | |||||||
| Agriculture, Forestry, Fishing and Hunting | 409 | 0.8 | % | 9,082 | 0.7 | % | |||||||
| Wholesale Trade | 215 | 0.4 | % | 4,938 | 0.4 | % | |||||||
| Educational Services | 203 | 0.4 | % | 5,155 | 0.4 | % | |||||||
| Construction | 194 | 0.4 | % | 4,505 | 0.4 | % | |||||||
| Vacant | — | — | % | 168,276 | 13.3 | % | |||||||
| Total Office | $ | 52,993 | 100.0 | % | 1,268,083 | 100.0 | % | ||||||
| Square Feet | % of Square | Annualized | % of Annualized | Annualized Rent | |||||||||||||
| Year of Lease | of Expiring | Feet | Rent (1) | Rent | Per Occupied | ||||||||||||
| Expiration | Leases | Expiring | (in thousands) | Expiring | Square Foot | ||||||||||||
| 2020 (2) | 172,029 | 15.5 | % | $ | 7,460 | 14.2 | % | $ | 43.36 | ||||||||
| 2021 | 81,025 | 7.4 | % | 4,417 | 8.3 | % | 54.51 | ||||||||||
| 2022 | 137,107 | 12.5 | % | 5,965 | 11.3 | % | 43.51 | ||||||||||
| 2023 | 68,130 | 6.2 | % | 3,155 | 6.0 | % | 46.31 | ||||||||||
| 2024 | 42,693 | 3.9 | % | 2,022 | 3.8 | % | 47.36 | ||||||||||
| 2025 | 385,116 | 35.0 | % | 16,963 | 32.0 | % | 44.05 | ||||||||||
| 2026 | 46,685 | 4.2 | % | 2,911 | 5.5 | % | 62.35 | ||||||||||
| 2027 | 91,010 | 8.3 | % | 4,104 | 7.7 | % | 45.09 | ||||||||||
| 2028 | 15,335 | 1.4 | % | 911 | 1.7 | % | 59.41 | ||||||||||
| 2029 | 30,342 | 2.8 | % | 3,629 | 6.8 | % | 119.60 | ||||||||||
| Thereafter | 30,335 | 2.8 | % | 1,456 | 2.7 | % | 48.00 | ||||||||||
| Total Occupied | 1,099,807 | 100.0 | % | $ | 52,993 | 100.0 | % | $ | 48.18 | ||||||||
| Vacant | 168,276 | ||||||||||||||||
| Total Office | 1,268,083 | ||||||||||||||||
| December 31, | ||||||||||||||||||
| 2019 | ||||||||||||||||||
| Rentable | Occupancy Rates (1) | |||||||||||||||||
| Property | Square Feet | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||
| 1 Kaiser Plaza | 540,175 | 96.7 | % | 96.4 | % | 93.4 | % | 93.5 | % | 96.6 | % | |||||||
| 11620 Wilshire Boulevard | 195,357 | 91.5 | % | 93.0 | % | 98.6 | % | 94.1 | % | 92.6 | % | |||||||
| 3601 S Congress Avenue (2) | 183,885 | 97.4 | % | 94.0 | % | 92.2 | % | 94.7 | % | 96.1 | % | |||||||
| 4750 Wilshire Boulevard | 141,310 | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 21.5 | % | |||||||
| 9460 Wilshire Boulevard (3) | 97,037 | N/A | N/A | N/A | 94.9% | 86.6 | % | |||||||||||
| 11600 Wilshire Boulevard | 56,697 | 84.7 | % | 80.0 | % | 87.6 | % | 90.4 | % | 92.9 | % | |||||||
| Lindblade Media Center (4) | 32,428 | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||
| 1130 Howard Street (5) | 21,194 | N/A | N/A | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
| 2 Kaiser Plaza Parking Lot (6) | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||
| Current Office Weighted Average | 1,268,083 | 95.9 | % | 95.2 | % | 94.9 | % | 94.7 | % | 86.7 | % | |||||||
| 211 Main Street (7) | N/A | 100.0 | % | 100.0 | % | N/A | N/A | N/A | ||||||||||
| 200 S College Street (7) | N/A | 66.9 | % | 90.1 | % | N/A | N/A | N/A | ||||||||||
| 980 9th Street (7) | N/A | 64.0 | % | 66.6 | % | N/A | N/A | N/A | ||||||||||
| 1010 8th Street Parking Garage & Retail (7) | N/A | 9.6 | % | 10.7 | % | N/A | N/A | N/A | ||||||||||
| 800 N Capitol Street (7) | N/A | 76.1 | % | 76.1 | % | N/A | N/A | N/A | ||||||||||
| 7083 Hollywood Boulevard (7) | N/A | 97.3 | % | 97.3 | % | N/A | N/A | N/A | ||||||||||
| 370 L'Enfant Promenade (7) | N/A | 87.7 | % | 39.1 | % | N/A | N/A | N/A | ||||||||||
| 1901 Harrison Street (7) | N/A | 98.2 | % | 97.5 | % | 91.8 | % | 81.1 | % | N/A | ||||||||
| 2100 Franklin Street (7) | N/A | 96.7 | % | 98.5 | % | 98.9 | % | 98.9 | % | N/A | ||||||||
| 2101 Webster Street (7) | N/A | 98.9 | % | 98.9 | % | 99.3 | % | 96.2 | % | N/A | ||||||||
| 2353 Webster Street Parking Garage (7) | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||
| 830 1st Street (7) | N/A | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | N/A | ||||||||
| 260 Townsend Street (7) | N/A | 89.7 | % | 78.8 | % | 100.0 | % | 100.0 | % | N/A | ||||||||
| 1333 Broadway (7) | N/A | 92.9 | % | 92.9 | % | 96.7 | % | 92.8 | % | N/A | ||||||||
| 899 N Capitol Street (7) | N/A | 73.7 | % | 74.1 | % | 86.1 | % | 86.1 | % | N/A | ||||||||
| 901 N Capitol Street (7) | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||
| 999 N Capitol Street (7) | N/A | 84.0 | % | 84.0 | % | 83.2 | % | 90.1 | % | N/A | ||||||||
| Total Weighted Average | 1,268,083 | 86.9 | % | 85.7 | % | 94.2 | % | 93.2 | % | 86.7 | % | |||||||
| December 31, | |||||||||||||||||||||||
| 2019 | |||||||||||||||||||||||
| Rentable | Annualized Rent Per Occupied Square Foot (1) | ||||||||||||||||||||||
| Property | Square Feet | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||
| 1 Kaiser Plaza | 540,175 | $ | 34.24 | $ | 37.13 | $ | 39.26 | $ | 41.77 | $ | 42.78 | ||||||||||||
| 11620 Wilshire Boulevard | 195,357 | 35.07 | 38.55 | 39.28 | 41.23 | 44.26 | |||||||||||||||||
| 3601 S Congress Avenue (2) | 183,885 | 30.21 | 31.84 | 33.65 | 35.66 | 37.15 | |||||||||||||||||
| 4750 Wilshire Boulevard | 141,310 | 25.03 | 25.71 | 26.17 | 26.92 | 47.92 | |||||||||||||||||
| 9460 Wilshire Boulevard (3) | 97,037 | N/A | N/A | N/A | 93.78 | 100.78 | |||||||||||||||||
| 11600 Wilshire Boulevard | 56,697 | 49.23 | 50.62 | 50.86 | 52.43 | 54.77 | |||||||||||||||||
| Lindblade Media Center (4) | 32,428 | 39.88 | 41.60 | 43.27 | 44.59 | 51.62 | |||||||||||||||||
| 1130 Howard Street (5) | 21,194 | N/A | N/A | 67.90 | 70.26 | 76.15 | |||||||||||||||||
| 2 Kaiser Plaza Parking Lot (6) | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||
| Current Office Weighted Average | 1,268,083 | $ | 33.32 | $ | 35.70 | $ | 37.88 | $ | 43.92 | $ | 48.18 | ||||||||||||
| 211 Main Street (7) | N/A | 28.81 | 28.80 | N/A | N/A | N/A | |||||||||||||||||
| 200 S College Street (7) | N/A | 23.33 | 23.60 | N/A | N/A | N/A | |||||||||||||||||
| 980 9th Street (7) | N/A | 29.69 | 30.23 | N/A | N/A | N/A | |||||||||||||||||
| 1010 8th Street Parking Garage & Retail (7) | N/A | 6.63 | 7.07 | N/A | N/A | N/A | |||||||||||||||||
| 800 N Capitol Street (7) | N/A | 45.36 | 45.02 | N/A | N/A | N/A | |||||||||||||||||
| 7083 Hollywood Boulevard (7) | N/A | 38.35 | 38.45 | N/A | N/A | N/A | |||||||||||||||||
| 370 L'Enfant Promenade (7) | N/A | 51.94 | 55.80 | N/A | N/A | N/A | |||||||||||||||||
| 1901 Harrison Street (7) | N/A | 34.02 | 35.49 | 36.99 | 45.39 | N/A | |||||||||||||||||
| 2100 Franklin Street (7) | N/A | 37.65 | 38.44 | 39.50 | 42.18 | N/A | |||||||||||||||||
| 2101 Webster Street (7) | N/A | 36.76 | 37.64 | 38.75 | 41.12 | N/A | |||||||||||||||||
| 2353 Webster Street Parking Garage (7) | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||
| 830 1st Street (7) | N/A | 42.53 | 43.90 | 43.60 | 47.09 | N/A | |||||||||||||||||
| 260 Townsend Street (7) | N/A | 64.92 | 68.97 | 70.80 | 74.32 | N/A | |||||||||||||||||
| 1333 Broadway (7) | N/A | 31.07 | 33.12 | 35.76 | 40.38 | N/A | |||||||||||||||||
| 899 N Capitol Street (7) | N/A | 50.44 | 49.49 | 51.99 | 52.90 | N/A | |||||||||||||||||
| 901 N Capitol Street (7) | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||
| 999 N Capitol Street (7) | N/A | 44.82 | 45.19 | 46.45 | 47.56 | N/A | |||||||||||||||||
| Total Weighted Average | 1,268,083 | $ | 36.75 | $ | 36.79 | $ | 41.00 | $ | 45.21 | $ | 48.18 | ||||||||||||
| Occupancy Rates (2) | |||||||||||||||
| Property (1) | Units | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||
| 4649 Cole Avenue (3) | 334 | 93.1 | % | 94.3 | % | N/A | N/A | N/A | |||||||
| 4200 Scotland Street | 308 | 91.2 | % | 93.2 | % | N/A | N/A | N/A | |||||||
| 47 E 34th Street | 110 | 89.1 | % | 85.5 | % | N/A | N/A | N/A | |||||||
| 3636 McKinney Avenue | 103 | 94.2 | % | 92.2 | % | N/A | N/A | N/A | |||||||
| 3839 McKinney Avenue (4) | 75 | 96.0 | % | 86.7 | % | N/A | N/A | N/A | |||||||
| Total Weighted Average | 930 | 92.4 | % | 92.0 | % | N/A | N/A | N/A | |||||||
| Monthly Rent Per Occupied Unit (2) | |||||||||||||||||
| Property (1) | Units | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||
| 4649 Cole Avenue (3) | 334 | $ | 1,404 | $ | 1,439 | N/A | N/A | N/A | |||||||||
| 4200 Scotland Street | 308 | 1,768 | 1,661 | N/A | N/A | N/A | |||||||||||
| 47 E 34th Street | 110 | 4,642 | 4,947 | N/A | N/A | N/A | |||||||||||
| 3636 McKinney Avenue | 103 | 1,696 | 1,735 | N/A | N/A | N/A | |||||||||||
| 3839 McKinney Avenue (4) | 75 | 1,597 | 1,661 | N/A | N/A | N/A | |||||||||||
| Total Weighted Average | 930 | $ | 1,942 | $ | 1,948 | N/A | N/A | N/A | |||||||||
| Occupancy (%) (1) | ||||||||||||||||||||
| Hotel Location | Franchise | Rooms | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||
| Sacramento, CA | Sheraton | 503 | 77.5 | % | 78.1 | % | 81.5 | % | 80.1 | % | 78.2 | % | ||||||||
| Los Angeles, CA (2) | Holiday Inn | 405 | 87.9 | % | 81.1 | % | N/A | N/A | N/A | |||||||||||
| Oakland, CA (3) | Courtyard | 162 | 81.9 | % | 74.3 | % | N/A | N/A | N/A | |||||||||||
| Weighted Average | 1,070 | 82.1 | % | 78.9 | % | 81.5 | % | 80.1 | % | 78.2 | % | |||||||||
| Average Daily Rate (Price) Per Room/Suite ($) (1) | |||||||||||||||||||||||||
| Hotel Location | Franchise | Rooms | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||
| Sacramento, CA | Sheraton | 503 | $ | 148.24 | $ | 152.89 | $ | 157.64 | $ | 161.95 | $ | 162.54 | |||||||||||||
| Los Angeles, CA (2) | Holiday Inn | 405 | 100.46 | 123.24 | N/A | N/A | N/A | ||||||||||||||||||
| Oakland, CA (3) | Courtyard | 162 | 173.05 | 169.58 | N/A | N/A | N/A | ||||||||||||||||||
| Weighted Average | 1,070 | $ | 132.61 | $ | 144.06 | $ | 157.64 | $ | 161.95 | $ | 162.54 | ||||||||||||||
| Revenue Per Available Room/Suite ($) (1) | |||||||||||||||||||||||||
| Hotel Location | Franchise | Rooms | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||
| Sacramento, CA | Sheraton | 503 | $ | 114.83 | $ | 119.44 | $ | 128.43 | $ | 129.73 | $ | 127.09 | |||||||||||||
| Los Angeles, CA (2) | Holiday Inn | 405 | 88.35 | 99.98 | N/A | N/A | N/A | ||||||||||||||||||
| Oakland, CA (3) | Courtyard | 162 | 141.72 | 126.00 | N/A | N/A | N/A | ||||||||||||||||||
| Weighted Average | 1,070 | $ | 108.88 | $ | 113.73 | $ | 128.43 | $ | 129.73 | $ | 127.09 | ||||||||||||||
| Outstanding | Balance Due | |||||||||||||
| Principal | At Maturity | |||||||||||||
| Balance | Interest | Maturity | Date | Prepayment/ | ||||||||||
| Property | (in thousands) | Rate | Date | (in thousands) | Defeasance | |||||||||
| 1 Kaiser Plaza | $ | 97,100 | 4.14% | 7/1/2026 | $ | 97,100 | (1) | |||||||
| Total/Weighted Average | $ | 97,100 | 4.14% | $ | 97,100 | |||||||||
| Tenant | NAICS Code | Lease Expiration | Annualized Rent (1) (in thousands) | % of Annualized Rent | Rentable Square Feet | % of Occupied Square Feet | Renewal Option | ||||||||||||
| Kaiser Foundation Health Plan, Inc. | Health Care and Social Assistance | 2025-2027 (3) (4) | $ | 15,536 | 69.6 | % | 373,938 | 71.7 | % | Yes (2) | |||||||||
| Total | $ | 15,536 | 69.6 | % | 373,938 | 71.7 | % | ||||||||||||
| Year of Lease Expiration | Square Feet of Expiring Leases | % of Square Feet Expiring | Annualized Rent (1) (in thousands) | % of Annualized Rent Expiring | Annualized Rent Per Occupied Square Foot | ||||||||||||
| 2020 (2) | 54,969 | 10.6 | % | $ | 1,984 | 8.9 | % | $ | 36.09 | ||||||||
| 2021 | 40,548 | 7.8 | % | 2,033 | 9.1 | % | 50.14 | ||||||||||
| 2022 | 19,450 | 3.7 | % | 956 | 4.3 | % | 49.15 | ||||||||||
| 2023 | 27,673 | 5.3 | % | 1,346 | 6.0 | % | 48.64 | ||||||||||
| 2024 | 2,842 | 0.5 | % | 173 | 0.8 | % | 60.87 | ||||||||||
| 2025 | 292,436 | 56.1 | % | 12,117 | 54.3 | % | 41.43 | ||||||||||
| 2026 | — | — | — | — | — | ||||||||||||
| 2027 | 83,696 | 16.0 | % | 3,714 | 16.6 | % | 44.37 | ||||||||||
| 2028 | — | — | — | — | — | ||||||||||||
| 2029 | — | — | — | — | — | ||||||||||||
| Thereafter | — | — | — | — | — | ||||||||||||
| Total Occupied | 521,614 | 100.0 | % | $ | 22,323 | 100.0 | % | $ | 42.78 | ||||||||
| Vacant | 18,561 | ||||||||||||||||
| Total | 540,175 | ||||||||||||||||
| Tenant | NAICS Code | Lease Expiration | Annualized Rent (1) (in thousands) | % of Annualized Rent | Rentable Square Feet | % of Occupied Square Feet | Renewal Option | ||||||||||||
| MUFG Union Bank, N.A. | Finance and Insurance | 2029 | $ | 3,482 | 41.1 | % | 27,569 | 32.8 | % | Yes | |||||||||
| 3 Arts Entertainment, Inc. | Arts, Entertainment, and Recreation | 2026 (2) | 2,094 | (2) | 24.7 | % | 27,112 | (2) | 32.3 | % | Yes | ||||||||
| Teles Properties, Inc. | Real Estate and Rental and Leasing | 2020 | 1,259 | 14.9 | % | 12,712 | 15.1 | % | Yes | ||||||||||
| StockCross Financial Services, Inc. | Finance and Insurance | 2021 | 1,004 | 11.9 | % | 8,685 | 10.3 | % | No | ||||||||||
| Total | $ | 7,839 | 92.6 | % | 76,078 | 90.5 | % | ||||||||||||
| Year of Lease Expiration | Square Feet of Expiring Leases | % of Square Feet Expiring | Annualized Rent (1) (in thousands) | % of Annualized Rent Expiring | Annualized Rent Per Occupied Square Foot | ||||||||||||
| 2020 (2) | 14,587 | 17.4 | % | $ | 1,388 | 16.4 | % | $ | 95.15 | ||||||||
| 2021 | 11,278 | 13.4 | % | 1,189 | 14.0 | % | 105.43 | ||||||||||
| 2022 | 3,786 | 4.5 | % | 330 | 3.9 | % | 87.16 | ||||||||||
| 2023 | — | — | — | — | — | ||||||||||||
| 2024 | — | — | — | — | — | ||||||||||||
| 2025 | — | — | — | — | — | ||||||||||||
| 2026 | 26,812 | 31.9 | % | 2,080 | 24.6 | % | 77.58 | ||||||||||
| 2027 | — | — | — | — | — | ||||||||||||
| 2028 | — | — | — | — | — | ||||||||||||
| 2029 | 27,569 | 32.8 | % | 3,482 | 41.1 | % | 126.30 | ||||||||||
| Thereafter | — | — | — | — | — | ||||||||||||
| Total Occupied | 84,032 | 100.0 | % | $ | 8,469 | 100.0 | % | $ | 100.78 | ||||||||
| Vacant | 13,005 | ||||||||||||||||
| Total | 97,037 | ||||||||||||||||
Sheraton Grand Hotel
(3)Based on May 2, 2008, and the seller retained a non-controlling interest of less than 0.5% in the property. The Company hasleases commenced renovations of the Sheraton Grand Hotel, which will renovate guest rooms, food and beverage amenities, public areas, meeting rooms and other amenities. The renovations are expected to cost approximately $26,300,000, which the Company expects to finance using cash flows from operations, borrowings under the Company’s revolving credit facility and or proceeds from offerings of shares of Common Stock, preferred stock, senior unsecured securities, or other equity and debt securities. Asas of December 31, 2019,2021.
Office Portfolio—Top 5 Tenantsby Annualized Rental Revenueas of December 31, 2021
| Credit | ||||||||||||||||||||||||||||||||||||||||||||
| Rating | % of | |||||||||||||||||||||||||||||||||||||||||||
| (S&P / | Annualized | % of | Rentable | Rentable | ||||||||||||||||||||||||||||||||||||||||
| Moody’s / | Lease | Rent | Annualized | Square | Square | |||||||||||||||||||||||||||||||||||||||
| Tenant | Property | Fitch) | Expiration | (in thousands) | Rent | Feet | Feet | |||||||||||||||||||||||||||||||||||||
| Kaiser Foundation Health Plan, Inc. | 1 Kaiser Plaza | AA- / - / AA- | 2025 - 2027(1) | $ | 16,729 | 30.9 | % | 366,777 | 27.6 | % | ||||||||||||||||||||||||||||||||||
| MUFG Union Bank, N.A. | 9460 Wilshire Boulevard | A / Aa3 / A | 2029 | 3,755 | 6.9 | % | 27,569 | 2.1 | % | |||||||||||||||||||||||||||||||||||
| F45 Training Holdings, Inc. | 3601 S Congress Avenue | - / - / - | 2030 | 2,279 | 4.2 | % | 44,171 | 3.3 | % | |||||||||||||||||||||||||||||||||||
| 3 Arts Entertainment, Inc. | 9460 Wilshire Boulevard | - / - / - | 2026 | 2,274 | 4.2 | % | 27,112 | 2.0 | % | |||||||||||||||||||||||||||||||||||
| Westwood One, Inc. | Lindblade Media Center | - / - / - | 2025 | 1,930 | 3.6 | % | 32,428 | 2.4 | % | |||||||||||||||||||||||||||||||||||
| Total for Top Five Tenants | 26,967 | 49.8 | % | 498,057 | 37.4 | % | ||||||||||||||||||||||||||||||||||||||
| All Other Tenants | 27,244 | 50.2 | % | 533,186 | 40.3 | % | ||||||||||||||||||||||||||||||||||||||
| Vacant | — | — | % | 296,164 | 22.3 | % | ||||||||||||||||||||||||||||||||||||||
| Total Office Portfolio | $ | 54,211 | 100.0 | % | 1,327,407 | 100.0 | % | |||||||||||||||||||||||||||||||||||||
(1)From and after February 28, 2023 with respect to the Company had incurred costsrentable 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 $2,423,000its lease with us, effective as of any date specified by the tenant in a written notice given to us at least 15 months prior to the termination, in each case in exchange for a termination penalty. The amount of such termination penalties is dependent on a variety of factors, including but not limited
50
to the renovation.date of the termination notice, the amount of the square feet to be terminated and the location within the building of the space to be terminated.
Office Portfolio—Diversificationby Industry as of December 31, 2021
| Annualized | % of | Rentable | ||||||||||||||||||||||||
| Rent | Annualized | Square | % of Rentable | |||||||||||||||||||||||
| Industry | (in thousands) | Rent | Feet | Square Feet | ||||||||||||||||||||||
| Health Care and Social Assistance | $ | 22,341 | 41.3 | % | 465,747 | 35.0 | % | |||||||||||||||||||
| Professional, Scientific, and Technical Services | 9,566 | 17.6 | % | 173,462 | 13.1 | % | ||||||||||||||||||||
| Arts, Entertainment, and Recreation | 5,430 | 10.0 | % | 89,902 | 6.8 | % | ||||||||||||||||||||
| Finance and Insurance | 4,720 | 8.7 | % | 45,974 | 3.5 | % | ||||||||||||||||||||
| Real Estate and Rental and Leasing | 4,386 | 8.1 | % | 90,312 | 6.8 | % | ||||||||||||||||||||
| Retail Trade | 1,617 | 3.0 | % | 36,943 | 2.8 | % | ||||||||||||||||||||
| Public Administration | 1,355 | 2.5 | % | 28,689 | 2.2 | % | ||||||||||||||||||||
| Information | 936 | 1.7 | % | 13,589 | 1.0 | % | ||||||||||||||||||||
| Manufacturing | 801 | 1.5 | % | 24,849 | 1.9 | % | ||||||||||||||||||||
| Administrative and Support and Waste Management and Remediation Services | 616 | 1.1 | % | 10,927 | 0.8 | % | ||||||||||||||||||||
| Other | 2,443 | 4.5 | % | 50,849 | 3.8 | % | ||||||||||||||||||||
| Vacant | — | — | % | 296,164 | 22.3 | % | ||||||||||||||||||||
| Total Office | $ | 54,211 | 100.0 | % | 1,327,407 | 100.0 | % | |||||||||||||||||||
51
Office Portfolio—Lease Expiration asof December 31, 2021
| Square Feet | % of Square | Annualized | % of Annualized | Annualized Rent | ||||||||||||||||||||||||||||
| Year of Lease | of Expiring | Feet | Rent | Rent | Per Occupied | |||||||||||||||||||||||||||
| Expiration | Leases | Expiring | (in thousands) | Expiring | Square Foot | |||||||||||||||||||||||||||
2022 (1) | 150,961 | 14.7 | % | $ | 7,202 | 13.3 | % | $ | 47.71 | |||||||||||||||||||||||
| 2023 | 108,279 | 10.5 | % | 5,640 | 10.4 | % | 52.09 | |||||||||||||||||||||||||
| 2024 | 58,011 | 5.6 | % | 3,058 | 5.6 | % | 52.71 | |||||||||||||||||||||||||
| 2025 | 407,665 | 39.6 | % | 19,492 | 36.0 | % | 47.81 | |||||||||||||||||||||||||
| 2026 | 72,612 | 7.0 | % | 4,501 | 8.3 | % | 61.99 | |||||||||||||||||||||||||
| 2027 | 113,532 | 11.0 | % | 5,629 | 10.4 | % | 49.58 | |||||||||||||||||||||||||
| 2028 | 15,335 | 1.5 | % | 994 | 1.8 | % | 64.82 | |||||||||||||||||||||||||
| 2029 | 30,342 | 2.9 | % | 3,916 | 7.2 | % | 129.06 | |||||||||||||||||||||||||
| 2030 | 74,506 | 7.2 | % | 3,779 | 7.0 | % | 50.72 | |||||||||||||||||||||||||
| 2031 | — | — | % | — | — | % | — | |||||||||||||||||||||||||
| Total Occupied | 1,031,243 | 100.0 | % | $ | 54,211 | 100.0 | % | $ | 52.57 | |||||||||||||||||||||||
| Vacant | 296,164 | |||||||||||||||||||||||||||||||
| Total Office | 1,327,407 | |||||||||||||||||||||||||||||||
(1)Includes 5,785 square feet of month-to-month leases as of December 31, 2021.
Property Indebtedness as of December 31, 2021
| Outstanding | Balance Due | |||||||||||||||||||||||||||||||
| Principal | At Maturity | |||||||||||||||||||||||||||||||
| Balance | Interest | Maturity | Date | Prepayment/ | ||||||||||||||||||||||||||||
| Property | (in thousands) | Rate | Date | (in thousands) | Defeasance | |||||||||||||||||||||||||||
| 1 Kaiser Plaza | $ | 97,100 | 4.14% | 7/1/2026 | $ | 97,100 | (1) | |||||||||||||||||||||||||
| Total/Weighted Average | $ | 97,100 | 4.14% | $ | 97,100 | |||||||||||||||||||||||||||
(1)Loan is generally not prepayable prior to April 1, 2026.
Item 3. Legal Proceedings
We are not currently involved in any material pending or threatened legal proceedings nor, to our knowledge, are any material legal proceedings currently threatened against us, other than routine litigation arising in the ordinary course of business. In the normal course of business, we are periodically party to certain legal actions and proceedings involving matters that are generally incidental to our business. While the outcome of these legal actions and proceedings cannot be predicted with certainty, in management'smanagement’s opinion, the resolution of these legal proceedings and actions will not have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Item 4. Mine Safety Disclosures
Not applicable.
52
PART II
Item 5. Market For Registrant'sRegistrant’s Common Equity, Related Stockholder Mattersand Issuer Purchasesof Equity Securities
Marketplace Designation, Sales Price Information and Holders
Shares of our Common Stock trade on Nasdaq, under the ticker symbol "CMCT"“CMCT”, and on the TASE, under the ticker symbol "CMCT-L." The following table sets forth the regular and special cash dividends per share, per quarter, declared during 2019 and 2018.
| Regular | ||||||||
| Quarterly | Special | |||||||
| Cash Dividends | Cash Dividends | |||||||
| Quarter Ended | Per Share (1) | Per Share (1) (2) | ||||||
| December 31, 2019 | $ | 0.075 | $ | — | ||||
| September 30, 2019 | $ | 0.075 | $ | 42.000 | ||||
| June 30, 2019 | $ | 0.375 | $ | — | ||||
| March 31, 2019 | $ | 0.375 | $ | — | ||||
| December 31, 2018 | $ | 0.375 | $ | — | ||||
| September 30, 2018 | $ | 0.375 | $ | — | ||||
| June 30, 2018 | $ | 0.375 | $ | — | ||||
| March 31, 2018 | $ | 0.375 | $ | — | ||||
“CMCT-L.”
On March 12, 2020,10, 2022, there were approximately 335387 holders of record of our Common Stock, excluding stockholders whose shares were held by brokerage firms, depositories and other institutional firms in "street name"“street name” for their customers. The closing price of our Common Stock on March 12, 202010, 2022 was $9.57$8.05 as reported on Nasdaq.
Approximately 80.4%58.7% of shares of our Common Stock as of March 12, 202010, 2022 were held by non-affiliated stockholders.
stockholders that are not our affiliates.
Holders of our Common Stock are entitled to receive dividends, if, as and when authorized by the Board of Directors and declared by us out of legally available funds. In determining our dividend policy, the Board of Directors considers many factors including the amount of cash resources available for dividend distributions, capital spending plans, cash flow, our financial position, applicable requirements of the MGCL, any applicable contractual restrictions, and future growth in NAV and cash flow per share prospects. Consequently, the dividend rate on a quarterly basis does not necessarily correlate directly to any individual factor. There can be no assurance that the future dividends declared by our Board of Directors will not differ materially from historical dividend levels. Risks inherent in our ability to pay dividends are further described in "Item“Item 1A—Risk Factors"Factors” of this Annual Report on Form 10-K.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information atas of December 31, 20192021 with respect to shares of our Common Stock, either under options or in respect of restricted stock awards that may be issued under existing equity compensation plans, all of which have been approved by our stockholders.
| Plan Category | Number of shares of | ||||||||||||||||||
| Common Stock | |||||||||||||||||||
| to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of shares of | Common Stock remaining available for future | ||||||||||||||||
| issuances under equity | |||||||||||||||||||
| compensation plans | |||||||||||||||||||
| of Common Stock) | |||||||||||||||||||
| Equity incentive plan | — | ||||||||||||||||||
| 49,770 | ||||||||
| Cumulative return on $100 invested on December 31, 2014 as of December 31, | ||||||||||||||||||||||||
| Index | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||
| CIM Commercial Trust Corporation | $ | 100.00 | $ | 108.66 | $ | 113.84 | $ | 170.95 | $ | 140.27 | $ | 162.55 | ||||||||||||
| S&P 500 | 100.00 | 101.38 | 113.51 | 138.29 | 132.23 | 173.86 | ||||||||||||||||||
| FTSE NAREIT Equity REIT | 100.00 | 103.18 | 112.25 | 118.11 | 112.63 | 141.89 | ||||||||||||||||||
Recent Sales of Unregistered Securities and Use of Proceeds
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||
| October 1, 2019 to October 31, 2019 | 2,468,390 | (1) | $ | 19.17 | — | $ | — | |||||||
| November 1, 2019 to November 30, 2019 | — | — | — | — | ||||||||||
| December 1, 2019 to December 31, 2019 | — | — | — | — | ||||||||||
| Total | 2,468,390 | $ | 19.17 | — | ||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||
| October 1, 2019 to October 31, 2019 | — | $ | — | — | $ | — | ||||||||
| November 1, 2019 to November 30, 2019 | 2,693,580 | (1) | 29.12 | (2) | — | — | ||||||||
| December 1, 2019 to December 31, 2019 | — | — | — | — | ||||||||||
| Total | 2,693,580 | $ | 29.12 | — | ||||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Consolidated Operating Data: | (in thousands, except per share amounts) | ||||||||||||||||||
| Total revenues (1) | $ | 139,989 | $ | 197,470 | $ | 236,059 | $ | 265,571 | $ | 275,935 | |||||||||
| Total expenses (1) (2) | 226,690 | 195,403 | 263,023 | 272,879 | 272,109 | ||||||||||||||
| Gain on sale of real estate (2) | 433,104 | — | 408,098 | 39,666 | 3,092 | ||||||||||||||
| Income from continuing operations before provision for income taxes | 346,403 | 2,067 | 381,134 | 32,358 | 6,918 | ||||||||||||||
| Provision for income taxes | 882 | 925 | 1,376 | 1,646 | 806 | ||||||||||||||
| Net income from continuing operations | 345,521 | 1,142 | 379,758 | 30,712 | 6,112 | ||||||||||||||
| Net income from discontinued operations (3) | — | — | — | 3,853 | 18,291 | ||||||||||||||
| Net income | 345,521 | 1,142 | 379,758 | 34,565 | 24,403 | ||||||||||||||
| Net loss (income) attributable to noncontrolling interests | 152 | (21 | ) | (21 | ) | (18 | ) | (11 | ) | ||||||||||
| Net income attributable to the Company | 345,673 | 1,121 | 379,737 | 34,547 | 24,392 | ||||||||||||||
| Redeemable preferred stock dividends declared or accumulated | (17,095 | ) | (15,423 | ) | (1,926 | ) | (9 | ) | — | ||||||||||
| Redeemable preferred stock redemptions | (5,882 | ) | 4 | 2 | — | — | |||||||||||||
| Net income (loss) attributable to common stockholders | $ | 322,696 | $ | (14,298 | ) | $ | 377,813 | $ | 34,538 | $ | 24,392 | ||||||||
| Funds from operations (FFO) attributable to common stockholders (4) (5) | $ | (14,034 | ) | $ | 38,930 | $ | 41,179 | $ | 66,840 | $ | 93,661 | ||||||||
| Cash dividends on common stock (6) | $ | 13,140 | $ | 21,895 | $ | 38,327 | $ | 77,316 | $ | 85,389 | |||||||||
| Cash dividends per share of common stock (6) (7) | $ | 0.900 | $ | 1.500 | $ | 1.782 | $ | 2.625 | $ | 2.625 | |||||||||
| Weighted average shares of common stock outstanding (7) | |||||||||||||||||||
| Basic | 14,598 | 14,597 | 23,021 | 30,443 | 32,529 | ||||||||||||||
| Diluted | 16,493 | 14,597 | 23,023 | 30,443 | 32,529 | ||||||||||||||
| At December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Consolidated Balance Sheet Data: | (in thousands) | ||||||||||||||||||
| Total assets | $ | 667,592 | $ | 1,342,401 | $ | 1,336,388 | $ | 2,022,884 | $ | 2,092,060 | |||||||||
| Debt | $ | 307,421 | $ | 588,671 | $ | 630,852 | $ | 967,886 | $ | 693,956 | |||||||||
| Redeemable preferred stock | $ | 36,841 | $ | 35,733 | $ | 27,924 | $ | 1,426 | $ | — | |||||||||
| Equity | $ | 278,195 | $ | 617,275 | $ | 626,705 | $ | 966,589 | $ | 1,297,347 | |||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Net income (loss) attributable to common stockholders (1) (2) | $ | 322,696 | $ | (14,298 | ) | $ | 377,813 | $ | 34,538 | $ | 24,392 | ||||||||
| Depreciation and amortization | 27,374 | 53,228 | 58,364 | 71,968 | 72,361 | ||||||||||||||
| Impairment of real estate | 69,000 | — | 13,100 | — | — | ||||||||||||||
| Gain on sale of depreciable assets | (433,104 | ) | — | (408,098 | ) | (39,666 | ) | (3,092 | ) | ||||||||||
| FFO attributable to common stockholders (1) (2) | $ | (14,034 | ) | $ | 38,930 | $ | 41,179 | $ | 66,840 | $ | 93,661 | ||||||||
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
This section includes many forward-looking statements. For cautions about relying on such forward-looking statements, please see "Forward-Looking Statements"“Forward-Looking Statements” at the beginning of thisreport immediately prior to "Item“Item 1—Business"Business” in this Annual Report on Form 10-K.
53
Overview
The following discussion focuses on recent developments expected to have current and future impacts on the results of our business, trends and uncertainties within our industry and business model that may impact our financial results, our recent results of operations, and our liquidity and capital resources.
You should read the following discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Executive Summary
Business Overview
We are operated by affiliates of CIM Group. CIM Group is a vertically-integratedcommunity-focused real estate and infrastructure owner, operator, lender and operator of real assets with multi-disciplinary expertise and in-house research, acquisition, credit analysis, development, finance, leasing, and onsite property management capabilities.developer. CIM Group is headquartered in Los Angeles, California and hasCA, with offices in Atlanta, GA, Bethesda, MD, Chicago, Illinois;IL, Dallas, Texas;TX, New York, New York;NY, Orlando, Florida;FL, Phoenix, Arizona; the San Francisco Bay Area; the Washington D.C. Metro Area;AZ, and Tokyo, Japan. CIM also maintains additional offices across the United States, as well as in Korea, Hong Kong and the United Kingdom to support its platform.
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. Since then, COVID-19 has spread worldwide, causing significant disruptions to the U.S. and world economies. During the early part of 2021, the U.S. and world economies initially showed signs of recovery from the impact of COVID-19 as vaccination rates increased, virus caseloads declined and businesses, schools and public services began to reopen. However, the emergence of variant strains of COVID-19 in the second half of 2021 and the concomitant disruption to the global supply chain have disrupted the recovery of the U.S. and world economies. As a result, there continues to be uncertainty regarding the continued impact of COVID-19 on the U.S. and international economies.
Additionally, the spread of COVID-19 in the United States and the resulting restrictions on travel, meetings and social gatherings that have been implemented from time to time have impacted, and are expected to continue to impact, the operations of our hotel in Sacramento, California. For the year ended December 31, 2021, our hotel segment net operating income was $1.9 million. Based on current expectations, we anticipate that the net operating income of our hotel for 2022 will be lower as compared to pre-COVID-19 levels for the comparable periods. As a result, contributions by the hotel to our funds from operations during such periods will be diminished.
Our loans originated and serviced under the SBA 7(a) Small Business Loan Program through December 31, 2021 consist primarily of loans to borrowers in the limited service hospitality sector. Certain of our borrowers experienced significant reductions in cash flows as COVID-19 caused reductions in travel. However, the substantial majority of our borrowers received relief under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) during the year ended December 31, 2020 through subsidy in the form of six months of monthly loan payments made on the borrower’s behalf pursuant to Section 1112 of the CARES Act. Section 1112 of the CARES Act was extended and, beginning February 1, 2021, the CARES Act provided up to an additional five months of subsidy of scheduled principal and interest payments (up to $9,000 per month, per loan). Those subsidies were not extended further.
The extent to which COVID-19 will continue to impact our operations and those of our tenants, business partners and borrowers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of any future COVID-19 outbreaks and actions taken to contain the pandemic or mitigate its impact, the distribution and acceptance of vaccines and their impact on the timing and speed of economic recovery, the spread
54
of new variants of COVID-19 and concerns regarding additional surges of COVID-19 as a result thereof, the impacts on the U.S. and international economies and the extent to which federal, state and local governments provide relief or assistance to those affected by COVID-19. We cannot predict the significance, extent or duration of any adverse impact of COVID-19 on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on its Common Stock or Preferred Stock. However, our business, financial condition, results of operations, and liquidity have been adversely affected and will likely continue to be adversely affected during 2022.
Properties
As of December 31, 2019,2021, our real estate portfolio consisted of 1114 assets, all of which were fee-simple properties. As of December 31, 2019,2021, our 9eleven office properties, (including one development site, which is being used as a parking lot), totaling approximately 1.3 million rentable square feet, were 86.7%77.7% occupied, our one development site was being used as a parking lot, and our one hotel with an ancillary parking garage, which has a total of 503 rooms, had RevPAR of $127.09$73.23 for the year ended December 31, 2019.2021.
Rental Rate Trends
Office Statistics: The following table sets forth occupancy rates and annualized rent per occupied square foot across our office portfolio as of the specified periods:
| As of December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Occupancy (1) | 86.7 | % | 93.2 | % | 94.2 | % | |||||
| Annualized rent per occupied square foot (1)(2)(3) | $ | 48.18 | $ | 45.21 | $ | 41.00 | |||||
| As of December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
Occupancy (1) | 77.7 | % | 79.3 | % | |||||||||||||
Annualized rent per occupied square foot (1)(2) | $ | 52.57 | $ | 50.94 | |||||||||||||
(1)The information presented in this table represents historical information as of the date indicated without giving effect to any property sales occurring thereafter.
(2)Represents gross monthly base rent under leases commenced as of the specified periods, multiplied by twelve. This amount reflects total cash rent before abatements. Total abatements, representing lease incentives in the form of free rent, for the years ended December 31, 2021 and 2020 were $1.5 million and $1.6 million, respectively. Where applicable, annualized rent has been grossed up by adding annualized expense reimbursements to base rent. Annualized rent for certain office properties includes rent attributable to retail.
Over the next four quarters, we expect to see expiring cash rents as set forth in the table below:
| For the Three Months Ended | |||||||||||||||
| March 31, | June 30, | September 30, | December 31, | ||||||||||||
| 2020 | 2020 | 2020 | 2020 | ||||||||||||
| Expiring Cash Rents: | |||||||||||||||
| Expiring square feet (1) | 45,949 | 39,542 | 20,740 | 65,798 | |||||||||||
| Expiring rent per square foot (2) | $ | 33.54 | $ | 59.30 | $ | 42.82 | $ | 40.82 | |||||||
| For the Three Months Ended | |||||||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | ||||||||||||||||||||
| 2022 | 2022 | 2022 | 2022 | ||||||||||||||||||||
| Expiring Cash Rents: | |||||||||||||||||||||||
Expiring square feet (1) | 29,832 | 12,979 | 51,424 | 56,726 | |||||||||||||||||||
Expiring rent per square foot (2) | $ | 59.27 | $ | 64.10 | $ | 43.35 | $ | 41.83 | |||||||||||||||
(1)Month-to-month tenants occupying a total of 5,785 square feet are included in the expiring leases in the first quarter listed.
(2)Represents gross monthly base rent, as of December 31, 2021, under leases expiring during the periods above, multiplied by twelve. This amount reflects total cash rent before abatements. Where applicable, annualized rent has been grossed up by adding annualized expense reimbursements to base rent.
55
During the year ended December 31, 2019,2021, we executed leases with terms longer than 12 months totaling 128,68799,139 square feet. The table below sets forth information on certain of our executed leases during the year ended December 31, 2019,2021, excluding space that was vacant for more than one year, month-to-month leases, leases with an original term of less than 12 months, related party leases, and space where the previous tenant was a related party:
| New Cash | Expiring Cash | ||||||||||||
| Number of | Rentable | Rents per Square | Rents per Square | ||||||||||
| Leases (1) | Square Feet | Foot (2) | Foot (2) | ||||||||||
| Twelve Months Ended December 31, 2019 | 26 | 103,979 | $ | 42.75 | $ | 38.30 | |||||||
| New Cash | Expiring Cash | ||||||||||||||||||||||
| Number of | Rentable | Rents per Square | Rents per Square | ||||||||||||||||||||
Leases (1) | Square Feet | Foot (2) | Foot (2) | ||||||||||||||||||||
| Twelve Months Ended December 31, 2021 | 15 | 50,828 | $ | 48.32 | $ | 52.66 | |||||||||||||||||
(1)Based on the number of tenants that signed leases.
(2)Cash rents represent gross monthly base rent, multiplied by twelve. This amount reflects total cash rent before abatements. Where applicable, annualized rent has been grossed up by adding annualized expense reimbursements to base rent.
Fluctuations in submarkets, buildings and terms of leases cause large variations in these numbers and make predicting the changes in rent in any specific period difficult.Our rental and occupancy rates are impacted by general economic conditions, including the pace of regional and economic growth, and access to capital. Therefore, we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates. Additionally, decreased demand and other negative trends or unforeseeable events that impair our ability to timely renew or re lease space could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Hotel Statistics: The following table sets forth the occupancy, ADR and RevPAR for our hotel in Sacramento, California for the specified periods:
| For the Year Ended | |||||||||||||||||
| December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Occupancy | 53.6 | % | 32.3 | % | |||||||||||||
| ADR | $ | 136.51 | $ | 144.36 | |||||||||||||
| RevPAR | $ | 73.23 | $ | 46.60 | |||||||||||||
| For the Year Ended | |||||||||||
| December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Occupancy | 78.2 | % | 80.1 | % | 81.5 | % | |||||
| ADR | $ | 162.54 | $ | 161.95 | $ | 157.64 | |||||
| RevPAR | $ | 127.09 | $ | 129.73 | $ | 128.43 | |||||
LendingSegment
Through our loans originated under the SBA 7(a) lending platform,Program, we are a national lender that primarily originates loans to small businesses. We identifyAdditionally, as an SBA 7(a) licensee, we originated loans under the PPP. During 2021 the lending segment benefited from a temporary increase in the SBA guarantee support from a maximum of 75% per loan origination opportunities through personal contacts, internet referrals, attendance at trade showsto 90% per loan and meetings, direct mailings, advertisementshigher market premiums. In addition, there was an increase in trade publications and other marketing methods. We also generate loans through referralsinterest income resulting from real estate and loan brokers, franchise representatives, existing borrowers, lawyers and accountants.
| Year Ended | ||||||||||||||
| December 31, | Change | |||||||||||||
| 2019 | 2018 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Total revenues | $ | 139,989 | $ | 197,470 | $ | (57,481 | ) | (29.1 | )% | |||||
| Total expenses | $ | 226,690 | $ | 195,403 | $ | 31,287 | 16.0 | % | ||||||
| Gain on sale of real estate | $ | 433,104 | $ | — | $ | 433,104 | — | |||||||
| Net income | $ | 345,521 | $ | 1,142 | $ | 344,379 | — | |||||||
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (in thousands) | |||||||
| Net income (loss) attributable to common stockholders (1) (2) | $ | 322,696 | $ | (14,298 | ) | ||
| Depreciation and amortization | 27,374 | 53,228 | |||||
| Impairment of real estate | 69,000 | — | |||||
| Gain on sale of depreciable assets | (433,104 | ) | — | ||||
| FFO attributable to common stockholders (1) (2) | $ | (14,034 | ) | $ | 38,930 | ||
| Year Ended | ||||||||||||||
| December 31, | Change | |||||||||||||
| 2019 | 2018 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Revenues: | ||||||||||||||
| Office | $ | 86,948 | $ | 147,811 | $ | (60,863 | ) | (41.2 | )% | |||||
| Hotel | $ | 38,748 | $ | 38,789 | $ | (41 | ) | (0.1 | )% | |||||
| Lending | $ | 10,964 | $ | 10,870 | $ | 94 | 0.9 | % | ||||||
| Expenses: | ||||||||||||||
| Office | $ | 37,159 | $ | 57,004 | $ | (19,845 | ) | (34.8 | )% | |||||
| Hotel | $ | 26,424 | $ | 25,295 | $ | 1,129 | 4.5 | % | ||||||
| Lending | $ | 5,826 | $ | 5,714 | $ | 112 | 2.0 | % | ||||||
2021 Results of Operations
| Year Ended | |||||||||||||||||||||||
| December 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Total revenues | $ | 90,926 | $ | 77,208 | $ | 13,718 | 17.8 | % | |||||||||||||||
| Total expenses | $ | 88,785 | $ | 92,945 | $ | (4,160) | (4.5) | % | |||||||||||||||
| Net loss | $ | (851) | $ | (15,015) | $ | 14,164 | (94.3) | % | |||||||||||||||
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Net loss decreased to $851,000, or by $14.2 million, for the year ended December 31, 2019 was $3,329,000,2021, compared to $0 for the year ended
| Year Ended | ||||||||||||||
| December 31, | Change | |||||||||||||
| 2018 | 2017 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Total revenues | $ | 197,470 | $ | 236,059 | $ | (38,589 | ) | (16.3 | )% | |||||
| Total expenses | $ | 195,403 | $ | 263,023 | $ | (67,620 | ) | (25.7 | )% | |||||
| Gain on sale of real estate | $ | — | $ | 408,098 | $ | (408,098 | ) | — | ||||||
| Net income | $ | 1,142 | $ | 379,758 | $ | (378,616 | ) | — | ||||||
Funds from Operations
Like any metric, FFO should not be used as the only measure of our performance because it excludes depreciation and amortization and captures neither the changes in the value of our real estate properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our operating results. Other REITs may not calculate FFO in accordance with the limitationsstandards established by the NAREIT; accordingly, our FFO may not be comparable to the FFOs of other REITs. Therefore, FFO should be considered only as a measurement tool.supplement to net income (loss) as a measure of our performance and should not be used as a supplement to or substitute measure for cash flows from operating activities computed in accordance with GAAP. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends.
FFO attributable to common stockholders was $133,000 for the year ended December 31, 2021, an increase of $12.2 million compared to $(12.1) million for the year ended December 31, 2020. The increase was primarily due to an increase of $14.4 million in segment net operating income resulting from improved performance at the lending and hotel segments for the year ended December 31, 2021, compared to the year ended December 31, 2020.
The following table sets forth a historical reconciliation of net (loss) incomeloss attributable to common stockholders to FFO attributable to common stockholders:holders of our Common Stock:
| Year Ended December 31, | |||||||
| 2018 | 2017 | ||||||
| (in thousands) | |||||||
| Net (loss) income attributable to common stockholders (1) | $ | (14,298 | ) | $ | 377,813 | ||
| Depreciation and amortization | 53,228 | 58,364 | |||||
| Impairment of real estate | 13,100 | ||||||
| Gain on sale of depreciable assets | — | (408,098 | ) | ||||
| FFO attributable to common stockholders (1) | $ | 38,930 | $ | 41,179 | |||
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
Net loss attributable to common stockholders (1) (2) | $ | (19,979) | $ | (33,467) | |||||||||||||||||||||||||
| Depreciation and amortization | 20,112 | 21,406 | |||||||||||||||||||||||||||
| Impairment of real estate | — | — | |||||||||||||||||||||||||||
| Gain on sale of depreciable assets | — | — | |||||||||||||||||||||||||||
FFO attributable to common stockholders (1) (2) | $ | 133 | $ | (12,061) | |||||||||||||||||||||||||
(1)During the year ended December 31, 2020, we recognized $281,000 of loss on early extinguishment of debt. Such losses are included in, and have the effect of reducing, net (loss) income |
(2)During the years ended December 31, 2021 and a decrease2020, we recognized $113,000 and $72,000, respectively, of $4,781,000redeemable preferred stock redemptions and $253,000 and $377,000 respectively, of redeemable preferred stock deemed dividends. Such amounts are included in, asset management and other feeshave the effect of reducing, net (loss) attributable to related partiescommon stockholders and FFO attributable to common stockholders, because redeemable preferred stock redemptions are not allocated to our operating segments.an adjustment prescribed by NAREIT.
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Summary Segment Results
During the yearyears ended December 31, 2018, CIM Commercial2021 and 2020, we operated in three segments: office and hotel properties and lending. During the year ended December 31, 2017, CIM Commercial operated in four segments: office, hotel and multifamily properties and lending. Set forth and described below are summary segment results for our operating segments.
| Year Ended | Year Ended | ||||||||||||||||||||||||||||||||||||
| December 31, | Change | December 31, | Change | ||||||||||||||||||||||||||||||||||
| 2018 | 2017 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||
| Revenues: | Revenues: | ||||||||||||||||||||||||||||||||||||
| Office | $ | 147,811 | $ | 173,853 | $ | (26,042 | ) | (15.0 | )% | Office | $ | 53,289 | $ | 55,468 | $ | (2,179) | (3.9) | % | |||||||||||||||||||
| Hotel | $ | 38,789 | $ | 38,585 | $ | 204 | 0.5 | % | Hotel | $ | 17,849 | $ | 13,314 | $ | 4,535 | 34.1 | % | ||||||||||||||||||||
| Multifamily | $ | — | $ | 13,400 | $ | (13,400 | ) | — | |||||||||||||||||||||||||||||
| Lending | $ | 10,870 | $ | 10,221 | $ | 649 | 6.3 | % | Lending | $ | 19,787 | $ | 8,322 | $ | 11,465 | 137.8 | % | ||||||||||||||||||||
| Expenses: | Expenses: | ||||||||||||||||||||||||||||||||||||
| Office | $ | 57,004 | $ | 69,631 | $ | (12,627 | ) | (18.1 | )% | Office | $ | 23,778 | $ | 23,975 | $ | (197) | (0.8) | % | |||||||||||||||||||
| Hotel | $ | 25,295 | $ | 25,136 | $ | 159 | 0.6 | % | Hotel | $ | 15,969 | $ | 14,123 | $ | 1,846 | 13.1 | % | ||||||||||||||||||||
| Multifamily | $ | — | $ | 7,952 | $ | (7,952 | ) | — | |||||||||||||||||||||||||||||
| Lending | $ | 5,714 | $ | 4,888 | $ | 826 | 16.9 | % | Lending | $ | 4,117 | $ | 6,365 | $ | (2,248) | (35.3) | % | ||||||||||||||||||||
| Non-Segment Revenue and Expenses: | Non-Segment Revenue and Expenses: | ||||||||||||||||||||||||||||||||||||
| Interest and other income | Interest and other income | $ | 1 | $ | 104 | $ | (103) | (99.0) | % | ||||||||||||||||||||||||||||
| Asset management and other fees to related parties | Asset management and other fees to related parties | $ | (9,030) | $ | (9,793) | $ | 763 | (7.8) | % | ||||||||||||||||||||||||||||
| Expense reimbursements to related parties—corporate | Expense reimbursements to related parties—corporate | $ | (2,050) | $ | (2,243) | $ | 193 | (8.6) | % | ||||||||||||||||||||||||||||
| Interest expense | Interest expense | $ | (9,005) | $ | (10,547) | $ | 1,542 | (14.6) | % | ||||||||||||||||||||||||||||
| General and administrative | General and administrative | $ | (4,581) | $ | (4,212) | $ | (369) | 8.8 | % | ||||||||||||||||||||||||||||
| Transaction costs | Transaction costs | $ | (143) | $ | — | $ | (143) | 100.0 | % | ||||||||||||||||||||||||||||
| Depreciation and amortization | Depreciation and amortization | $ | (20,112) | $ | (21,406) | $ | 1,294 | (6.0) | % | ||||||||||||||||||||||||||||
| Loss on early extinguishment of debt | Loss on early extinguishment of debt | $ | — | $ | (281) | $ | 281 | (100.0) | % | ||||||||||||||||||||||||||||
| (Provision) benefit for income taxes | (Provision) benefit for income taxes | $ | (2,992) | $ | 722 | $ | (3,714) | (514.4) | % | ||||||||||||||||||||||||||||
Revenues
OfficeRevenue: Office revenue includes rental revenues,revenue, expense reimbursements and lease termination income from office properties. Office revenue decreased to $147,811,000, or by 15.0%,3.9% for the year ended December 31, 20182021 compared to $173,853,000the year ended December 31, 2020. The decrease is primarily due to lower revenues at an office property in Beverly Hills, California, an office property in Los Angeles, California and an office property in Oakland, California, all due to decreases in occupancy as compared to the prior year, partially offset by an increase in revenues at an office property in Austin, Texas due to an increase in occupancy and an increase in revenues related to another office property in Austin, Texas that was purchased in November 2020.
Hotel Revenue: Hotel revenue increased by 34.1% for the year ended December 31, 2017. The decrease was primarily due2021 compared to the sale of one office property in San Francisco, California in March 2017, the sale of one office property in Charlotte, North Carolina in June 2017, the sale of one office property and one parking garage in Sacramento, California in June 2017, the sale of two office properties in Washington, D.C. in August and October 2017, the sale of one office property in Los Angeles, California in September 2017, a decrease in lease termination income at two of our California properties primarily due to recognition of fees in connection with the early termination of a large tenant who vacated inyear ended December 2017, which space has been leased to a new tenant whose rent commenced on January 1, 2018, and a decrease in expense reimbursements revenue at certain of our California properties and one of our Washington, D.C. properties, partially offset by an31, 2020. The increase from the acquisition of one office property in San Francisco, California in December 2017, the acquisition of one office property in Beverly Hills, California in January 2018, an increase in revenue at certain of our California and Washington, D.C. propertiesis due to increases in occupancy, ADR, and or rental rates,food, beverage, and an increase from real estate tax refunds related to prior years receivedother sundry services during the year ended December 31, 2018 for the property in Washington, D.C. that we sold in October 2017.
Lending Revenue: Lending revenue represents revenue from our lending subsidiaries, including interest income on loans and other loan related fee income. Lending revenue increased to $10,870,000, or by 6.3%,137.8% for the year ended December 31, 20182021 compared to $10,221,000 for the year ended December 31, 2017.2020. The increase wasis primarily due to increases in the prime rate, an increase in the retained loan portfolio, and higher revenue resulting from the recognition of accretion for discounts related to increased prepayments on our loans, partially offset by a decrease in premium income from the sale of the guaranteed portion of our SBA 7(a) loans, which benefited from an increase in the SBA guaranty support from a maximum of 75% per loan to 90% per loan and higher market premiums. In addition, there was an increase in interest income resulting from an increase in our average outstanding lending portfolio during 2021 compared to the prior year. As a result of the conclusion of the enhanced government support provided by the CARES Act, the SBA guaranty support has now reverted back to 75% from 90% as of October 1, 2021 for loans approved after September 30, 2021. This will likely cause future loan originations to decline and the premiums achieved on sales of the guaranteed portion of our SBA 7(a) loans to decrease, relatedin each case possibly by a material amount.
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Interest and Other Income: Interest and other income represents revenue generated outside of our reportable segments. Interest and other income decreased by $103,000 for the year ended December 31, 2021 compared to a break-up fee receivedthe year ended December 31, 2020. The decrease is due to higher cash average balances in our interest bearing accounts during the year ended December 31, 2017.
2020 as compared to the year ended December 31, 2021.
Expenses
OfficeExpenses: Office expenses decreased to $57,004,000, or by 18.1%,remained relatively unchanged for the year ended December 31, 20182021 compared to $69,631,000the year ended December 31, 2020.
Hotel Expenses: Hotel expenses increased by 13.1% for the year ended December 31, 2017. The decrease was primarily due2021 compared to the sale of one office property in Charlotte, North Carolina in June 2017, the sale of one office property and one parking garage in Sacramento, California in June 2017, the sale of two office properties in Washington, D.C. in August and October 2017, the sale of one office property in Los Angeles, California in September 2017, a decrease in other tenant reimbursable expenses at one of our Washington, D.C. properties, and a decrease in real estate taxes at certain California properties due to real estate tax refunds related to prior years, which were received during the year ended December 31, 2018, partially offset by the transfer of the right to collect supplemental real estate tax reimbursements which reduced real estate taxes at our office property in San Francisco, California at the time of the property's sale in March 2017, an increase from the acquisition of one office property in San Francisco, California in December 2017, the acquisition of one office property in Beverly Hills, California in January 2018, and an increase in operating expenses at certain of our California properties and at one of our Washington, D.C. properties.
Lending Expenses: Lending expenses represent expenses from our lending subsidiaries, including interest expense, general and administrative expenses and feesexpense reimbursements to related party.parties. Lending expenses increased to $5,714,000, ordecreased by 16.9%,35.3% for the year ended December 31, 20182021 compared to $4,888,000 for the year ended December 31, 2017. The increase is2020 primarily due to interest expense that commenced in May 2018 as a result of the issuance of the SBA 7(a) loan-backed notes and an increase in interest expense in connection withallocated expenses incurred during the year ended December 31, 2020 related to the one-time retirement payment to our secured borrowings, partially offset byformer president, a decrease in allocated executive time resulting in a reduction in allocated payroll related expenses.during the year ended December 31, 2021, a reduction in the provision for loan losses of $362,000 due to an increase in the general reserve made during the year ended December 31, 2020 and a reduction in interest expense of $460,000 resulting from a reduction to principal outstanding on our SBA 7(a) loan backed notes.
AssetManagementandOther Fees to Related Parties: Asset management fees and other fees to related parties, which have not been allocated to our operating segments were $22,006,000decreased by 7.8% for the year ended December 31, 2018, a decrease of $4,781,000,2021 compared to $26,787,000the year ended December 31, 2020. Asset management fees totaled $9.0 million for the year ended December 31, 2017. Asset management fees totaled $17,880,0002021 compared to $9.5 million for the year ended December 31, 2018 compared to $22,229,000 for the year ended December 31, 2017.2020. Asset management fees arewere calculated based on a percentage of the daily average adjusted fair value of CIM Urban'sUrban’s assets, which are appraised in the fourth quarter of each year. The lower fees reflect a decrease in the adjusted fair value of CIM Urban'sUrban’s assets in the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to the sale of one office property in March 2017, the sale of two multifamily properties in May 2017, the sale of two office properties, one parking garage, and one multifamily property in June 2017, the sale of one office property in August 2017, the sale of one office property and one multifamily property in September 2017, the sale of one office property in October 2017, and the sale of one multifamily property in December 2017, partially offset by the acquisition of one office property in December 2017, the acquisition of one office property in January 2018 and net increasesa decrease in the aggregate fair value of CIM Urban’s investments in real estate assets based onresulting from valuation changes at the end of 2020. We expect asset management fees and other fees to related parties to decrease during the year ended December 31, 2017 appraisals2022, when compared to the year ended December 31, 2021, as well as incremental capital expenditures during 2018. CIM Commercial also paysa result of the Fee Waiver.
We paid a Base Service Fee to the Administrator, a related party, which totaled $1,079,000$282,000 for the year ended December 31, 2018 compared2020. On May 11, 2020, the Master Services Agreement was amended to $1,060,000 forreplace the Base Service Fee with the Prior Incentive Fee effective as of April 1, 2020. The Administrator did not earn any Prior Incentive Fee during the year ended December 31, 2017. In addition,2021. Based on the expected performance of the Company for 2022, we do not anticipate that any Revised Incentive Fee will be payable in respect of the year ended December 31, 2022.
Expense Reimbursements to Related Parties—Corporate: The Administrator received compensation and or reimbursement for performing certain services (other than the Base Services) for CIM Commercialus and itsour subsidiaries that are not covered by the Base Service Fee. ForFee or the yearsPrior Incentive Fee, as the case may be. Expense reimbursements to related parties—corporate decreased by 8.6% for the year ended December 31, 2018 and 2017, we expensed $2,783,000 and $3,065,000 for such services, respectively. For2021 compared to the yearsyear ended December 31, 2018 and 2017, we also expensed $264,000 and $433,000, respectively, related2020, primarily due to corporate services subject to reimbursement by us under the CIM SBA Staffing and Reimbursement Agreement.reductions in allocated payroll.
Interest Expense: Interest expense, which has not been allocated to our operating segments, was $25,482,000decreased by 14.6% for the year ended December 31, 2018, a decrease of $8,588,0002021 compared to $34,070,000 for the year ended December 31, 2017.2020. The decrease in interest expense, which includes the impact of interest rate swaps and loan fee amortization expense, is primarily due to a lower average outstanding balances underprincipal balance on our 2018 Credit Facility during the unsecured credit and term loan facilities, andyear ended December 31, 2021 compared to the year ended December 31, 2020, partially offset by an increase in interest expense on our revolving credit facility resulting from the 2018 Credit Facility Modification which was in effect from September 2020 through August 2021. Although we do not know how much variable rate indebtedness we will incur in 2022, we expect our interest expense to increase in 2022 as a
result of aggregate repayments of $215,000,000 of outstanding borrowingsexpected increases in interest rates.We expect that such increases will be partially offset by expected increases in interest income earned on our unsecured term loan facility in August and November 2017, the payoff ofloans receivable (which earn interest at a $25,331,000 mortgage loan in March 2017 in connection with the sale of one office property, the payoff of mortgage loans with a combined balance of $38,781,000 in connection with the sale of three multifamily properties in May and June 2017, the assumption of a $21,700,000 mortgage loan by the buyer of one office property in September 2017, and the assumption of a $28,560,000 mortgage loan by the buyer of one multifamily property in December 2017.variable rate).
General andAdministrativeExpenses: General and administrative expenses, which have not been allocated to our operating segments, were $4,928,000increased by 8.8% for the year ended December 31, 2018,2021 compared to the year ended December 31, 2020. The increase is primarily due to an increase of $1,910,000in legal and consulting fees. We expect general and administrative expenses to decrease during the year ended December 31, 2022, when compared to $3,018,000the year ended December 31, 2021, as a result of cost saving measures implemented by our Administrator and the nonrecurring nature of some of the 2021 legal expenses.
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Transaction Costs: Transaction costs were $143,000 for the year ended December 31, 2017. The2021, an increase was primarily dueof 100.0% compared to certain expenses related to our multifamily properties sold during the year ended December 31, 2017, which were expensed2020, due to abandoned project costs incurred in 2018,2021 related to potential real estate transactions.
Depreciation and an increase in legalAmortizationExpense: Depreciation and other professional fees and shareholder services expenses.
Loss on Early Extinguishment of Debt: Loss on early extinguishment of debt was $808,000 for the year ended December 31, 2018, a decrease of $7,407,000, compared to $8,215,000 for the year ended December 31, 2017. Loss on early extinguishment of debt for the year ended December 31, 2018 consists of the write-off in October 2018 of unamortized deferred loan costs on our unsecured term loan facility, as a result of the repayment and termination of the $170,000,000 of outstanding borrowings on our unsecured term loan facility using proceeds from our revolving credit facility we entered into in October 2018. Loss on early extinguishment of debt for the year ended December 31, 2017 consists of the costs associated with the repayment, assumption of mortgage loans, and the write-off of unamortized deferred loan costs, in connection with the payoff of a $25,331,000 mortgage loan in March 2017 at the sale of one office property, the payoff of mortgage loans with a combined balance of $38,781,000 at the sale of three multifamily properties in May and June 2017, the assumption of a $21,700,000 mortgage loan by the buyer of one office property in September 2017, and the assumption of a $28,560,000 mortgage loan by the buyer of one multifamily property in December 2017, as well as the write-off of unamortized deferred loan costs on our unsecured term loan facility as a result of aggregate repayments of $215,000,000 of outstanding borrowings on our unsecured term loan facility in August and November 2017.
Cash Flow Analysis
Our cash flows from operating activities are primarily dependent upon the real estate assets owned, occupancy level of $189,242,000 in connection with the sale of an office property in San Francisco, California, which was consummated in March 2017, a gain on sale ofour real estate assets, the rental rates achieved through our leases, the ADR of $11,613,000 in connection withour hotel, the salecollectability of two multifamily properties in Dallas, Texas, which was consummated in May 2017, a gain on sale of real estate of $45,906,000 in connection with the sale of an office property in Charlotte, North Carolina, $34,559,000 in connection with the sale of an office propertyrent and a parking garage in Sacramento, California,recoveries from our tenants, and $28,648,000 in connection with the sale of a multifamily property in Dallas, Texas, allloan related activity, many of which were consummatednegatively impacted by the effects of COVID-19 during the years ended December 31, 2021 and 2020. Our cash flows from operating activities are also impacted by fluctuations in June 2017, a gain on sale of real estate of $34,456,000 in connection with the sale of an office property in Washington, D.C., which was consummated in August 2017, a gain on sale of real estate of $23,810,000 in connection with the sale of an office property in Los Angeles, California,operating expenses and a gain on sale of real estate of $16,556,000 in connection with the sale of a multifamily property in New York, New York, which were consummated in September 2017, a gain on sale of real estate of $2,994,000 in connection with the sale of an office property in Washington, D.C., which was consummated in October 2017,other general and a gain on sale of real estate of $20,314,000 in connection with the sale of a multifamily property in Houston, Texas, which was consummated in December 2017.
Our cash flows from investing activities are primarily related to property acquisitions and dispositions, expenditures for the development or repositioning of properties, capital expenditures and cash flows associated with loans originated at our lending segment. Net cash used in investing activities was $12.7 million for the year ended December 31, 2021 compared to $38.3 million for the year ended December 31, 2020. The decrease in cash used in investing activities was primarily due to a decrease in taxable incomeadditions to investments in real estate and acquisitions of real estate of $13.9 million, collectively, mainly as a result of the development of an office building at one3601 S Congress Avenue which was completed during 2020. Additionally, we had an increase of our taxable REIT subsidiaries.$22.7 million in principal collected on loans receivable partially offset by an increase in cash used to fund loans of $10.9 million during the year ended December 31, 2021 as compared to 2020, both primarily as a result of the PPP originations and collection of principal on the related loans.
Our cash flows from financing activities are generally impacted by borrowings and capital activities. Net cash used in financing activities for the year ended December 31, 2021 was $43.6 million compared to cash provided by financing activities of $33.2 million for the year ended December 31, 2020. The change was due to $100.3 million increase in payment of unsecured revolving lines of credit, revolving credit facilities, mortgages payable, term notes and principal on SBA 7(a) loan-backed notes, a $42.1 million decrease in proceeds from unsecured revolving lines of credit, revolving credit facilities and term notes, as well as a $12.1 million decrease in proceeds from issuance of preferred stock partially offset by net proceeds of $76.9 million from issuance of Common Stock related to the Rights Offering (as defined below) during the year ended December 31, 2021.
Our cash flows from operating activities are primarily dependent upon the real estate assets owned, occupancy level of our real estate assets, the rental rates achieved through our leases, the ADR of our hotel, the collectability of rent and Capital Resources
Our cash flows from financing activities are generally impacted by borrowings and capital activities. Net cash used in financing activities for the year ended December 31, 2019, which represents the write-off2021 was $43.6 million compared to cash provided by financing activities of deferred loan costs of $243,000 and related accumulated amortization of $65,000. On May 16, 2019, one mortgage loan with an outstanding principal balance of $39,500,000 at such time, was legally defeased in connection with the sale of the related property. The cash outlay required for this defeasance in the net amount of $44,108,000 was based on the purchase price of U.S. government securities that will generate sufficient cash flow to fund continued interest payments on the loan from the effective date of this defeasance through the date on which we could repay the loan at par. As a result of this defeasance, we recognized a loss on early extinguishment of debt of $4,911,000$33.2 million for the year ended December 31, 2019, which represents the sum2020. The change was due to $100.3 million increase in payment of the difference between the purchase priceunsecured revolving lines of U.S. government securities of $44,108,000credit, revolving credit facilities, mortgages payable, term notes and the outstanding principal balance of the mortgage loan of $39,500,000, the write-off of deferred loan costs of $287,000 and related accumulated amortization of $82,000, and transaction costs of $98,000.
Cash Flow Analysis
lending segment net operating income.
Our cash flows from investing activities are primarily related to property acquisitions and sales,dispositions, expenditures for development or repositioning of properties, capital expenditures and cash flows associated with loans originated at our lending segment. Net cash provided by investing activities for the year ended December 31, 2019 was $917,193,000 compared to net cash used in investing activities of $131,734,000 in the corresponding period in 2018. The increase was primarily due to $941,032,000 of cash generated from the Asset Sale compared to an outflow of $112,048,000 for the acquisition of real estate during the year ended December 31, 2018, and a $8,681,000 decrease in loans funded, partially offset by an increase of $12,545,000 in cash used to fund additions to investments in real estate, and a $497,000 decrease in principal collected on loans.
related loans.
Our cash flows from financing activities are generally impacted by borrowings and capital activities. Net cash used in financing activities for the year ended December 31, 20182021 was $6,535,000$43.6 million compared to $989,011,000 incash provided by financing activities of $33.2 million for the corresponding period in 2017.year ended December 31, 2020. The change was due to $100.3 million increase in cash flowspayment of unsecured revolving lines of credit, revolving credit facilities, mortgages payable, term notes and principal on SBA 7(a) loan-backed notes, a $42.1 million decrease in proceeds from financing activities was primarily dueunsecured revolving lines of credit, revolving credit facilities and term notes, as well as a $12.1 million decrease in proceeds from issuance of preferred stock partially offset by net proceeds of $76.9 million from issuance of Common Stock related to $886,010,000 usedthe Rights Offering (as defined below) during the year ended December 31, 20172021.
Liquidity and Capital Resources
General
On a short-term basis, our principal demands for funds will be for the acquisition of assets, development or repositioning of properties, or re-leasing of space in existing properties, capital expenditures, interest and principal on current and any future debt financings, SBA 7(a) loan originations, and paying distributions on our Preferred Stock and Common Stock. We may finance our future activities through one or more of the following methods: (i) offerings of shares of Common Stock, preferred stock or other equity and or debt securities of the Company; (ii) credit facilities and term loans; (iii) the addition of senior recourse or non-recourse debt using target acquisitions as well as existing assets as collateral; (iv) the sale of existing assets; and or (v) cash flows from operations. With respect to the $100.0 million outstanding under the 2018 revolving credit facility as of March 10, 2022 that is scheduled to mature in October 2022, we expect to extend its maturity to October
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2023, subject to satisfying certain conditions, and/or refinance such indebtedness. Based on our projected performance and current capital market conditions, we expect that we can implement either or both options. In November 2022, holders of the Series L Preferred Stock will have the right to require us to redeem all or any of the shares of Series L Preferred Stock held by such holders. At the same time, we will also have the right to redeem any or all shares of our Series L Preferred Stock. The redemption price, whether the redemption is at the request of a holder or by us, will be equal to 100% of the stated value of the Series L Preferred Stock plus any accrued and unpaid dividend. We can pay the redemption price, at our option and in our sole discretion, either in cash or in equal value through the issuance of shares of our Common Stock. We do not know whether holders of Series L Preferred Stock will exercise their redemption rights and, if so, in what amounts. We are currently actively evaluating our options with respect to whether we will exercise our redemption right with respect to any or all shares of Series L Preferred Stock as well as other alternatives.
Our long-term liquidity needs will consist primarily of funds necessary for acquisitions of assets, development or repositioning of properties, or re-leasing of space in existing properties, capital expenditures, refinancing of indebtedness, SBA 7(a) loan originations, paying distributions on our Preferred Stock or any other preferred stock we may issue, any future repurchase and or redemption of our Preferred Stock (if we choose, or are required, to pay the redemption price in cash instead of in shares of our Common Stock) and distributions on our Common Stock. Additionally, our outstanding commitments to fund loans were $32.6 million as of December 31, 2021, substantially all of which reflect prime-based loans to be originated by our subsidiary engaged in SBA 7(a) Small Business Loan Program lending. The majority of these commitments have government guarantees of 90% (although the government guarantee has now reverted to 75%) and we believe that we will be able to sell the guaranteed portion of these loans in a liquid secondary market upon fully funding these loans. Since some commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements.
We may not have sufficient funds on hand or may not be able to obtain additional financing to cover all of our long-term cash requirements. The nature of our business, and the requirements imposed by REIT rules that we distribute a substantial majority of our REIT taxable income on an annual basis in the form of dividends, may cause us to have substantial liquidity needs over the long-term. While we will seek to satisfy such needs through one or more of the methods described in the first paragraph of this section, our ability to take such actions is highly uncertain and cannot be predicted, and could be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and other risks detailed in “Item 1A—Risk Factors” of this Annual Report on Form 10-K. If we cannot obtain funding for our long-term liquidity needs, our assets may generate lower cash flows or decline in value, or both, which may cause us to sell assets at a time when we would not otherwise do so which could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our Common Stock or Preferred Stock.
Sources and Uses of Funds
Mortgages
We have one mortgage loan agreement with an outstanding balance of $97.1 million as of December 31, 2021.
Revolving Credit Facilities
In October 2018, we entered into the 2018 revolving credit facility that, as amended, allows us to borrow up to $209.5 million, subject to a borrowing base calculation. As of December 31, 2021 and 2020, the variable interest rate was 2.15% and 2.20%, respectively. The 2018 revolving credit facility matures in October 2022 and provides for one one-year extension option under certain conditions, including providing notice of the election and paying an extension fee of 0.15% of each lender’s commitment being extended on the effective date of such extension. We expect to extend its maturity to October 2023, subject to satisfying certain conditions, and/or refinance such indebtedness. Based on our projected performance and current capital market conditions, we expect that we can implement either or both options. As of March 10, 2022, December 31, 2021, and December 31, 2020, $100.0 million, $60.0 million and $166.5 million, respectively, was outstanding under the 2018 Credit Facility and approximately $77.6 million, $117.6 million, and $28.0 million, respectively, was available for future borrowings.
In May 2020, to further enhance our liquidity position and maintain financial flexibility, we entered into the 2020 unsecured revolving credit facility (the “2020 Credit Facility”) pursuant to which we can borrow up to a maximum of $10.0 million. Outstanding advances under the 2020 Credit Facility bear interest at the rate of 1.00%. The 2020 Credit Facility matures in May 2022. As of both March 10, 2022 and December 31, 2021, no amounts were outstanding under the 2020 Credit Facility and $10.0 million was available for future borrowings.
In June 2020, we commenced borrowing funds from the Federal Reserve through the PPPLF. Advances under the PPPLF carry an interest rate of 0.35%, are made on a dollar-for-dollar basis based on the amount of loans originated under the
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PPP and are secured by loans made by us under the PPP. The PPPLF contains customary covenants but is not subject to any financial covenants. The maturity date of PPPLF borrowings is the same as the maturity date of the loans pledged to secure the extension of credit, generally two years. At maturity, both principal and accrued interest are due. The maturity date of a PPPLF borrowing will be accelerated if, among other things, we have been reimbursed by the SBA for a loan forgiveness (to the extent of the forgiveness), we have received payment from the SBA representing exercise of the loan guarantee or we have received payment from the underlying borrower (to the extent of the payment received). We borrowed money under the PPPLF to finance all the loans we originated under the PPP. As of December 31, 2021, $5.0 million was outstanding under the PPPLF.
Other Financing Activity
On May 30, 2018, we completed a securitization of the unguaranteed portion of certain of our SBA 7(a) loans receivable with the issuance of $38.2 million of unguaranteed SBA 7(a) loan-backed notes. The SBA 7(a) loan-backed notes mature on March 20, 2043, with monthly payments due as payments on the collateralized loans are received. Based on the anticipated repayments of our collateralized SBA 7(a) loans, at issuance, we estimated the weighted average life of the SBA 7(a) loan-backed notes to be approximately two years. The SBA 7(a) loan-backed notes bear interest at the lower of the one-month LIBOR plus 1.40% or the prime rate less 1.08%. The outstanding balance of SBA 7(a) loan-backed notes on March 10, 2022, December 31, 2021, and December 31, 2020, was $6.5 million, $7.7 million and $14.2 million, respectively.
We have junior subordinated notes with a variable interest rate that resets quarterly based on the three-month LIBOR plus 3.25%, with quarterly interest‑only payments. The junior subordinated balance is due at maturity on March 30, 2035. The junior subordinated notes may be redeemed at par at our option. The aggregate principal balance of the junior subordinated notes was $27.1 million as of December 31, 2021.
As an SBA 7(a) licensee, we are an authorized lender under the PPP and originated loans under the program. As of December 31, 2021, we had $5.1 million outstanding in PPP loans. We expect that all of the outstanding PPP loans will be forgiven, either in part or in full, by the SBA or be repaid by the borrower, including both principal and accrued interest.
Securities Offerings
We conducted a continuous public offering of Series A Preferred Units from October 2016 through January 2020, where each Series A Preferred Unit consisted of one share of Series A Preferred Stock and one Series A Preferred Warrant. During the tenure of the offering, we issued 4,603,287 Series A Preferred Units and received net proceeds of $105.2 million after commissions, fees and allocated costs.
The Series A Preferred Warrants are exercisable beginning on the first anniversary of the date of their original issuance until and including the fifth anniversary of the date of such issuance. At the time of issuance, the exercise price of each Series A Preferred Warrant was equal to a 15.0% premium to the per share estimated NAV of our Common Stock most recently published and designated as the applicable NAV by us at the time of issuance. However, in accordance with the terms of the Series A Preferred Warrants, the exercise price of each Series A Preferred Warrant issued prior to the Reverse Stock Split was automatically adjusted to reflect the effect of the Reverse Stock Split and, in the discretion of our Board of Directors, the exercise price and the number of shares issuable upon exercise of each Series A Preferred Warrant issued prior to the Special Dividend was adjusted to reflect the effect of the Special Dividend. As of December 31, 2021, there were 4,541,852 Series A Preferred Warrants to purchase 1,178,125 shares of Common Stock outstanding.
Since February 2020, we have conducted a continuous public offering of up to approximately $785.0 million of our Series A Preferred Stock and Series D Preferred Stock. We intend to use the net proceeds from the offering for general corporate purposes, acquisitions of shares of our Common Stock and Preferred Stock, whether through one or more tender offers, share repurchases or otherwise, and acquisitions consistent with our acquisition and asset management strategies. As of December 31, 2021, we had issued 7,557,916 shares of Series A Preferred Stock and 56,857 shares of Series D Preferred Stock and received aggregate net debt payments, inclusiveproceeds of secured borrowings$172.2 million after commissions, fees and SBA 7(a) loan-backed notesallocated costs.
On March 16, 2020, we established an “at the market” (“ATM”) program through which we may, from time to time in our discretion, offer and sell shares of Common Stock having an aggregate offering price of up to $25.0 million through an investment banking firm acting as the sales agent. Sales of Common Stock under the ATM program may be made directly on or through Nasdaq, among other methods. We intend to use the net proceeds from shares sold under the ATM program, if any, for general corporate purposes, acquisitions of shares of our Preferred Stock, whether through one or more tender offers, share repurchases or otherwise, and acquisitions consistent with our acquisition and asset management strategies. As of March 10, 2022, no sales of Common Stock have been made under the ATM program.
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During the twelve months ended December 31, 2021, we conducted the Rights Offering pursuant to which we issued an aggregate of 8,521,589 shares of Common Stock at a subscription price of $9.25 per share for aggregate gross proceeds of $78.8 million before issuance costs of $1.9 million.
Dividends on and Redemptions of Preferred Stock
Holders of Series A Preferred Stock, Series D Preferred Stock and Series L Preferred Stock are entitled to receive, if, as and when authorized by our Board of Directors, and declared by us out of legally available funds, cumulative cash dividends on each share at an annual rate of 5.50% of the lending business,Series A Preferred Stock Stated Value (i.e., the equivalent of $11,157,000$0.34375 per share per quarter), 5.65% of the Series D Preferred Stock Stated Value (i.e., the equivalent of $0.35313 per share per quarter), and 5.50% of the Series L Preferred Stock Stated Value (i.e., the equivalent of $1.56035 per share per year), respectively. However, if we fail to timely declare distributions or fail to timely pay any distribution on the Series L Preferred Stock, the annual dividend rate of the Series L Preferred Stock will temporarily increase by 1.00% per year, up to a maximum annual rate of 8.50% of the Series L Preferred Stock Stated Value. Dividends on each share of Preferred Stock begin accruing on, and are cumulative from, the date of issuance. Prior to the payment of any distributions on Series L Preferred Stock in respect of a given year, we must first declare and pay dividends on the Common Stock in respect of such year in an aggregate amount equal to the Initial Dividend announced by our Board of Directors at the end of the prior fiscal year. On December 29, 2021, we announced an Initial Dividend on shares of our Common Stock for fiscal year 2022 in the aggregate amount of $7,010,799,
We expect to pay dividends on the Series A Preferred Stock and Series D Preferred Stock in arrears on a monthly basis, and on the Series L Preferred Stock in arrears on a yearly basis, unless our results of operations, our general financing conditions, general economic conditions, applicable requirements of the MGCL or other factors make it imprudent to do so. The timing and amount of dividends declared and paid on our Preferred Stock will be determined by our Board of Directors, in its sole discretion, and may vary from time to time.
Holders of our Common Stock are entitled to receive dividends, if, as and when authorized by the Board of Directors and declared by us out of legally available funds. In determining our dividend policy, the Board of Directors considers many factors including the amount of cash resources available for dividend distributions, capital spending plans, cash flow, our financial position, applicable requirements of the MGCL, any applicable contractual restrictions, and future growth in NAV and cash flow per share prospects. Consequently, the dividend rate on a quarterly basis does not necessarily correlate directly to any individual factor.
From the date of issuance until the fifth anniversary of the date of issuance, holders of Series A Preferred Stock and Series D Preferred Stock may require us to redeem such shares at a discount to the Series A Preferred Stated Value and Series D Preferred Stated Value, respectively. From and after the fifth anniversary of the date of original issuance of any share of our Preferred Stock, we generally (subject to certain conditions) have the right (but not the obligation) to redeem, and the holder of such share may require us to redeem, such share at a redemption price equal to 100% of the stated value of such share, plus any accrued but unpaid dividends in respect of such share as of the effective date of the redemption. The redemption price in respect of any share of Preferred Stock, whether redeemed at our option or at the option of a holder, may be paid in cash or in shares of Common Stock in our sole discretion. During the year ended December 31, 2018, compared with net debt payments of $287,551,000 in the corresponding period in 2017, primarily due to the repayment of $215,000,000 of outstanding
| Payments Due by Period | |||||||||||||||||||
| Contractual Obligations | Total | 2020 | 2021 - 2022 | 2023 - 2024 | Thereafter | ||||||||||||||
| (in thousands) | |||||||||||||||||||
| Debt: | |||||||||||||||||||
| Mortgages payable | $ | 97,100 | $ | — | $ | — | $ | — | $ | 97,100 | |||||||||
| Other (1) (2) | 202,352 | 2,650 | 155,740 | 2,692 | 41,270 | ||||||||||||||
| Secured borrowings (2) | 12,152 | 1,893 | 941 | 1,038 | 8,280 | ||||||||||||||
| Interest and fees: | |||||||||||||||||||
| Debt (3) | 73,537 | 12,088 | 22,962 | 13,061 | 25,426 | ||||||||||||||
| Other contractual obligations: | |||||||||||||||||||
| Borrower advances | 3,250 | 3,250 | — | — | — | ||||||||||||||
| Loan commitments | 9,696 | 9,696 | — | — | — | ||||||||||||||
| Tenant improvements | 7,747 | 4,547 | 580 | 2,620 | — | ||||||||||||||
| Operating leases | 106 | 106 | — | — | — | ||||||||||||||
| Total contractual obligations | $ | 405,940 | $ | 34,230 | $ | 180,223 | $ | 19,411 | $ | 172,076 | |||||||||
Off Balance Sheet Arrangements
Critical Accounting Policies and Estimates and Recently Issued Accounting Pronouncements
The discussion and analysis of our historical financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While we believe that our estimates are based on reasonable assumptions and judgments at the time they are made, some of our assumptions, estimates and judgments will inevitably prove to be incorrect. As a result, actual results could differ from our estimates, and those differences could be material.
We believe the following critical accounting policies,policy, among others, affectaffects our more significant estimates and assumptions used in preparing our consolidated financial statements. For a discussion of recently issued accounting literature, see Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.
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As described in Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K, investments in real estate are evaluated for impairment on a quarterly basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. RecoverabilityIf, and when, such events or changes in circumstances are present, the recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future netundiscounted cash flows undiscounted and without interest, expected to be generated by the asset.assets and its eventual disposition. If suchthe undiscounted cash flows are less than the carrying amount of the assets, are consideredan impairment is recognized to be impaired, the impairment to be recognized is measured by the amount by whichextent the carrying amount of the assets exceeds the estimated fair value of the assets. Assets held for sale are reported at the lower of the asset’s carrying amount or fair value, less cost to sell. The Company recognized impairment of long lived assets of $69,000,000, $0 and $13,100,000 during the years ended December 31, 2019, 2018 and 2017, respectively.
FINRA Estimated Per Share Value
We have prepared an estimate of the per share value of each of our Series A Preferred Stock and Series D Preferred Stock as of December 31, 20192021 in order to assist broker-dealers that are participating in our public offering of Series A Preferred Stock and Series D Preferred Stock in meeting their obligations under applicable FINRA rules. This estimate utilizes the fair values of our investments in real estate and certain lending assets as well as the carrying amounts of our other assets and liabilities, in each case as of December 31, 20192021 (the "Calculated“Calculated Assets and Liabilities"Liabilities”). Specifically, we divided (i) the fair values of our investments in real estate and certain lending assets and the carrying amounts of our other assets less the carrying amounts of our liabilities, in each case as of December 31, 2019,2021, by (ii) the number of shares of Series A Preferred Stock and Series D Preferred Stock outstanding as of that date. The fair values of our investments in real estate and certain lending assets were determined with material assistance from third-party appraisal firms engaged to value our investments in real estate and certain lending assets, in each case in accordance with standards set forth by the American Institute of Certified Public Accountants. We believe our methodology of determining the Calculated Assets and Liabilities conforms to standard industry practices and is reasonably designed to ensure it is reliable.
The terms of the Series A Preferred Stock and Series D Preferred Stock expressly provide that the amount that a holder of Series A Preferred Stock or Series D Preferred Stock, as the case may be, would be entitled to receive upon the redemption of the Series A Preferred Stock or Series D Preferred Stock, as the case may be, or our liquidation of the Company would be equal to the Series A Preferred Stock Stated Value or Series D Preferred Stock Stated Value, as the case may be, plus, in each case, all accumulated, accrued and unpaid dividends thereon (the “Maximum Value”), subject to any applicable redemption fee in the case of a redemption by such holder. As a result, in no event would a holder of Series A Preferred Stock or Series D Preferred Stock, as the case may be, be entitled to receive an amount greater than the Maximum Value upon the redemption of such shares or the liquidation of the Company.our liquidation. Accordingly, although the estimated value of the Series A Preferred Stock and Series D Preferred Stock, calculated based on the Calculated Assets and Liabilities as described above, exceeded the Maximum Value, the Companywe determined that the estimated value of each of the Series A Preferred Stock and Series D Preferred Stock, as of December 31, 2019,2021, was equal to $25.00 per share, plus accrued and unpaid dividends.
Dividends
As of December 31, 2021, there were 8,126,597 and 7,903,302 shares of Series A Preferred Stock issued and outstanding, respectively, 56,857 shares of Series D Preferred Stock issued and outstanding, 8,080,740 and 5,387,160 shares of Series L Preferred Stock issued and outstanding, respectively, and 23,369,331 shares of Common Stock issued and outstanding.
Holders of Series A Preferred Stock are entitled to receive, if, as and when authorized by our Board of Directors, and declared by us out of legally available funds, cumulative cash dividends on each shareas follows:
| Annual Rate of Dividend (as a % of stated value) | ||||||||
| Series A Preferred Stock | 5.50% | |||||||
| Series D Preferred Stock | 5.65% | |||||||
Series L Preferred Stock (1) | 5.50% | |||||||
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Contents
| Declaration Date | Payment Date | Number of Shares | Cash Dividends | |||||
| (in thousands) | ||||||||
| December 3, 2019 | January 15, 2020 | 4,468,315 | $ | 1,467 | ||||
| August 8, 2019 | October 15, 2019 | 4,091,980 | $ | 1,318 | ||||
| June 4, 2019 | July 15, 2019 | 3,601,721 | $ | 1,150 | ||||
| February 20, 2019 | April 15, 2019 | 3,149,924 | $ | 1,010 | ||||
| December 4, 2018 | January 15, 2019 | 2,847,150 | $ | 890 | ||||
| August 22, 2018 | October 15, 2018 | 2,457,119 | $ | 769 | ||||
| June 4, 2018 | July 16, 2018 | 2,149,863 | $ | 662 | ||||
| March 6, 2018 | April 16, 2018 | 1,674,841 | $ | 493 | ||||
Dividends on each share of Preferred Stock begin accruing on, and are cumulative from, the date of issuance. Prior to the payment of any distributions on Series L Preferred Stock in respect of a given year, the Companywe must first declare and pay dividends on the Common Stock in respect of such year in an aggregate amount equal to the Initial Dividend announced by our Board of Directors at the end of the prior fiscal year. On December 20, 2019, our Board of Directors29, 2021, we announced an Initial Dividend on shares of our Common Stock for fiscal year 20202022 in the aggregate amount of $4,380,644.70.$7,010,799.
| Declaration Date | Payment Date | Number of Shares | Cash Dividends | |||||
| (in thousands) | ||||||||
| December 3, 2019 | January 16, 2020 | 5,387,160 | $ | 8,406 | (1) | |||
| December 4, 2018 | January 17, 2019 | 8,080,740 | $ | 14,045 | (2) | |||
dividends declared and paid on our Preferred Stock will be determined by our Board of Directors, in its sole discretion, and may vary from time to time.
Holders of our Common Stock are entitled to receive dividends, if, as and when authorized by the Board of Directors and declared by us out of legally available funds. In determining our dividend policy, the Board of Directors considers many factors including the amount of cash resources available for dividend distributions, capital spending plans, cash flow, our financial position, applicable requirements of the MGCL, any applicable contractual restrictions, and future growth in NAV and cash flow per share prospects. Consequently, the dividend rate on a quarterly basis does not necessarily correlate directly to any individual factor.
| Declaration Date | Payment Date | Type (1) | Cash Dividend Per Common Share (1) | |||||
| December 3, 2019 | December 27, 2019 | Regular Quarterly | $ | 0.075 | ||||
| August 8, 2019 | September 18, 2019 | Regular Quarterly | $ | 0.075 | ||||
| August 8, 2019 | August 30, 2019 | Special Cash | $ | 42.000 | ||||
| June 4, 2019 | June 27, 2019 | Regular Quarterly | $ | 0.375 | ||||
| February 20, 2019 | March 25, 2019 | Regular Quarterly | $ | 0.375 | ||||
| December 4, 2018 | December 27, 2018 | Regular Quarterly | $ | 0.375 | ||||
| August 22, 2018 | September 25, 2018 | Regular Quarterly | $ | 0.375 | ||||
| June 4, 2018 | June 28, 2018 | Regular Quarterly | $ | 0.375 | ||||
| March 6, 2018 | March 29, 2018 | Regular Quarterly | $ | 0.375 | ||||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The fair value of our mortgagesmortgage payable is sensitive to fluctuations in interest rates. Discounted cash flow analysis is generally used to estimate the fair value of our mortgagesmortgage payable, using a rate of 3.67% at December 31, 2019,3.22% and rates ranging from 4.62% to 4.64% at December 31, 2018. Mortgages payable, exclusive of debt included in liabilities associated with assets held for sale, net, with book values of $96,926,000 and $386,923,0003.38% as of December 31, 20192021 and 2018, respectively, have2020, respectively. As of both December 31, 2021 and 2020, our mortgage payable had a book value of $97.1 million and a fair valuesvalue of $99,764,000 and $377,364,000, respectively.
$100.8 million.
Our future income, cash flow and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We are exposed to market risk in the form of changes in interest rates and the potential impact such changes may have on the cash flows from our
floating rate debt or the fair values of our fixed rate debt. AtAs of December 31, 20192021 and 20182020 (excluding premiums, discounts, and deferred loan costs, including debt included in liabilities associated with assets held for sale, net, and before the impact of interest rate swaps, as applicable)costs), $97,100,000$102.1 million (or 31.2%50.2%) and $416,300,000$111.6 million (or 66.8%34.0%) of our debt, respectively, was fixed rate mortgage loans, and $214,504,000$101.4 million (or 68.8%49.8%) and $206,604,000$216.3 million (or 33.2%66.0%), respectively, was floating rate borrowings. Based on the level of floating rate debt outstanding atas of December 31, 20192021 and 2018, and before the impact of the interest rate swaps, as applicable,2020, a 12.550 basis point change in LIBOR would result in an annual impact to our earnings of approximately $268,000$507,000 and $258,000,$1.1 million, respectively. We calculate interest rate sensitivity by multiplying the amount of floating rate debt by the respective change in rate. The sensitivity analysis does not take into consideration possible changes in the balances or fair value of our floating rate debt or the impact of interest rate swaps, as applicable.debt.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is incorporated herein by reference to the Financial Statements and Auditors'Auditors’ Report beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2019,2021, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e)13a-15I and 15d-15(e) under the Exchange Act) at the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC'sSEC’s rules and forms and include controls and procedures designed to ensure the information required to be disclosed by the Companyus in such reports is accumulated and communicated to
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management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. We reviewed the results of management'smanagement’s assessment with the Audit Committee of the Board of Directors.
Management assessed the effectiveness of the Company'sour internal control over financial reporting as of December 31, 2019.2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control—Integrated Framework (2013). Based on their assessment, management determined that as of December 31, 2019, the Company's2021, our internal control over financial reporting was effective based on those criteria.
The effectiveness of the Company'sour internal control over financial reporting as of December 31, 20192021 has been audited by BDO USA,Deloitte & Touche, LLP, an independent registered public accounting firm as stated in their report which appears herein.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Opinion on Internal Control over Financial Reporting
We have audited CIM Commercial Trust Corporation and its subsidiaries’ (the “Company’s”)the internal control over financial reporting of Creative Media & Community Trust Corporation (formerly, CIM Commercial Trust Corporation) (the “Company”) as of December 31, 2019,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”)(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on the COSO criteria. established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated balance sheetsfinancial statements as of and for the year ended December 31, 2021, of the Company and subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and schedules and our report dated March 16, 20202022, expressed an unqualified opinion thereon.
on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting. Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA,Deloitte & Touche LLP
Los Angeles, CA
March 16, 20202022
67
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system'ssystem’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.
We conducted our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Definition and Limitations of Internal Control - Integrated Framework (2013) issuedover Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Los Angeles, CA
March 16, 2022
67
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the Committeeindividual acts of Sponsoring Organizationssome persons, by collusion of two or more people, or by management override of the Treadway Commission (“COSO”)controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and our report dated March 16, 2020 expressed an unqualified opinion thereon.there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.
Basis for Opinion
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Los Angeles, CA
March 16, 2022
67
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
68
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item regarding our directors and executive officers, and corporate governance, including information with respect to beneficial ownership reporting compliance, will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2022 Annual Meeting of Stockholders. Such information is incorporated herein by reference. Information relating to the registrant’s Code of Business Conduct and Ethics that applies to its employees, including its senior financial officers, is included in Part I of this Annual Report on Form 10-K under “Item 1––Business—Available Information.”
Item 11. Executive Compensation
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2022 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item regarding security ownership of certain beneficial owners and management will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2022 Annual Meeting of Stockholders. Such information is incorporated herein by reference. Information relating to securities authorized for issuance under our equity compensation plans is included in Part II of this Annual Report on Form 10-K under “Item 5—Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2022 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2022 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
69
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
The list of the financial statements filed as part of this Annual Report on Form 10-K is set forth on page F-1 herein.
2. Financial Statement Schedules
The list of the financial statement schedules filed as part of this Annual Report on Form 10-K is set forth on page F-1 herein.
Note: Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
3. Exhibits
The following documents are included or incorporated by reference in this Annual Report on Form 10-K:
| Exhibit No. | Document | |||||||
| 3.1 | ||||||||
| 3.1(a) | ||||||||
| 3.1(b) | ||||||||
| 3.1(c) | ||||||||
| 3.1(d) | ||||||||
| 3.1(e) | ||||||||
| 3.1(f) | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| *3.6 | ||||||||
| *4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 4.4 | ||||||||
70
| 4.5 | ||||||||
| 4.6 | ||||||||
| 4.7 | ||||||||
| 4.8 | ||||||||
| +10.1 | ||||||||
| +10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6 | ||||||||
| 10.7 | ||||||||
| 10.8 | ||||||||
| 10.9 | ||||||||
| 10.10 | ||||||||
| 10.11 | ||||||||
| 10.12 | ||||||||
| 10.13 | ||||||||
| 10.14 | ||||||||
71
| 10.15 | ||||||||
| 10.16 | ||||||||
| 10.17 | ||||||||
| 16.1 | ||||||||
| *21.1 | ||||||||
| *23.1 | ||||||||
| *24.1 | ||||||||
| *31.1 | ||||||||
| *31.2 | ||||||||
| *32.1 | ||||||||
| *32.2 | ||||||||
* Filed herewith.
+ Management contract or compensatory plan
(b) Exhibits
The exhibits listed in Item 15(a) are incorporated by reference or attached hereto.
(c) Excluded Financial Statements
None.
Item 16. Form 10-K Summary
None.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Creative Media & Community Trust Corporation | |||||||||||
| Dated: | March 16, 2022 | By: | /s/ DAVID THOMPSON | ||||||||
| David Thompson | |||||||||||
| Chief Executive Officer | |||||||||||
| Dated: | March 16, 2022 | By: | /s/ NATHAN D. DEBACKER | ||||||||
| Nathan D. DeBacker | |||||||||||
| Chief Financial Officer | |||||||||||
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David Thompson and Nathan D. DeBacker and each of them severally, his true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ David Thompson | Chief Executive Officer (Principal Executive | March 16, 2022 | ||||||||||||
| David Thompson | Officer) | |||||||||||||
| /s/ Nathan D. DeBacker | Chief Financial Officer (Principal Financial | March 16, 2022 | ||||||||||||
| Nathan D. DeBacker | Officer and Principal Accounting Officer) | |||||||||||||
| /s/ Douglas Bech | Director | March 16, 2022 | ||||||||||||
| Douglas Bech | ||||||||||||||
| /s/ Marcie L. Edwards | Director | March 16, 2022 | ||||||||||||
| Marcie L. Edwards | ||||||||||||||
| /s/ Kelly Eppich | Director | March 16, 2022 | ||||||||||||
| Kelly Eppich | ||||||||||||||
| /s/ Frank Golay | Director | March 16, 2022 | ||||||||||||
| Frank Golay | ||||||||||||||
| /s/ Shaul Kuba | Director | March 16, 2022 | ||||||||||||
| Shaul Kuba | ||||||||||||||
| /s/ Richard Ressler | Director | March 16, 2022 | ||||||||||||
| Richard Ressler | ||||||||||||||
| /s/ Avraham Shemesh | Director | March 16, 2022 | ||||||||||||
| Avraham Shemesh | ||||||||||||||
73
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
| Financial Statements | Page Number | |||||||
Report of Independent Registered Public Accounting Firm(PCAOB ID No. 34) | F-2 | |||||||
F-4 | ||||||||
F-5 | ||||||||
F-6 | ||||||||
F-8 | ||||||||
F-9 | ||||||||
F-43 | ||||||||
F-45 | ||||||||
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Creative Media & Community Trust Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Creative Media & Community Trust Corporation (formerly, CIM Commercial Trust Corporation) (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive (loss) income, equity and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Investments in Real Estate – Evaluation of Impairment Indicators and Undiscounted Cash Flows – Refer to Note 2 to the consolidated financial statements
Critical Audit Matter Description
The Company’s evaluation of investments in real estate for impairment involves an initial assessment of each real estate asset to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of each investment in real estate is no longer recoverable. Possible indications of impairment may include changes in real estate market conditions, property performance, and additional property valuation assumptions including discount and terminal capitalization rates. When events or changes in circumstances exist, the Company evaluates its investment in real estate for impairment by comparing undiscounted future cash flows expected to be generated over the life of each asset to the respective carrying amount. If the carrying amount of an asset exceeds the undiscounted future cash flows, an analysis is performed to determine the fair value of the asset.
F-2
The Company makes significant assumptions to evaluate investments in real estate for possible indications of impairment. Changes in these assumptions could have a significant impact on the investment in real estate identified for further analysis. For those investments in real estate where indications of impairment have been identified, the Company makes significant estimates and assumptions to determine whether the undiscounted future cash flows expected to be generated over the life of the asset exceed the carrying amount of the investment in real estate. Management concluded that the carrying value of the assets were recoverable and therefore were not subjected to a discounted cash flow analysis. Estimates and assumptions used for the undiscounted future cash flows of the office property include rental rates, lease-up period, growth rates, hold period, and terminal capitalization rates.
We identified the determination of impairment indicators for investments in real estate and certain assumptions used for the undiscounted future cash flows of the properties as a critical audit matter because of (1) the significant assumptions management makes when determining whether events or changes in circumstances have occurred indicating that the carrying amounts of investments in real estate assets may not be recoverable and (2) for those investments in real estate where indications of impairment have been identified, the significant estimates and assumptions management makes to evaluate whether the undiscounted future cash flows expected to be generated over the life of the asset exceed the carrying amount of the property, including those related to rental rates, lease-up period, growth rates, hold period, and terminal capitalization rates. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate (1) whether management appropriately identified impairment indicators and (2) the reasonableness of management’s assumptions related to rental rates, lease-up period, growth rates, hold period, and terminal capitalization rates for the undiscounted future cash flows analysis.
How the Critical Audit Matter Was Addressed in the Audit
•We tested the effectiveness of controls over (1) management’s identification of possible circumstances that may indicate that the carrying amounts of investments in real estate are no longer recoverable and (2) the undiscounted cash flows, including review of the underlying inputs.
•We evaluated the accuracy and relevance of factors utilized in the Company’s qualitative assessment for a sample of properties.
•We performed corroborating inquiries with management, including property accounting, leasing and portfolio oversight to determine whether factors were identified in the current period that may be an impairment indicator or whether factors were identified in the current period that may result in a change to assumptions used in the undiscounted cash flow models.
•We evaluated whether the assumptions used in the Company’s undiscounted model relating to rental rates, lease-up period, growth rates, hold period, and terminal capitalization rates were consistent with evidence obtained in other areas of the audit.
•With the assistance of our fair value specialists, we evaluated the undiscounted cash flow analysis, including office asset estimates of rental rates, lease-up periods, growth rates, hold period and terminal capitalization rates by (1) evaluating the source of information and assumptions used by management and (2) testing the mathematical accuracy of the undiscounted cash flow analysis.
•We evaluated the reasonableness of management’s undiscounted cash flow analysis by comparing management’s projections to the Company’s historical results and external market sources.
/s/ BDO USA,Deloitte & Touche LLP
Los Angeles, CA
March 16, 20202022
We have served as the Company’s auditor since 2020.
F-3
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Investments in real estate, net | $ | 497,984 | $ | 506,040 | |||||||
| Cash and cash equivalents | 22,311 | 33,636 | |||||||||
| Restricted cash | 11,340 | 10,013 | |||||||||
| Loans receivable, net | 73,543 | 83,135 | |||||||||
| Accounts receivable, net | 3,396 | 1,737 | |||||||||
| Deferred rent receivable and charges, net | 36,095 | 35,956 | |||||||||
| Other intangible assets, net | 5,251 | 6,313 | |||||||||
| Other assets | 10,946 | 8,787 | |||||||||
| TOTAL ASSETS | $ | 660,866 | $ | 685,617 | |||||||
| LIABILITIES, REDEEMABLE PREFERRED STOCK, AND EQUITY | |||||||||||
| LIABILITIES: | |||||||||||
| Debt, net | $ | 201,145 | $ | 324,313 | |||||||
| Accounts payable and accrued expenses | 26,751 | 20,327 | |||||||||
| Intangible liabilities, net | 237 | 587 | |||||||||
| Due to related parties | 4,541 | 6,706 | |||||||||
| Other liabilities | 16,861 | 9,733 | |||||||||
| Total liabilities | 249,535 | 361,666 | |||||||||
| COMMITMENTS AND CONTINGENCIES (Note 13) | 0 | 0 | |||||||||
| REDEEMABLE PREFERRED STOCK: Series A cumulative redeemable preferred stock, $0.001 par value; 36,000,000 shares authorized; 1,633,965 and 1,631,965 shares issued and outstanding, respectively, as of December 31, 2021 and 2,008,256 and 2,007,856 shares issued and outstanding, respectively, as of December 31, 2020; liquidation preference of $25.00 per share, subject to adjustment | 37,782 | 45,837 | |||||||||
| EQUITY: | |||||||||||
| Series A cumulative redeemable preferred stock, $0.001 par value; 36,000,000 shares authorized; 6,492,632 and 6,271,337 shares issued and outstanding, respectively, as of December 31, 2021 and 4,484,376 and 4,377,762 shares issued and outstanding, respectively, as of December 31, 2020; liquidation preference of $25.00 per share, subject to adjustment | 156,431 | 108,729 | |||||||||
| Series D cumulative redeemable preferred stock, $0.001 par value; 32,000,000 shares authorized; 56,857 shares issued and outstanding as of December 31, 2021 and 19,145 shares issued and outstanding as of December 31, 2020; liquidation preference of $25.00 per share, subject to adjustment | 1,396 | 473 | |||||||||
| Series L cumulative redeemable preferred stock, $0.001 par value; 9,000,000 shares authorized; 8,080,740 and 5,387,160 shares issued and outstanding, respectively, as of December 31, 2021 and 8,080,740 and 5,387,160 shares issued and outstanding as of December 31, 2020; liquidation preference of $28.37 per share, subject to adjustment | 152,834 | 152,834 | |||||||||
| Common stock, $0.001 par value; 900,000,000 shares authorized; 23,369,331 and 14,827,410 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively | 24 | 15 | |||||||||
| Additional paid-in capital | 866,746 | 794,127 | |||||||||
| Distributions in excess of earnings | (804,227) | (778,519) | |||||||||
| Total stockholders’ equity | 373,204 | 277,659 | |||||||||
| Noncontrolling interests | 345 | 455 | |||||||||
| Total equity | 373,549 | 278,114 | |||||||||
| TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND EQUITY | $ | 660,866 | $ | 685,617 | |||||||
| December 31, | |||||||
| 2019 | 2018 | ||||||
| ASSETS | |||||||
| Investments in real estate, net | $ | 508,707 | $ | 1,040,937 | |||
| Cash and cash equivalents | 23,801 | 54,659 | |||||
| Restricted cash | 12,146 | 22,512 | |||||
| Loans receivable, net | 68,079 | 83,248 | |||||
| Accounts receivable, net | 3,520 | 6,640 | |||||
| Deferred rent receivable and charges, net | 34,857 | 84,230 | |||||
| Other intangible assets, net | 7,260 | 9,531 | |||||
| Other assets | 9,222 | 18,469 | |||||
| Assets held for sale, net (Note 3) | — | 22,175 | |||||
| TOTAL ASSETS | $ | 667,592 | $ | 1,342,401 | |||
| LIABILITIES, REDEEMABLE PREFERRED STOCK, AND EQUITY | |||||||
| LIABILITIES: | |||||||
| Debt, net | $ | 307,421 | $ | 588,671 | |||
| Accounts payable and accrued expenses | 24,309 | 41,598 | |||||
| Intangible liabilities, net | 1,282 | 2,872 | |||||
| Due to related parties | 9,431 | 10,951 | |||||
| Other liabilities | 10,113 | 16,535 | |||||
| Liabilities associated with assets held for sale, net (Note 3) | — | 28,766 | |||||
| Total liabilities | 352,556 | 689,393 | |||||
| COMMITMENTS AND CONTINGENCIES (Note 15) | |||||||
| REDEEMABLE PREFERRED STOCK: Series A, $0.001 par value; 36,000,000 shares authorized; 1,630,821 and 1,630,421 shares issued and outstanding, respectively, at December 31, 2019 and 1,566,386 and 1,565,346 shares issued and outstanding, respectively, at December 31, 2018; liquidation preference of $25.00 per share, subject to adjustment | 36,841 | 35,733 | |||||
| EQUITY: | |||||||
| Series A cumulative redeemable preferred stock, $0.001 par value; 36,000,000 shares authorized; 2,853,555 and 2,837,094 shares issued and outstanding, respectively, at December 31, 2019 and 1,287,169 and 1,281,804 shares issued and outstanding, respectively, at December 31, 2018; liquidation preference of $25.00 per share, subject to adjustment | 70,633 | 31,866 | |||||
| Series L cumulative redeemable preferred stock, $0.001 par value; 9,000,000 shares authorized; 8,080,740 and 5,387,160 shares issued and outstanding, respectively, at December 31, 2019 and 8,080,740 shares issued and outstanding at December 31, 2018; liquidation preference of $28.37 per share, subject to adjustment | 152,834 | 229,251 | |||||
| Common stock, $0.001 and $0.003 par value at December 31, 2019 and 2018, respectively; 900,000,000 shares authorized; 14,602,149 and 14,598,357 shares issued and outstanding at December 31, 2019 and 2018, respectively (1) | 15 | 44 | |||||
| Additional paid-in capital | 794,825 | 790,354 | |||||
| Accumulated other comprehensive income | — | 1,806 | |||||
| Distributions in excess of earnings | (740,617 | ) | (436,883 | ) | |||
| Total stockholders' equity | 277,690 | 616,438 | |||||
| Noncontrolling interests | 505 | 837 | |||||
| Total equity | 278,195 | 617,275 | |||||
| TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND EQUITY | $ | 667,592 | $ | 1,342,401 | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| REVENUES: | |||||||||||||||||
| Rental and other property income | $ | 52,838 | $ | 54,823 | |||||||||||||
| Hotel income | 16,722 | 11,882 | |||||||||||||||
| Interest and other income | 21,366 | 10,503 | |||||||||||||||
| Total Revenues | 90,926 | 77,208 | |||||||||||||||
| EXPENSES: | |||||||||||||||||
| Rental and other property operating | 39,272 | 37,544 | |||||||||||||||
| Asset management and other fees to related parties | 9,030 | 9,793 | |||||||||||||||
| Expense reimbursements to related parties—corporate | 2,050 | 2,243 | |||||||||||||||
| Expense reimbursements to related parties—lending segment | 1,921 | 3,491 | |||||||||||||||
| Interest | 9,413 | 11,415 | |||||||||||||||
| General and administrative | 6,844 | 6,772 | |||||||||||||||
| Transaction costs | 143 | — | |||||||||||||||
| Depreciation and amortization | 20,112 | 21,406 | |||||||||||||||
| Loss on early extinguishment of debt (Note 6) | — | 281 | |||||||||||||||
| Impairment of real estate (Note 3) | — | — | |||||||||||||||
| Total Expenses | 88,785 | 92,945 | |||||||||||||||
| Gain on sale of real estate (Note 3) | — | — | |||||||||||||||
| INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES | 2,141 | (15,737) | |||||||||||||||
| Provision (benefit) for income taxes | 2,992 | (722) | |||||||||||||||
| NET (LOSS) INCOME | (851) | (15,015) | |||||||||||||||
| Net loss (income) attributable to noncontrolling interests | 1 | (1) | |||||||||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY | (850) | (15,016) | |||||||||||||||
| Redeemable preferred stock dividends declared or accumulated (Note 9) | (18,763) | (18,002) | |||||||||||||||
| Redeemable preferred stock deemed dividends (Note 9) | (253) | (377) | |||||||||||||||
| Redeemable preferred stock redemptions (Note 9) | (113) | (72) | |||||||||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (19,979) | $ | (33,467) | |||||||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE: | |||||||||||||||||
| Basic | $ | (1.04) | $ | (2.27) | |||||||||||||
| Diluted | $ | (1.04) | $ | (2.27) | |||||||||||||
| WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: | |||||||||||||||||
| Basic | 19,187 | 14,748 | |||||||||||||||
| Diluted | 19,187 | 14,748 | |||||||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| REVENUES: | |||||||||||
| Rental and other property income | $ | 88,331 | $ | 147,095 | $ | 175,534 | |||||
| Hotel income | 35,633 | 35,672 | 35,576 | ||||||||
| Interest and other income | 16,025 | 14,703 | 24,949 | ||||||||
| 139,989 | 197,470 | 236,059 | |||||||||
| EXPENSES: | |||||||||||
| Rental and other property operating | 62,928 | 79,917 | 101,268 | ||||||||
| Asset management and other fees to related parties | 18,303 | 24,451 | 30,251 | ||||||||
| Interest | 12,175 | 26,894 | 34,484 | ||||||||
| General and administrative | 6,354 | 9,167 | 5,479 | ||||||||
| Transaction costs (Note 15) | 574 | 938 | 11,862 | ||||||||
| Depreciation and amortization | 27,374 | 53,228 | 58,364 | ||||||||
| Loss on early extinguishment of debt (Note 7) | 29,982 | 808 | 8,215 | ||||||||
| Impairment of real estate (Note 2) | 69,000 | — | 13,100 | ||||||||
| 226,690 | 195,403 | 263,023 | |||||||||
| Gain on sale of real estate (Note 3) | 433,104 | — | 408,098 | ||||||||
| INCOME BEFORE PROVISION FOR INCOME TAXES | 346,403 | 2,067 | 381,134 | ||||||||
| Provision for income taxes | 882 | 925 | 1,376 | ||||||||
| NET INCOME | 345,521 | 1,142 | 379,758 | ||||||||
| Net loss (income) attributable to noncontrolling interests | 152 | (21 | ) | (21 | ) | ||||||
| NET INCOME ATTRIBUTABLE TO THE COMPANY | 345,673 | 1,121 | 379,737 | ||||||||
| Redeemable preferred stock dividends declared or accumulated (Note 10) | (17,095 | ) | (15,423 | ) | (1,926 | ) | |||||
| Redeemable preferred stock redemptions (Note 10) | (5,882 | ) | 4 | 2 | |||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | 322,696 | $ | (14,298 | ) | $ | 377,813 | ||||
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE: (1) | |||||||||||
| Basic | $ | 22.11 | $ | (0.98 | ) | $ | 16.41 | ||||
| Diluted | $ | 19.74 | $ | (0.98 | ) | $ | 16.41 | ||||
| WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: (1) | |||||||||||
| Basic | 14,598 | 14,597 | 23,021 | ||||||||
| Diluted | 16,493 | 14,597 | 23,023 | ||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| NET INCOME | $ | 345,521 | $ | 1,142 | $ | 379,758 | |||||
| Other comprehensive (loss) income: cash flow hedges | (1,806 | ) | 175 | 2,140 | |||||||
| COMPREHENSIVE INCOME | 343,715 | 1,317 | 381,898 | ||||||||
| Comprehensive loss (income) attributable to noncontrolling interests | 152 | (21 | ) | (21 | ) | ||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY | $ | 343,867 | $ | 1,296 | $ | 381,877 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Equity
(In thousands, except share and per share amounts)
| Years Ended December 31, 2021 and 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock (1) | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Distributions | Total | Non- | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Par | Par | Paid - in | in Excess | Stockholders’ | controlling | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | of Earnings | Equity | Interests | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2019 | 14,602,149 | $ | 15 | 8,224,254 | $ | 223,467 | $ | 794,825 | $ | (740,617) | $ | 277,690 | $ | 505 | $ | 278,195 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | (51) | (51) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 21,912 | — | — | — | 222 | — | 222 | — | 222 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares of Common Stock in exchange for asset management fees | 203,349 | — | — | — | 2,359 | — | 2,359 | — | 2,359 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series A Preferred Warrants | — | — | — | — | 28 | — | 28 | — | 28 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common dividends ($0.300 per share) | — | — | — | — | — | (4,431) | (4,431) | — | (4,431) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to holders of Series A Preferred Stock ($1.719 per share) | — | — | — | — | — | (9,579) | (9,579) | — | (9,579) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series D Preferred Stock | — | — | 19,145 | 473 | (17) | — | 456 | — | 456 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to holders of Series D Preferred Stock ($1.648 per share) | — | — | — | — | — | (21) | (21) | — | (21) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to holders of Series L Preferred Stock ($1.560 per share) | — | — | — | — | — | (8,406) | (8,406) | — | (8,406) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of Series A Preferred Stock to permanent equity | — | — | 1,570,421 | 38,837 | (3,354) | — | 35,483 | — | 35,483 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Preferred Stock deemed dividends | — | — | — | — | — | (377) | (377) | — | (377) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Series A Preferred Stock | — | — | (29,753) | (741) | 64 | (72) | (749) | — | (749) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | (15,016) | (15,016) | 1 | (15,015) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2020 | 14,827,410 | $ | 15 | 9,784,067 | $ | 262,036 | $ | 794,127 | $ | (778,519) | $ | 277,659 | $ | 455 | $ | 278,114 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Years Ended December 31, 2019, 2018 and 2017 | ||||||||||||||||||||||||||||||||||||||||
| Common Stock (1) | Preferred Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||
| Series A | Series L | Additional | Other | Distributions | Non- | |||||||||||||||||||||||||||||||||||
| Par | Paid - in | Comprehensive | in Excess | controlling | Total | |||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Amount | Shares | Amount | Capital | Income (Loss) | of Earnings | Interests | Equity | ||||||||||||||||||||||||||||||
| Balances, December 31, 2016 | 28,016,025 | $ | 84 | — | $ | — | — | $ | — | $ | 1,566,073 | $ | (509 | ) | $ | (599,971 | ) | $ | 912 | $ | 966,589 | |||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | — | (43 | ) | (43 | ) | |||||||||||||||||||||||||||
| Stock-based compensation expense | 3,195 | — | — | — | — | — | 154 | — | — | — | 154 | |||||||||||||||||||||||||||||
| Share repurchases | (13,424,241 | ) | (40 | ) | — | — | — | — | (752,218 | ) | — | (133,752 | ) | — | (886,010 | ) | ||||||||||||||||||||||||
| Special cash dividends declared to certain common stockholders ($8.970 per share) (1) | — | — | — | — | — | — | — | — | (6,447 | ) | — | (6,447 | ) | |||||||||||||||||||||||||||
| Common dividends ($1.782 per share) (1) | — | — | — | — | — | — | — | — | (38,327 | ) | — | (38,327 | ) | |||||||||||||||||||||||||||
| Issuance of Series A Preferred Warrants | — | — | — | — | — | — | 126 | — | — | — | 126 | |||||||||||||||||||||||||||||
| Issuance of Series L Preferred Stock | — | — | — | — | 8,080,740 | 229,251 | (21,406 | ) | — | — | — | 207,845 | ||||||||||||||||||||||||||||
| Dividends to holders of Series A Preferred Stock ($1.375 per share) | — | — | — | — | — | — | — | — | (490 | ) | — | (490 | ) | |||||||||||||||||||||||||||
| Reclassification of Series A Preferred Stock to permanent equity | — | — | 61,013 | 1,518 | — | — | (101 | ) | — | — | — | 1,417 | ||||||||||||||||||||||||||||
| Redemption of Series A Preferred Stock | — | — | (421 | ) | (10 | ) | — | — | 3 | — | — | — | (7 | ) | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | 2,140 | — | — | 2,140 | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | 379,737 | 21 | 379,758 | |||||||||||||||||||||||||||||
| Balances, December 31, 2017 | 14,594,979 | $ | 44 | 60,592 | $ | 1,508 | 8,080,740 | $ | 229,251 | $ | 792,631 | $ | 1,631 | $ | (399,250 | ) | $ | 890 | $ | 626,705 | ||||||||||||||||||||
(Continued)
F-6
Consolidated Statements of Equity (Continued)
(In thousands, except share and per share amounts)
| Years Ended December 31, 2021 and 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Additional Paid-in Capital | Distributions in Excess of Earnings | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2020 | 14,827,410 | $ | 15 | 9,784,067 | $ | 262,036 | $ | 794,127 | $ | (778,519) | $ | 277,659 | $ | 455 | $ | 278,114 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions to noncontrolling interests | — | — | — | — | — | — | — | 9 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | (118) | (118) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 20,332 | — | — | — | 220 | — | 220 | — | 220 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common dividends ($0.300 per share) | — | — | — | — | — | (5,732) | (5,732) | — | (5,732) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to holders of Series A Preferred Stock ($1.375 per share) | — | — | — | — | — | (10,289) | (10,289) | — | (10,289) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series D Preferred Stock | — | — | 37,712 | 923 | (30) | — | 893 | — | 893 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to holders of Series D Preferred Stock ($1.413 per share) | — | — | — | — | — | (65) | (65) | — | (65) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to holders of Series L Preferred Stock ($1.560 per share) | — | — | — | — | — | (8,406) | (8,406) | — | (8,406) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of Series A Preferred Stock to permanent equity | — | — | 2,006,456 | 50,508 | (4,702) | — | 45,806 | — | 45,806 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Preferred Stock deemed dividends | — | — | — | — | — | (253) | (253) | — | (253) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Series A Preferred Stock | — | — | (112,881) | (2,806) | 219 | (113) | (2,700) | — | (2,700) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock | 8,521,589 | 9 | — | — | 76,912 | — | 76,921 | — | 76,921 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (850) | (850) | (1) | (851) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2021 | 23,369,331 | $ | 24 | 11,715,354 | $ | 310,661 | $ | 866,746 | $ | (804,227) | $ | 373,204 | $ | 345 | $ | 373,549 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Years Ended December 31, 2019, 2018 and 2017 | ||||||||||||||||||||||||||||||||||||||||
| Common Stock (1) | Preferred Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||
| Series A | Series L | Additional | Other | Distributions | Non- | |||||||||||||||||||||||||||||||||||
| Par | Paid - in | Comprehensive | in Excess | controlling | Total | |||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Amount | Shares | Amount | Capital | Income | of Earnings | Interests | Equity | ||||||||||||||||||||||||||||||
| Balances, December 31, 2017 | 14,594,979 | $ | 44 | 60,592 | $ | 1,508 | 8,080,740 | $ | 229,251 | $ | 792,631 | $ | 1,631 | $ | (399,250 | ) | $ | 890 | $ | 626,705 | ||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | — | (74 | ) | (74 | ) | |||||||||||||||||||||||||||
| Stock-based compensation expense | 3,378 | — | — | — | — | — | 162 | — | — | — | 162 | |||||||||||||||||||||||||||||
| Common dividends ($1.500 per share) (1) | — | — | — | — | — | — | — | — | (21,895 | ) | — | (21,895 | ) | |||||||||||||||||||||||||||
| Issuance of Series A Preferred Warrants | — | — | — | — | — | — | 73 | — | — | — | 73 | |||||||||||||||||||||||||||||
| Dividends to holders of Series A Preferred Stock ($1.375 per share) | — | — | — | — | — | — | — | — | (2,814 | ) | — | (2,814 | ) | |||||||||||||||||||||||||||
| Dividends to holders of Series L Preferred Stock ($1.738 per share) | — | — | — | — | — | — | — | — | (14,045 | ) | — | (14,045 | ) | |||||||||||||||||||||||||||
| Reclassification of Series A Preferred Stock to permanent equity | — | — | 1,223,032 | 30,403 | — | — | (2,516 | ) | — | — | — | 27,887 | ||||||||||||||||||||||||||||
| Redemption of Series A Preferred Stock | — | — | (1,820 | ) | (45 | ) | — | — | 4 | — | — | — | (41 | ) | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | 175 | — | — | 175 | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | 1,121 | 21 | 1,142 | |||||||||||||||||||||||||||||
| Balances, December 31, 2018 | 14,598,357 | $ | 44 | 1,281,804 | $ | 31,866 | 8,080,740 | $ | 229,251 | $ | 790,354 | $ | 1,806 | $ | (436,883 | ) | $ | 837 | $ | 617,275 | ||||||||||||||||||||
| Years Ended December 31, 2019, 2018 and 2017 | ||||||||||||||||||||||||||||||||||||||||
| Common Stock (1) | Preferred Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||
| Series A | Series L | Additional | Other | Distributions | Non- | |||||||||||||||||||||||||||||||||||
| Par | Paid - in | Comprehensive | in Excess | controlling | Total | |||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Amount | Shares | Amount | Capital | Income (Loss) | of Earnings | Interests | Equity | ||||||||||||||||||||||||||||||
| Balances, December 31, 2018 | 14,598,357 | $ | 44 | 1,281,804 | $ | 31,866 | 8,080,740 | $ | 229,251 | $ | 790,354 | $ | 1,806 | $ | (436,883 | ) | $ | 837 | $ | 617,275 | ||||||||||||||||||||
| Contributions to noncontrolling interests | — | — | — | — | — | — | — | — | — | 455 | 455 | |||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | — | (522 | ) | (522 | ) | |||||||||||||||||||||||||||
| Extinguishment of noncontrolling interests | — | — | — | — | — | — | — | — | — | (113 | ) | (113 | ) | |||||||||||||||||||||||||||
| Stock-based compensation expense | 3,880 | — | — | — | — | — | 194 | — | — | — | 194 | |||||||||||||||||||||||||||||
| Retirement of fractional shares | (88 | ) | — | — | — | — | — | (1 | ) | — | — | — | (1 | ) | ||||||||||||||||||||||||||
| Change in par value | — | (29 | ) | — | — | — | — | 29 | — | — | — | — | ||||||||||||||||||||||||||||
| Special cash dividends ($42.000 per share) (Note 11) | — | — | — | — | — | — | — | — | (613,294 | ) | — | (613,294 | ) | |||||||||||||||||||||||||||
| Common dividends ($0.900 per share) (1) | — | — | — | — | — | — | — | — | (13,140 | ) | — | (13,140 | ) | |||||||||||||||||||||||||||
| Issuance of Series A Preferred Warrants | — | — | — | — | — | — | 382 | — | — | — | 382 | |||||||||||||||||||||||||||||
| Dividends to holders of Series A Preferred Stock ($1.375 per share) | — | — | — | — | — | — | — | — | (4,945 | ) | — | (4,945 | ) | |||||||||||||||||||||||||||
| Dividends to holders of Series L Preferred Stock ($1.560 per share) | — | — | — | — | — | — | — | — | (12,150 | ) | — | (12,150 | ) | |||||||||||||||||||||||||||
| Repurchase of Series L Preferred Stock | — | — | — | — | (2,693,580 | ) | (76,417 | ) | 7,135 | — | (5,873 | ) | — | (75,155 | ) | |||||||||||||||||||||||||
| Reclassification of Series A Preferred Stock to permanent equity | — | — | 1,561,746 | 38,927 | — | — | (3,278 | ) | — | — | — | 35,649 | ||||||||||||||||||||||||||||
| Redemption of Series A Preferred Stock | — | — | (6,456 | ) | (160 | ) | — | — | 10 | — | (5 | ) | — | (155 | ) | |||||||||||||||||||||||||
| Other comprehensive (loss) income | — | — | — | — | — | — | — | (1,806 | ) | — | — | (1,806 | ) | |||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | — | — | 345,673 | (152 | ) | 345,521 | ||||||||||||||||||||||||||||
| Balances, December 31, 2019 | 14,602,149 | $ | 15 | 2,837,094 | $ | 70,633 | 5,387,160 | $ | 152,834 | $ | 794,825 | $ | — | $ | (740,617 | ) | $ | 505 | $ | 278,195 | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Consolidated Statements of Cash Flows
(In thousands)
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||||||
| Net (loss) income | $ | (851) | $ | (15,015) | |||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization, net | 20,188 | 21,085 | |||||||||||||||
| Loss on early extinguishment of debt | — | 281 | |||||||||||||||
| Amortization of deferred loan costs | 1,068 | 1,192 | |||||||||||||||
| Amortization of premiums and discounts on debt | (61) | (84) | |||||||||||||||
| Unrealized premium adjustment | 2,930 | 1,281 | |||||||||||||||
| Amortization of deferred costs and accretion of fees on loans receivable, net | (622) | (410) | |||||||||||||||
| (Recoveries) write-offs of uncollectible receivables | (82) | 2,622 | |||||||||||||||
| Deferred income taxes | 72 | (995) | |||||||||||||||
| Stock-based compensation | 220 | 222 | |||||||||||||||
| Loans funded, held for sale to secondary market | (96,991) | (28,131) | |||||||||||||||
| Proceeds from sale of guaranteed loans | 109,000 | 25,722 | |||||||||||||||
| Principal collected on loans subject to secured borrowings | 1,786 | 3,695 | |||||||||||||||
| Commitment fees remitted and other operating activity | (2,559) | (935) | |||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable | (1,519) | (419) | |||||||||||||||
| Other assets | (1,340) | 1,233 | |||||||||||||||
| Accounts payable and accrued expenses | 2,574 | (1,080) | |||||||||||||||
| Deferred leasing costs | (1,669) | (1,838) | |||||||||||||||
| Other liabilities | 7,128 | (274) | |||||||||||||||
| Due to related parties | 7,009 | 4,675 | |||||||||||||||
| Net cash provided by operating activities | 46,281 | 12,827 | |||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||||
| Additions to investments in real estate | (4,047) | (14,731) | |||||||||||||||
| Acquisition of real estate | (2,933) | (6,131) | |||||||||||||||
| Loans funded | (36,299) | (25,393) | |||||||||||||||
| Principal collected on loans | 30,584 | 7,884 | |||||||||||||||
| Other investing activity | — | 51 | |||||||||||||||
| Net cash (used in) provided by investing activities | (12,695) | (38,320) | |||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||||
| Payment of unsecured revolving lines of credit, revolving credit facilities, mortgages payable, term notes and principal on SBA 7(a) loan-backed notes | (157,910) | (57,584) | |||||||||||||||
| Proceeds from unsecured revolving lines of credit, revolving credit facilities and term notes | 35,396 | 77,516 | |||||||||||||||
| Payment of principal on secured borrowings | (1,786) | (3,695) | |||||||||||||||
| Payment of deferred preferred stock offering costs | (1,149) | (943) | |||||||||||||||
| Payment of deferred costs | (1) | (983) | |||||||||||||||
| Payment of common dividends | (3,979) | (4,431) | |||||||||||||||
| Proceeds from issuance of Common Stock | 78,825 | — | |||||||||||||||
| Payment of Common Stock offering costs | (1,900) | — | |||||||||||||||
| Net proceeds from issuance of Series A Preferred Warrants | — | 28 | |||||||||||||||
| Net proceeds from issuance of Preferred Stock | 29,829 | 41,958 | |||||||||||||||
| Payment of preferred stock dividends | (18,045) | (16,536) | |||||||||||||||
| Redemption of Preferred Stock | (2,755) | (2,084) | |||||||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 345,521 | $ | 1,142 | $ | 379,758 | |||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Deferred rent and amortization of intangible assets, liabilities and lease inducements | (2,727 | ) | (3,636 | ) | (2,172 | ) | |||||
| Depreciation and amortization | 27,374 | 53,228 | 58,364 | ||||||||
| Reclassification from AOCI to interest expense | (1,806 | ) | (1,552 | ) | — | ||||||
| Reclassification from other assets to interest expense for swap termination | 1,421 | — | — | ||||||||
| Change in fair value of swaps | 209 | 1,728 | — | ||||||||
| Transfer of right to collect supplemental real estate tax reimbursements | — | — | (5,097 | ) | |||||||
| Gain on sale of real estate | (433,104 | ) | — | (408,098 | ) | ||||||
| Impairment of real estate | 69,000 | — | 13,100 | ||||||||
| Loss on early extinguishment of debt | 29,982 | 808 | 8,215 | ||||||||
| Straight-line rent, below-market ground lease and amortization of intangible assets | — | (18 | ) | 1,069 | |||||||
| Straight-line lease termination income | — | — | (362 | ) | |||||||
| Amortization of deferred loan costs | 1,133 | 896 | 1,016 | ||||||||
| Amortization of premiums and discounts on debt | (227 | ) | (444 | ) | (590 | ) | |||||
| Unrealized premium adjustment | 1,697 | 2,522 | 2,447 | ||||||||
| Amortization and accretion on loans receivable, net | (501 | ) | (41 | ) | 96 | ||||||
| Bad debt expense | 40 | 494 | 677 | ||||||||
| Deferred income taxes | (81 | ) | (3 | ) | 271 | ||||||
| Stock-based compensation | 194 | 162 | 154 | ||||||||
| Loans funded, held for sale to secondary market | (29,694 | ) | (55,655 | ) | (57,237 | ) | |||||
| Proceeds from sale of guaranteed loans | 40,033 | 54,142 | 51,312 | ||||||||
| Principal collected on loans subject to secured borrowings | 3,613 | 5,698 | 6,674 | ||||||||
| Other operating activity | (822 | ) | (1,587 | ) | (1,718 | ) | |||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable and interest receivable | 3,197 | 6,692 | (977 | ) | |||||||
| Other assets | 2,980 | (1,421 | ) | (21,341 | ) | ||||||
| Accounts payable and accrued expenses | (6,326 | ) | (365 | ) | (14,139 | ) | |||||
| Deferred leasing costs | (1,695 | ) | (5,773 | ) | (6,973 | ) | |||||
| Other liabilities | (6,825 | ) | 2,221 | (5,589 | ) | ||||||
| Due to related parties | (1,601 | ) | 2,218 | (1,584 | ) | ||||||
| Net cash provided by (used in) operating activities | 40,985 | 61,456 | (2,724 | ) | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Additions to investments in real estate | (24,600 | ) | (12,055 | ) | (21,101 | ) | |||||
| Acquisition of real estate | — | (112,048 | ) | (19,631 | ) | ||||||
| Proceeds from sale of real estate, net | 941,032 | — | 1,018,476 | ||||||||
| Loans funded | (9,898 | ) | (18,579 | ) | (19,079 | ) | |||||
| Principal collected on loans | 10,273 | 10,770 | 10,883 | ||||||||
| Other investing activity | 386 | 178 | 317 | ||||||||
| Net cash provided by (used in) investing activities | 917,193 | (131,734 | ) | 969,865 | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Payment of unsecured revolving lines of credit, revolving credit facilities and term notes | (135,500 | ) | (220,000 | ) | (335,000 | ) | |||||
| Proceeds from unsecured revolving lines of credit, revolving credit facilities and term notes | 158,500 | 180,000 | 120,000 | ||||||||
| Payment of mortgages payable | (46,000 | ) | — | (65,877 | ) | ||||||
| Investments in marketable securities in connection with the legal defeasance of mortgages payable | (268,194 | ) | — | — | |||||||
| Prepayment penalties and other payments for early extinguishment of debt | (5,660 | ) | — | (6,361 | ) | ||||||
| Payment of principal on SBA 7(a) loan-backed notes | (11,487 | ) | (4,431 | ) | — | ||||||
| Proceeds from SBA 7(a) loan-backed notes | — | 38,200 | — | ||||||||
| Payment of principal on secured borrowings | (3,613 | ) | (5,698 | ) | (6,674 | ) | |||||
| Proceeds from secured borrowings | — | 772 | — | ||||||||
(Continued)
Consolidated Statements of Cash Flows (Continued)
(In thousands)
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Payment of deferred preferred stock offering costs | (1,320 | ) | (1,136 | ) | (3,832 | ) | |||||
| Payment of deferred loan costs | (34 | ) | (4,234 | ) | (304 | ) | |||||
| Payment of other deferred costs | (389 | ) | (235 | ) | — | ||||||
| Payment of common dividends | (13,140 | ) | (21,895 | ) | (38,327 | ) | |||||
| Payment of special cash dividends | (613,294 | ) | (1,575 | ) | (4,872 | ) | |||||
| Repurchase of Common Stock | — | — | (886,010 | ) | |||||||
| Payment of borrowing costs | — | — | (8 | ) | |||||||
| Net proceeds from issuance of Series A Preferred Warrants | 385 | 73 | 127 | ||||||||
| Net proceeds from issuance of Series A Preferred Stock | 37,197 | 35,984 | 28,070 | ||||||||
| Net proceeds from issuance of Series L Preferred Stock | — | — | 210,377 | ||||||||
| Repurchase of Series L Preferred Stock | (75,155 | ) | — | — | |||||||
| Payment of preferred stock dividends | (22,157 | ) | (2,173 | ) | (250 | ) | |||||
| Redemption of Series A Preferred Stock | (228 | ) | (113 | ) | (27 | ) | |||||
| Retirement of fractional shares of Common Stock | (1 | ) | — | — | |||||||
| Noncontrolling interests' distributions | (522 | ) | (74 | ) | (43 | ) | |||||
| Noncontrolling interests' contributions | 455 | — | — | ||||||||
| Net cash used in financing activities | (1,000,157 | ) | (6,535 | ) | (989,011 | ) | |||||
| Change in cash balances included in assets held for sale | 755 | (755 | ) | — | |||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (41,224 | ) | (77,568 | ) | (21,870 | ) | |||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH: | |||||||||||
| Beginning of period | 77,171 | 154,739 | 176,609 | ||||||||
| End of period | $ | 35,947 | $ | 77,171 | $ | 154,739 | |||||
| RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS: | |||||||||||
| Cash and cash equivalents | $ | 23,801 | $ | 54,659 | $ | 127,731 | |||||
| Restricted cash | 12,146 | 22,512 | 27,008 | ||||||||
| Total cash and cash equivalents and restricted cash | $ | 35,947 | $ | 77,171 | $ | 154,739 | |||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||
| Cash paid during the period for interest | $ | 13,674 | $ | 27,473 | $ | 35,092 | |||||
| Federal income taxes paid | $ | 1,000 | $ | 622 | $ | 1,595 | |||||
| SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||
| Additions to investments in real estate included in accounts payable and accrued expenses | $ | 5,663 | $ | 11,875 | $ | 9,024 | |||||
| Net increase in fair value of derivatives applied to other comprehensive income | $ | — | $ | 1,727 | $ | 2,140 | |||||
| Reduction of loans receivable and secured borrowings due to the SBA's repurchase of the guaranteed portion of loans | $ | — | $ | — | $ | 534 | |||||
| Additions to deferred loan costs included in accounts payable and accrued expenses | $ | — | $ | 32 | $ | — | |||||
| Additions to deferred costs included in accounts payable and accrued expenses | $ | 35 | $ | 174 | $ | — | |||||
| Additions to preferred stock offering costs included in accounts payable and accrued expenses | $ | 264 | $ | 172 | $ | 388 | |||||
| Accrual of dividends payable to preferred stockholders | $ | 9,873 | $ | 14,935 | $ | 249 | |||||
| Preferred stock offering costs offset against redeemable preferred stock in temporary equity | $ | 347 | $ | 229 | $ | 122 | |||||
| Preferred stock offering costs offset against redeemable preferred stock in permanent equity | $ | 3 | $ | — | $ | 2,532 | |||||
| Reclassification of Series A Preferred Stock from temporary equity to permanent equity | $ | 35,649 | $ | 27,887 | $ | 1,417 | |||||
| Reclassification of loans receivable, net to real estate owned | $ | 243 | $ | — | $ | — | |||||
| Reclassification of Series A Preferred Stock from temporary equity to accounts payable and accrued expenses | $ | — | $ | — | $ | 13 | |||||
| Reclassification of Series A Preferred Stock from permanent equity to accounts payable and accrued expenses | $ | 20 | $ | — | $ | — | |||||
| Accrual of special cash dividends | $ | — | $ | — | $ | 1,575 | |||||
| Accrual reversed to lease termination income | $ | — | $ | — | $ | 480 | |||||
| Payable to related parties included in net proceeds from disposition of real estate | $ | — | $ | — | $ | 202 | |||||
| Establishment of right-of-use asset and lease liability | $ | 362 | $ | — | $ | — | |||||
| Marketable securities transferred in connection with the legal defeasance of mortgages payable | $ | 268,194 | $ | — | $ | — | |||||
| Mortgage notes payable legally defeased | $ | 245,000 | $ | — | $ | — | |||||
| Mortgage note assumed in connection with our sale of real estate | $ | 28,200 | $ | — | $ | — | |||||
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Noncontrolling interests’ distributions | (118) | (51) | |||||||||||||||
| Noncontrolling interests’ contributions | 9 | — | |||||||||||||||
| Net cash (used in) provided by financing activities | (43,584) | 33,195 | |||||||||||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (9,998) | 7,702 | |||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH: | |||||||||||||||||
| Beginning of period | 43,649 | 35,947 | |||||||||||||||
| End of period | $ | 33,651 | $ | 43,649 | |||||||||||||
| RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS: | |||||||||||||||||
| Cash and cash equivalents | $ | 22,311 | $ | 33,636 | |||||||||||||
| Restricted cash | 11,340 | 10,013 | |||||||||||||||
| Total cash and cash equivalents and restricted cash | $ | 33,651 | $ | 43,649 | |||||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||||||||
| Cash paid during the period for interest | $ | 8,463 | $ | 10,315 | |||||||||||||
| Federal income taxes paid | $ | 2,900 | $ | 273 | |||||||||||||
| SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||||||||
| Accrued capital expenditures, tenant improvements and real estate developments | $ | 2,127 | $ | 267 | |||||||||||||
| Accrued deferred costs | $ | — | $ | 125 | |||||||||||||
| Accrued preferred stock offering costs | $ | 161 | $ | 675 | |||||||||||||
| Accrual of dividends payable to preferred stockholders | $ | 12,051 | $ | 11,343 | |||||||||||||
| Accrual of dividends payable to common stockholders | $ | 1,753 | $ | — | |||||||||||||
| Preferred stock offering costs offset against redeemable preferred stock | $ | 400 | $ | 583 | |||||||||||||
| Reclassification of Series A Preferred Stock from temporary equity to permanent equity | $ | 45,806 | $ | 35,483 | |||||||||||||
| Reclassification of loans receivable, net to real estate owned | $ | — | $ | 174 | |||||||||||||
| Reclassification of Series A Preferred Stock from permanent equity to accounts payable and accrued expenses | $ | 48 | $ | 25 | |||||||||||||
| Redeemable preferred stock deemed dividends | $ | 253 | $ | 377 | |||||||||||||
| Accrued Redeemable Preferred Stock fees | $ | 638 | $ | 493 | |||||||||||||
| Equity-based payment for management fees | $ | 9,174 | $ | 7,400 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020
1. ORGANIZATION AND OPERATIONS
Creative Media & Community Trust Corporation (formerly known as CIM Commercial Trust Corporation ("CIM Commercial" or the "Company"Corporation) (the “Company”), is a Maryland corporation and real estate investment trust ("REIT"(“REIT”), together with its wholly-owned subsidiaries ("we," "us" or "our") primarily acquires, owns, and operates. The Company’s portfolio of investments currently consists of Class A and creative office real assets in vibrant and improving metropolitan communities throughout the United States (including improvingStates. The Company seeks to acquire, operate and developingdevelop premier multifamily and creative office assets that cater to rapidly growing industries such assets). Theseas technology, media and entertainment in vibrant and emerging communities are locatedthroughout the United States. The Company seeks to apply the expertise of CIM Group, L.P. (“CIM Group”) to the acquisition, development and operation of top-tier multifamily properties situated in areas that include traditional downtown areasdynamic markets with similar business and suburban main streets, which have high barriersemployment characteristics to entry, high population density, positive population trends and a propensity for growth. We wereits creative office investments. The Company was originally organized in 1993 as PMC Commercial Trust ("(“PMC Commercial"Commercial”), a Texas real estate investment trust.
The Company conducted a continuous public offering of Series A Preferred Units from October 2016 through January 2020, where each Series A Preferred Unit consisted of 1 share of Series A Preferred Stock, par value $0.001 per share, of the Company (collectively, the “Series A Preferred Stock”) with an initial stated value of $25.00 per share, subject to adjustment (the “Series A Preferred Stock Stated Value”), and 1 warrant (collectively, the “Series A Preferred Warrants”) to purchase 0.25 of a share of Common Stock, subject to adjustment (Note 10). Proceeds and expenses from the sale of the Series A Preferred Units were allocated to the Series A Preferred Stock and Series A Preferred Warrants using their relative fair values on the date of issuance.
During the year ended December 31, 2021, the Company conducted a rights offering (the “Rights Offering”) pursuant to which the Company issued an aggregate of 8,521,589 shares of Common Stock at a subscription price of $9.25 per share for aggregate gross proceeds of $78.8 million before issuance costs of $1.9 million.
The Company has qualified and intends to continue to qualify as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the "Code").amended.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"(“GAAP”).
F-9
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
Principles of Consolidation—The consolidated financial statements include the accounts of CIM Commercialthe Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. In determining whether the Company has controlling interests in an entity and the requirement to consolidate the accounts in that entity, the Company analyzes its investments in real estate in accordance with standards set forth in GAAP to determine whether they are variable interest entities (“VIEs”), and if so, whether the Company is the primary beneficiary. The Company’s judgment with respect to its level of influence or control over an entity and whether the Company is the primary beneficiary of a VIE involves consideration of various factors, including the form of the Company’s ownership interest, the Company’s voting interest, the size of the Company’s investment (including loans), and the Company’s ability to participate in major policy-making decisions. The Company’s ability to correctly assess its influence or control over an entity affects the presentation of these investments in real estate on the Company’s consolidated financial statements. As of December 31, 2021, the Company has determined that the trust formed for the benefit of the note holders (the “Trust”) for the securitization of the unguaranteed portion of certain of the Company’s SBA 7(a) loans receivable is considered a VIE. Applying the consolidation requirements for VIEs, the Company determined that it is the primary beneficiary based on its power to direct activities through its role as servicer and its obligations to absorb losses and right to receive benefits.
Investments in Real Estate—Real estate acquisitions are recorded at cost as of the acquisition date. Costs related to the acquisition of properties were expensed as incurred for acquisitions that occurred prior to October 1, 2017. For any acquisition occurring on or after October 1, 2017, we have conducted and will conduct an analysis to determine if the acquisition constitutes a business combination or an asset purchase. If the acquisition constitutes a business combination, then the transaction costs will be expensed as incurred, and if the acquisition constitutes an asset purchase, then the transaction costs
| Buildings and improvements | 15 - 40 years | ||||
| Furniture, fixtures, and equipment | 3 - 5 years | ||||
| Tenant improvements | |||||
Capitalized Project Costs
The Company capitalizes project costs, including pre-construction costs, interest expense, property taxes, insurance, and other costs directly related and essential to the development, redevelopment, or construction of a project, while activities are ongoing to prepare an asset for its intended use. Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred.
Improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. Ordinary repairs and maintenance are expensed as incurred.
Recoverability of Investments in Real Estate—The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Investments in real estate are evaluated for impairment on a quarterly basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. RecoverabilityIf, and when, such events or changes in circumstances are present, the recoverability of assets to be held and used requires significant judgment and estimates and is measured by a comparison of the carrying amount to the future netundiscounted cash flows undiscounted and without interest, expected to be generated by the asset.assets and their eventual disposition. If suchthe undiscounted cash flows are less than the carrying amount of the assets, are consideredan impairment is recognized to be impaired, the impairment to be recognized is measured by the amount by whichextent the carrying amount of the assets exceeds the estimated fair value of the assets. The process for evaluating real estate impairment requires management to make significant assumptions related to certain inputs, including rental rates, lease-up period, occupancy, estimated fair value ofholding periods, capital expenditures, growth rates, market discount rates and terminal capitalization rates. These inputs require a subjective evaluation based on the asset group identified for step two ofspecific property and market. Changes in the impairment testing under GAAP is basedassumptions could have a significant impact on either the income approach with market discount rate, terminal capitalization rate and rental rate assumptions being most critical to such analysis,fair value, the amount of impairment charge, if any, or on the sales comparison approach to similar properties. Assetsboth. Any asset held for sale areis reported at the lower of the asset'sasset’s carrying amount or fair value, less costs to sell. We recognizedWhen an asset is identified by the Company as held for sale, the Company will cease recording depreciation and amortization of the asset. The Company did not recognize any impairment of long-lived assets of $69,000,000, $0 and $13,100,000 during the years ended December 31, 2019, 20182021 and 2017, respectively2020 (Note 3).
Cash and Cash Equivalents—Cash and cash equivalents include short-term liquid investments with initial maturities of three months or less.
F-10
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
Restricted Cash—OurThe Company’s mortgage loan and hotel management agreements provide for depositing cash into restricted accounts reserved for capital expenditures, free rent, tenant improvement and leasing commission obligations. Restricted cash also includes cash required to be segregated in connection with certain of ourthe Company’s loans receivable.
Loans Receivable—OurThe Company’s loans receivable are carried at their unamortized principal balance less unamortized acquisition discounts and premiums, deferred origination fees, retained loan discounts and loan loss reserves. ForAcquisition discounts or premiums, origination fees and retained loan discounts are amortized as a component of interest and other income using the effective interest method over the life of the respective loans, or on a straight-line basis when it approximates the effective interest method. All loans were originated pursuant to programs sponsored by the Small Business Administration (the “SBA”). The programs consist of loans originated under the SBA 7(a) Small Business Administration's ("SBA") 7(a) Guaranteed Loan Program ("(the “SBA 7(a) Program”) and, commencing with the quarter ended June 30, 2020, the Paycheck Protection Program (the “PPP”).
Pursuant to the SBA 7(a) Program"), we sellProgram, the Company sells the portion of the loan that is guaranteed by the SBA. Upon sale of the SBA guaranteed portion of the loans, which are accounted for as sales, the unguaranteed portion of the loan retained by usthe Company is valued on arecorded at fair value basis and a discount (the "Retained Loan Discount") is recorded as a reduction in basis of the retained portion of the loan. Unamortized retained loan discounts were $7,631,000$9.6 million and $7,234,000$7.8 million as of December 31, 20192021 and 2018, respectively
2020, respectively.
At the Acquisition Date,closing of the merger between CIM Urban REIT, LLC (“CIM REIT”), an affiliate of CIM Group, and certain of its subsidiaries and PMC Commercial Trust, the predecessor to the Company, the carrying value of ourthe Company’s loans was adjusted to estimated fair market value and acquisition discounts of $33,907,000$33.9 million were recorded, which are being accreted to interest and other income using the effective interest method. We sold substantially all of our commercial mortgage loans with unamortized acquisition discounts of $15,951,000 to an unrelated third-party in December 2015. Acquisition discounts of $624,000$381,000 and $884,000$492,000 remained as of December 31, 20192021 and 2018,2020, respectively.
A loan receivable is generally classified as non-accrual (a "Non-Accrual Loan"“Non-Accrual Loan”) if (i) it is past due as to payment of principal or interest for a period of 60 days or more, (ii) any portion of the loan is classified as doubtful or is charged-off or (iii) the repayment in full of the principal and or interest is in doubt. Generally, loans are charged-off when management determines that wethe Company will be unable to collect any remaining amounts due under the loan agreement, either through liquidation of collateral or other means. Interest income, included in interest and other income, or discontinued operations, on a Non-Accrual Loan is recognized on either the cash basis or the cost recovery basis.
Loan Loss Reserves—On a quarterly basis, and more frequently if indicators exist, we evaluatethe Company evaluates the collectability of ourits loans receivable. OurThe Company’s evaluation of collectability involves significant judgment, estimates, and a review of the ability of the borrower to make principal and interest payments, the underlying collateral and the borrowers'borrowers’ business models and future operations in accordance with Accounting Standards Codification ("ASC") 450-20, Contingencies—Loss Contingencies, and ASC 310-10, Receivables.operations. For the years ended December 31, 2019, 20182021 and 2017, we2020, the Company recorded $66,000, $147,000net impairment losses of $19,000 and $97,000a net recovery of impairment$16,000, respectively, on ourits loans receivable, respectively.receivable. There were no material loans receivable subject to credit risk which were considered to be impaired atas of December 31, 20192021 or 2018. We2020. The Company considers a loan to be impaired when the Company does not expect to collect all of the contractual interest and principal payments as scheduled in the loan agreements. The Company also establishestablishes a general loan loss reserve when available information indicates that it is probable a loss has occurred based on the carrying value of the portfolio and the amount of the loss can be reasonably estimated. Significant judgment is required in determining the general loan loss reserve, including estimates of the likelihood of default and the estimated fair value of the collateral. The general loan loss reserve includes those loans, which may have negative characteristics which have not yet become known to us.the Company. In addition to the reserves established on loans not considered impaired that have been evaluated under a specific evaluation, we establishthe Company establishes the general loan loss reserve using a consistent methodology to determine a loss percentage to be applied to loan balances. These loss percentages are based on many factors, primarily cumulative and recent loss history and general economic conditions.
Deferred Rent Receivable and Charges—Deferred rent receivable and charges consist of deferred rent, deferred leasing costs, deferred offering costs (Note 10)9) and other deferred costs. Deferred rent receivable is $19,988,000 and $52,366,000 at December 31, 2019 and 2018, respectively. Deferred leasing costs, which represent lease commissions and other direct costs associated with the acquisition of tenants, are capitalized and amortized on a straight-line basis over the terms of the related leases. Deferred leasing costs of $16,881,000 and $51,152,000 are presented net of accumulated amortization of $7,438,000 and $23,910,000 at December 31, 2019 and 2018, respectively. Deferred offering costs represent direct costs incurred in connection with ourthe Company’s offerings of Series A Preferred Units, (as defined in Note 10) and, after January 2020, Series A Preferred Stock (as defined in Note 10) and Series D Preferred Stock, (as defined in Note 10), excluding costs specifically identifiable to a closing, such as commissions, dealer-manager fees, and other offering fees and expenses. Generally, for a specific issuance of securities, issuance-specific offering costs are recorded as a reduction of proceeds raised on the issuance date and offering costs incurred but not directly related to a specifically identifiable closing of a security are deferred. Deferred offering costs are first allocated to each issuance of a security on a pro-rata basis equal to the
F-11
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
ratio of the number of units or securities issued in a given issuance to the maximum number of units or securities that are expected to be issued in the related offering. In the case of the Series A Preferred Units, which were issued prior to February 2020, the issuance-specific offering costs and the deferred offering costs allocated to such issuance arewere further allocated to the Series A Preferred Stock (as defined in Note 10) and Series A Preferred Warrants (as defined in Note 10) issued in such issuance based on the relative fair value of the instruments on the date of issuance. The deferred offering costs allocated to the Series A Preferred Stock and Series A Preferred Warrants are reductions to temporary equity and permanent equity, respectively. Deferred offering costs
As of $5,275,000December 31, 2021 and $4,213,000 related to our offering of Series A Preferred Units are included in2020, deferred rent receivable and charges, at December 31, 2019 and 2018, respectively. Other deferred costs are $151,000 and $409,000 at December 31, 2019 and 2018, respectively.net consist of the following:
| December 31, 2021 | December 31, 2020 | |||||||||||||
| (in thousands) | ||||||||||||||
| Deferred rent receivable | $ | 20,870 | $ | 20,470 | ||||||||||
| Deferred leasing costs, net of accumulated amortization of $8,971 and $7,742, respectively | 8,453 | 8,950 | ||||||||||||
| Deferred offering costs | 6,281 | 6,046 | ||||||||||||
| Other deferred costs | 491 | 490 | ||||||||||||
| Deferred rent receivable and charges, net | $ | 36,095 | $ | 35,956 | ||||||||||
Noncontrolling Interests—Noncontrolling interests represent the interests in various properties owned by third parties.
Redeemable Preferred Stock—Beginning on the date of original issuance of any given shares of Series A Preferred Stock (as defined in Note 10) or Series D Preferred Stock, (as defined in Note 10),and from and after the fifth anniversary date of the original issuance of the Series L Preferred Stock, the holder of such shares has the right to require the Company to redeem such shares, at a redemption price of 100% ofsubject to certain limitations as discussed in Note 9. The Company records the activity related to the Series A Preferred Stock Stated Value (as defined in Note 10) orWarrants, Series D Preferred Stock Stated Value (as defined in Note 10), as applicable, plus accrued and unpaid dividends, subject to the payment of a redemption fee until the fifth anniversary of such issuance. From and after the fifth anniversary of the date of the original issuance, the holder will have the right to require the Company to redeem such shares at a redemption price of 100% of the Series AL Preferred Stock Stated Value or Series D Preferred Stock Stated Value, as applicable, plus accrued and unpaid dividends, without a redemption fee, andin permanent equity. In the Company will have the right (but not the obligation) to redeem such shares at 100% of the Series A Preferred Stock Stated Value or Series D Preferred Stock Stated Value, as
Purchase Accounting for Acquisition of Investments in Real Estate—We applyThe Company applies the acquisition method to all acquired real estate assets. The purchase consideration of the real estate, which for real estate acquired on or after October 1, 2017 includes the transaction costs incurred in connection with such acquisitions, is recorded at fair value to the acquired tangible assets, consisting primarily of land, land improvements, building and improvements, tenant improvements, and furniture, fixtures, and equipment, and identified intangible assets and liabilities, consisting of the value of acquired above-market and below-market leases, in-place leases and ground leases, if any, based in each case on their respectiverelative fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market rate loans, are recorded based on the fair value of any loans assumed in connection with acquiring the real estate.
The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the "as-if-vacant"“as-if-vacant” value is then allocated to land (or acquired ground lease if the land is subject to a ground lease), land improvements, building and improvements, and tenant improvements based on management'smanagement’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases, including leasing commissions, legal, and other related costs.
In allocating the purchase consideration of the identified intangible assets and liabilities of an acquired property, above-market, below-market, and in-place lease values are recorded based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant
F-12
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
to the in-place leases and (ii) management'smanagement’s estimate of fair market lease rates for the corresponding in-place leases measured
over a period equal to the remaining non-cancelable term of the lease, and for below-market leases, over a period equal to the initial term plus any below-market fixed-rate renewal periods. Acquired above-market and below-market leases are amortized and recorded to rental and other property income over the initial terms of the respective leases.
The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the estimated cost of operations during a theoretical lease-up period to replace in-place leases, including lost revenues and any unreimbursed operating expenses, plus an estimate of deferred leasing commissions for in-place leases. The value of in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written-off.
recognition.
Revenue from leasing activities
•One party (lessor) must hold an identified asset;
•The counterparty (lessee) must have the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of the contract; and creative office assets. In determining whether our
•The counterparty (lessee) must have the right to direct the use of the identified asset throughout the period of the contract.
The Company determined that the Company’s contracts with ourits tenants constitute leases, we determined that our contracts explicitly identify the premises and that any substitution rights to relocate the tenanttenants to other premises within the same building stated in the contract are not substantive. Additionally, so long as payments are made timely under thesesuch contracts, ourthe Company’s tenants have the right to obtain substantially all the economic benefits from the use of thisthe identified asset and can direct how and for what purpose the premises are used to conduct their operations. Therefore, ourthe contracts with ourthe Company’s tenants constitute leases.
All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases when collectability is reasonably assuredprobable and the tenant has taken possession or controls the physical use of the leased asset. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent. If the lease provides for tenant improvements, we determinethe Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or us.the Company. When we arethe Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is considered the owner of the improvements, any tenant improvement allowance that is funded is treated as an incentive. Lease incentives paid to tenants are included in other assets and amortized as a reduction to rental revenue on a straight-line basis over the term of the related lease. Lease incentives of $3,976,000$4.0 million and $12,958,000$4.0 million are presented net of accumulated amortization of $2,029,000$2.7 million and $6,188,000 at$2.4 million as of December 31, 20192021 and 2018,2020, respectively.
Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes, insurance, and other recoverable costs, are recognized as revenue and are included in rental and other property income in the period the expenses are incurred.incurred, with the corresponding expenses included in rental and other property operating expense. Tenant reimbursements are recognized and presented on a gross basis when we arethe Company is primarily responsible for fulfilling the promise to provide the specified good or service and control that specified good or service before it is transferred to the tenant. We haveThe Company has elected not to separate lease and non-lease components as the pattern of revenue recognition does not differ for the two components, and the non-lease component is not the primary component in ourthe Company’s leases.
In addition to minimum rents, certain leases, including the Company’s parking leases with third-party operators, provide for additional rents based upon varying percentages of tenants'tenants’ sales in excess of annual minimums. Percentage rent is recognized once lessees'lessees’ specified sales targets have been met. Included in rental and other property income for the years ended December 31, 2019, 2018 and 2017, is $40,000, $65,000 and $304,000, respectively, of percentage rent.
F-13
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020 (Continued)
For the years ended December 31, 2019, 20182021 and 2017, we2020, the Company recognized rental income as follows:
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Rental and other property income | ||||||||||||
| Fixed lease payments (1) | $ | 80,205 | $ | 136,145 | $ | 162,479 | ||||||
| Variable lease payments (2) | 8,126 | 10,950 | 13,055 | |||||||||
| Rental and other property income | $ | 88,331 | $ | 147,095 | $ | 175,534 | ||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Rental and other property income | ||||||||||||||||||||
Fixed lease payments (1) | $ | 45,773 | $ | 50,245 | ||||||||||||||||
Variable lease payments (2) | 7,065 | 4,578 | ||||||||||||||||||
| Rental and other property income | $ | 52,838 | $ | 54,823 | ||||||||||||||||
(1)Fixed lease payments include contractual rents under lease agreements with tenants recognized on a straight-line basis over the lease term, including amortization of acquired above-market leases, below-market leases and lease incentives. (2)Variable lease payments include expense reimbursements billed to tenants and percentage rent, net of bad debt expense from the Company’s operating leases plus cash payments from tenants deemed not probable of collections. Collectability of Lease-Related Receivables The Company continually reviews whether collection of lease-related receivables, including any straight-line rent, and current and future operating expense reimbursements from tenants is probable. The determination of whether collectability is probable takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Upon the determination that the collectability of a receivable is not probable, the Company will record a reduction to rental and other property income and a decrease in the outstanding receivable. Revenue from leases where collection is deemed to be not probable is recorded on a cash basis until collectability becomes probable. Management’s estimate of the collectability of lease-related receivables is based on the best information available at the time of estimate. The Company does not use a general reserve approach. As of December 31, 2021 and 2020, the Company had identified certain tenants where collection was no longer considered probable and decreased outstanding receivables by $579,000 and $1.9 million, respectively, across all operating leases. |
Revenue from lending activities
Interest income included in interest and other income is comprised of interest earned on loans and ourthe Company’s short-term investments and the accretion of net loan origination fees and discounts. Interest income on loans is accrued as earned with the accrual of interest suspended when the related loan becomes a Non-Accrual Loan.
Loan (as defined below).
Revenue from hotel activities
•cancellable and noncancelable room revenues from reservations and
•ancillary services including facility usage and food or beverage.
Cancellable reservations represent a single performance obligation of providing lodging services at the hotel. The Company satisfies its performance obligation and recognizes revenues associated with these reservations over time as services are rendered to the customer. The Company satisfies its performance obligation and recognizes revenues associated with noncancelable reservations at the earlier of (i) the date on which the customer cancels the reservation or (ii) over time as services are rendered to the customer.
F-14
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
Ancillary services include facilities usage and providing food and beverage. The Company satisfies its performance obligation and recognizes revenues associated with these services at a point in time aswhen the good or service is delivered to the customer.
At inception of these contractsa contract with customersa customer for hotel revenues,goods and services, the contractual price is equivalent to the transaction price as there are no elements of variable consideration to estimate.
The Company presents hotel revenues net of sales, occupancy, and other taxes.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2021 | 2020 | ||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
| Hotel properties | Hotel properties | |||||||||||||||||||||||||||||||
| Hotel income | $ | 35,633 | $ | 35,672 | $ | 35,576 | Hotel income | $ | 16,722 | $ | 11,882 | |||||||||||||||||||||
| Rental and other property income | 2,947 | 2,922 | 2,877 | Rental and other property income | 1,070 | 1,353 | ||||||||||||||||||||||||||
| Interest and other income | 168 | 195 | 132 | Interest and other income | 57 | 79 | ||||||||||||||||||||||||||
| Hotel revenues | $ | 38,748 | $ | 38,789 | $ | 38,585 | Hotel revenues | $ | 17,849 | $ | 13,314 | |||||||||||||||||||||
Tenant recoveries outside of the lease agreements
Tenant recoveries outside of the lease agreements are related to construction projects in which ourthe Company’s tenants have agreed to fully reimburse usthe Company for all costs related to construction. These services include architectural, permit expediter and construction services. At inception of the contract with the customer, the contractual price is equivalent to the transaction price as there are no elements of variable consideration to estimate. While these individual services are distinct, in the context of the arrangement with the customer, all of these services are bundled together and represent a single package of construction services requested by the customer. The Company satisfies its performance obligation and recognizes revenues associated with these services over time as the construction is completed. AmountsNo amounts were recognized for tenant recoveries outside of the lease agreements were $205,000, $399,000 and $6,822,000 for the years ended December 31, 2019, 20182021 and 2017, respectively, which are included in interest and other income on the consolidated statements of operations.2020. As of December 31, 2019,2021, there were no remaining performance obligations associated with tenant recoveries outside of the lease agreements.
Premiums and Discounts on Debt— Premiums and discounts on debt are accreted or amortized to interest expense using the effective interest method or on a straight-line basis over the respective term of the loan,debt, which approximates the effective interest method.
Stock-Based Compensation Plans—We haveThe Company has issued and continue to issue restricted shares under stock-based compensation plans described more fully in Note 8. We useThe Company uses fair value recognition provisions to account for all awards granted, modified or settled.
Earnings per Share ("EPS"(“EPS”)—Basic EPS is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of Common Stock outstanding for the period. Net income attributable to common stockholders includes a deduction for dividends due to preferred stockholders. Diluted EPS is computed by dividing net income attributable to common stockholders by the weighted average number of shares of Common Stock outstanding adjusted for the dilutive effect, if any, of securities such as stock-based compensation awards, warrants, including the Series A Preferred Warrants (Note 11) and preferred stock, including the Series A Preferred Stock, (Note 10), Series D Preferred Stock (Note 10) and Series L Preferred Stock, (Note 10), whose redemption is payable in shares of Common Stock or cash, at the discretion of the Company. The dilutive effect of stock-based compensation awards and warrants, including the Series A Preferred Warrants, is reflected in the weighted average diluted shares calculation by application of the treasury stock method. The dilutive effect of preferred stock, including the Series A Preferred Stock, Series D Preferred Stock and Series L Preferred Stock, whose redemption is payable in shares of Common Stock or cash, at the discretion of the Company, is reflected in the weighted average diluted shares calculation by application of the if-converted method.
F-15
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
Distributions—Distributions on ourthe Company’s Series A Preferred Stock, (as defined in Note 10), Series D Preferred Stock, (as defined in Note 10), Series L Preferred Stock (as defined in Note 10) and Common Stock are recorded when they are authorized by ourits Board of Directors and declared by the Company.
Assets Held for Sale and Discontinued Operations—In the ordinary course of business, wethe Company may periodically enter into agreements to dispose of ourits assets. Some of these agreements are non-binding because either they do not obligate either
party to pursue any transactions until the execution of a definitive agreement or they provide the potential buyer with the ability to terminate without penalty or forfeiture of any material deposit, subject to certain specified contingencies, such as completion of due diligence at the discretion of such buyer. We doThe Company does not classify assets that are subject to such non-binding agreements as held for sale.
Assets held for sale are recorded at the lower of cost or estimated fair value less cost to sell. In addition, if wethe Company were to determine that the asset disposal associated with assets held for sale or disposed of represents a strategic shift, the revenues, expenses and net gain (loss) on dispositions would be recorded in discontinued operations for all periods presented through the date of the applicable disposition.
Derivative Financial Instruments—As part of risk management and operational strategies, from time to time, wethe Company may enter into derivative contracts with various counterparties. All derivatives are recognized on the balance sheet at their estimated fair value. On the date that we enter into a derivative contract, we designate the derivative as a fair value hedge, a cash flow hedge, a foreign currency fair value or cash flow hedge, a hedge of a net investment in a foreign operation, or a trading or non-hedging instrument.
Income Taxes—We haveThe Company has elected to be taxed as a REIT under the provisions of the Code. To the extent we qualifythe Company qualifies for taxation as a REIT, weit generally will not be subject to a federal corporate income tax on ourits taxable income that is distributed to ourits stockholders. WeThe Company may, however, be subject to certain federal excise taxes and state and local taxes on ourits income and property. If we failthe Company fails to qualify as a REIT in any taxable year, weit will be subject to federal income taxes at regular corporate rates and will not be able to qualify as a REIT for four subsequent taxable years. In order to remain qualified as a REIT under the Code, wethe Company must satisfy various requirements in each taxable year, including, among others, limitations on share ownership, asset diversification, sources of income, and the distribution of at least 90% of ourits taxable income within the specified time in accordance with the Code.
recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases.
ASC 740, Income Taxes, provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing ourthe Company’s tax returns to determine whether the tax positions are "more“more likely than not"not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current period. We haveThe Company has reviewed all open tax years and concluded that the application of ASC 740 resulted in no material effect to ourits consolidated financial position or results of operations.
F-16
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for Our Investments in Real Estate—ASC 810-10, Consolidation, addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights that would require the entity to be consolidated. We analyze our investments in real estate in accordance with this accounting standard to determine whether they are variable interest entities,Years Ended December 31, 2021 and if so, whether we are the primary beneficiary. Our judgment with respect to our level of influence or control over an entity and whether we are the primary beneficiary of a variable interest entity involves consideration of various factors, including the form of our ownership interest, our voting interest, the size of our investment (including loans), and our ability to participate in major policy-making decisions. Our ability to correctly assess our influence or control over an entity affects the presentation of these investments in real estate on our consolidated financial statements.2020 (Continued)
Use of Estimates—The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases such estimates on historical experience, information available at the time, and assumptions the Company believes to be reasonable under the circumstances and at such time, including the impact of extraordinary events such as COVID-19. Actual results could differ from those estimates.
Concentration of Credit Risk—Financial instruments that subject us to credit risk consist primarily of cash and cash equivalents and interest rate swap agreements. We have ourThe Company has its cash and cash equivalents on deposit with what we believeit believes to be high-quality financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. Management routinely assesses the financial strength of its tenants and, as a consequence, believes that its accounts receivable credit risk exposure is limited.
The majority of ourthe Company’s revenues are earned from properties located in California. We areThe Company is subject to risks incidental to the ownership and operation of commercial real estate. These include, among others, the risks normally associated with changes in the general economic climate in the communities in which we operate,the Company operates, trends in the real estate industry, changes in tax laws, interest rate levels, availability of financing, and the potential liability under environmental and other laws.
Segment Information—Segment information is prepared on the same basis that ourthe Company’s management reviews information for operational decision-making purposes. OurThe Company reportable segments for the years ended December 31, 20192021 and 20182020 consist of two2 types of commercial real estate properties, namely office and hotel, as well as a segment for our lending business. Our reportable segments for the year ended December 31, 2017 consist of three types of commercial real estate properties, namely, office, hotel and multifamily, as well as a segment for ourits lending business. The products for ourthe Company’s office segment primarily include rental of office space and other tenant services, including tenant reimbursements, parking, and storage space rental. The products for our multifamily segment include rental of apartments and other tenant services. The products for ourthe Company’s hotel segment include revenues generated from the operations of hotel properties and rental income generated from a garage located directly
across the street from one of the hotels.hotel. The income from ourthe Company’s lending segment includes premium income recognized from the sale of the government guaranteed portion of loans receivable, income from the yield on its loans receivable and other related fee income earned on ourits loans receivable.
Recently Issued Accounting Pronouncements—In FebruaryJune 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued ASU No. 2016-02, Leases (Topic 842), which was intended to improve financial reporting about leasing transactions. Under the new guidance, a lessee was required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with previous GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily depended on its classification as a finance or operating lease. However, unlike previous GAAP, which required a lessee to recognize only capital leases on the balance sheet, the new ASU required a lessee to recognize both types of leases on the balance sheet. The lessor accounting remained largely unchanged from previous GAAP. However, the ASU contained some targeted improvements that were intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. In July 2018, the FASB issued ASU No. 2018-10, Leases (Topic 842), which contained targeted improvements to amend inconsistencies and clarified guidance that was brought about by stakeholders. Furthermore, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), which provided the following practical expedients to entities: (1) a transition method that allowed entities to apply the new standard at the adoption date and to recognize a cumulative-effect adjustment to the opening balance of retained earnings effective at the adoption date; and (2) the option for lessors to not separate lease and non-lease components provided that certain criteria were met. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842), which provided lessors the option to elect to account for sales and other similar taxes in which the lessee directly pays third-parties to be excluded from the measurement of the contract consideration. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842), which provided narrow amendments, including clarification on transition disclosures to certain aspects of ASU 2016-02. For public entities, these ASUs were effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2018.
Q&A provides
F-17
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020 (Continued)
3. ACQUISITIONS AND DISPOSITIONSINVESTMENTS IN REAL ESTATE
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Land | $ | 141,236 | $ | 139,397 | |||||||
| Land improvements | 2,644 | 2,611 | |||||||||
| Buildings and improvements | 454,431 | 450,741 | |||||||||
| Furniture, fixtures, and equipment | 4,398 | 4,969 | |||||||||
| Tenant improvements | 29,733 | 31,414 | |||||||||
| Work in progress | 10,260 | 8,073 | |||||||||
| Investments in real estate | 642,702 | 637,205 | |||||||||
| Accumulated depreciation | (144,718) | (131,165) | |||||||||
| Net investments in real estate | $ | 497,984 | $ | 506,040 | |||||||
For the years ended December 31, 2021 and 2020, the Company recorded depreciation expense of acquired above-market$16.9 million and below-market leases, in-place leases and ground leases, if any, based in each case on their respective fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market rate loans, are recorded based on the fair value of any loans assumed in connection with acquiring the real estate.$17.7 million, respectively.
| Property | Asset Type | Date of Sale | Square Feet | Sales Price | Transaction Costs | Gain on Sale | |||||||||||||
| (in thousands) | |||||||||||||||||||
| March Oakland Properties, Oakland, CA (1) | Office / Parking Garage | March 1, 2019 | 975,596 | $ | 512,016 | $ | 8,971 | $ | 289,779 | ||||||||||
| 830 1st Street, Washington, D.C. | Office | March 1, 2019 | 247,337 | 116,550 | 2,438 | 45,710 | |||||||||||||
| 260 Townsend Street, San Francisco, CA | Office | March 14, 2019 | 66,682 | 66,000 | 2,539 | 42,092 | |||||||||||||
| 1333 Broadway, Oakland, CA | Office | May 16, 2019 | 254,523 | 115,430 | 658 | 55,221 | |||||||||||||
| Union Square Properties, Washington, D.C. (2) | Office / Land | July 30, 2019 | 630,650 | 181,000 | 3,744 | 302 | |||||||||||||
| $ | 990,996 | $ | 18,350 | $ | 433,104 | ||||||||||||||
| Asset | Date of | Purchase | ||||||||||||||||||||||||
| Property | Type | Acquisition | Square Feet | Price (1) | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| 1037 North Sycamore, Los Angeles, CA | Office | July 13, 2021 | 4,900 | $ | 2,900 | |||||||||||||||||||||
(1)Transaction costs that were capitalized as incurreda component of the assets acquired and liabilities assumed in connection with the acquisition of this acquisition.
| Asset | Date of | Purchase | ||||||||
| Property | Type | Acquisition | Square Feet | Price (1) | ||||||
| (in thousands) | ||||||||||
| 9460 Wilshire Boulevard, Beverly Hills, CA | Office | January 18, 2018 | 91,750 | $ | 132,000 | |||||
property totaled $33,000, which are not included in the purchase price above.
There were no dispositions during the year ended December 31, 2018.
F-18
| Asset | Date of | Purchase | ||||||||
| Property | Type | Acquisition | Square Feet | Price (1) | ||||||
| (in thousands) | ||||||||||
| 1130 Howard Street, San Francisco, CA | Office | December 29, 2017 | 21,194 | $ | 17,717 | |||||
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020 (Continued)
| Asset | Date of | Purchase | ||||||||||||||||||||||||
| Property | Type | Acquisition | Square Feet | Price (1) | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| 1021 East 7th Street, Austin, TX | Office | November 30, 2020 | 11,180 | $ | 6,079 | |||||||||||||||||||||
(1)Transaction costs that were capitalized as a component of the assets acquired and liabilities assumed in connection with the acquisition of this property totaled $51,000, which we sold a 100% leasehold interest, to unrelated third-partiesare not included in the purchase price above.
There were no dispositions during the year ended December 31, 2017. Transaction costs related to these sales were expensed as incurred.
| Property | Asset Type | Date of Sale | Square Feet or Units (1) | Sales Price | Transaction Costs | Gain on Sale | ||||||||||||
| (in thousands) | ||||||||||||||||||
| 211 Main Street, San Francisco, CA (2) | Office | March 28, 2017 | 417,266 | $ | 292,882 | $ | 1,435 | $ | 189,242 | |||||||||
| 3636 McKinney Avenue, Dallas, TX (2) | Multifamily | May 30, 2017 | 103 | $ | 20,000 | $ | 177 | $ | 6,631 | |||||||||
| 3839 McKinney Avenue, Dallas, TX (2) | Multifamily | May 30, 2017 | 75 | $ | 14,100 | $ | 180 | $ | 4,982 | |||||||||
| 200 S College Street, Charlotte, NC | Office | June 8, 2017 | 567,865 | $ | 148,500 | $ | 833 | $ | 45,906 | |||||||||
| 980 9th and 1010 8th Street, Sacramento, CA | Office & Parking Garage | June 20, 2017 | 485,926 | $ | 120,500 | $ | 1,119 | $ | 34,559 | |||||||||
| 4649 Cole Avenue, Dallas, TX (2) | Multifamily | June 23, 2017 | 334 | $ | 64,000 | $ | 499 | $ | 28,648 | |||||||||
| 800 N Capitol Street, Washington, D.C. | Office | August 31, 2017 | 311,593 | $ | 119,750 | $ | 2,388 | $ | 34,456 | |||||||||
| 7083 Hollywood Boulevard, Los Angeles, CA (3) | Office | September 21, 2017 | 82,193 | $ | 42,300 | $ | 584 | $ | 23,810 | |||||||||
| 47 E 34th Street, New York, NY | Multifamily | September 26, 2017 | 110 | $ | 80,000 | $ | 3,157 | $ | 16,556 | |||||||||
| 370 L'Enfant Promenade, Washington, D.C. (4) | Office | October 17, 2017 | 409,897 | $ | 126,680 | $ | 2,451 | $ | 2,994 | |||||||||
| 4200 Scotland Street, Houston, TX (3) | Multifamily | December 15, 2017 | 308 | $ | 64,025 | $ | 597 | $ | 20,314 | |||||||||
| $ | 1,092,737 | $ | 13,420 | $ | 408,098 | |||||||||||||
2020.
The results of operations of the properties we sold have been included in the consolidated statements of operations through each properties' respective disposition date. The following is the detail of the carrying amounts of assets and liabilities at the time of the sales of the properties that occurred during the years ended December 31, 2019, 2018 and 2017:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Assets | |||||||||||
| Investments in real estate, net | $ | 476,532 | $ | — | $ | 631,740 | |||||
| Deferred rent receivable and charges, net | 55,297 | — | 34,071 | ||||||||
| Other intangible assets, net | 316 | — | 11,283 | ||||||||
| Other assets | 4,096 | — | 38 | ||||||||
| Total assets | $ | 536,241 | $ | — | $ | 677,132 | |||||
| Liabilities | |||||||||||
| Debt, net (1) (2) | $ | 318,072 | $ | — | $ | 115,037 | |||||
| Other liabilities | — | — | 14,029 | ||||||||
| Intangible liabilities, net | — | — | 1,800 | ||||||||
| Total liabilities | $ | 318,072 | $ | — | $ | 130,866 | |||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Land | $ | — | $ | 52,199 | $ | 8,290 | |||||
| Land improvements | — | 756 | — | ||||||||
| Buildings and improvements | — | 74,522 | 10,109 | ||||||||
| Tenant improvements | — | 1,451 | 371 | ||||||||
| Acquired in-place leases (1) | — | 7,003 | 1,184 | ||||||||
| Acquired above-market leases (2) | — | 109 | 37 | ||||||||
| Acquired below-market leases (3) | — | (3,992 | ) | (360 | ) | ||||||
| Net assets acquired | $ | — | $ | 132,048 | $ | 19,631 | |||||
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Land | $ | 1,839 | $ | 4,976 | |||||||||||||
| Land improvements | 33 | 9 | |||||||||||||||
| Buildings and improvements | 1,061 | 534 | |||||||||||||||
| Tenant improvements | — | 190 | |||||||||||||||
Acquired in-place leases (1) | — | 408 | |||||||||||||||
Acquired above-market leases (2) | — | 18 | |||||||||||||||
Acquired below-market leases (3) | — | (5) | |||||||||||||||
| Net assets acquired | $ | 2,933 | $ | 6,130 | |||||||||||||
(1)Acquired in-place leases have a weighted average amortization period of 3 years for the 2020 acquisition.
(2)Acquired above-market leases have a weighted average amortization period of 3 years for the 2020 acquisition.
(3)Acquired below-market leases have a weighted average amortization period of 3 years for the 2020 acquisition.
Property Concentrations—Kaiser Foundation Health Plan, Incorporated (“Kaiser”), which occupied space in one of the Company’s Oakland, California properties accounted for 30.9% of its annualized rental income for the year ended December 31, 2021.
F-19
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020 (Continued)
| December 31, 2018 | ||||
| (in thousands) | ||||
| Assets | ||||
| Investments in real estate, net (1) | $ | 17,123 | ||
| Cash and cash equivalents | 755 | |||
| Accounts receivable, net | 41 | |||
| Deferred rent receivable and charges, net (2) | 4,009 | |||
| Other intangible assets, net (3) | 220 | |||
| Other assets | 27 | |||
| Total assets held for sale, net | $ | 22,175 | ||
| Liabilities | ||||
| Debt, net (4) | $ | 28,018 | ||
| Accounts payable and accrued expenses | 370 | |||
| Due to related parties | 81 | |||
| Other liabilities | 297 | |||
| Total liabilities associated with assets held for sale, net | $ | 28,766 | ||
4. INVESTMENTS IN REAL ESTATE
| December 31, | |||||||
| 2019 | 2018 | ||||||
| (in thousands) | |||||||
| Land | $ | 134,421 | $ | 266,410 | |||
| Land improvements | 2,713 | 18,368 | |||||
| Buildings and improvements | 438,349 | 912,892 | |||||
| Furniture, fixtures, and equipment | 4,628 | 4,245 | |||||
| Tenant improvements | 35,667 | 133,487 | |||||
| Work in progress | 13,484 | 9,234 | |||||
| Investments in real estate | 629,262 | 1,344,636 | |||||
| Accumulated depreciation | (120,555 | ) | (303,699 | ) | |||
| Net investments in real estate | $ | 508,707 | $ | 1,040,937 | |||
Loans receivable consist of the following:
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| (in thousands) | ||||||||||||||
| SBA 7(a) loans receivable, subject to credit risk | $ | 42,103 | $ | 32,226 | ||||||||||
| SBA 7(a) loans receivable, subject to loan-backed notes | 18,050 | 23,631 | ||||||||||||
| SBA 7(a) loans receivable, Paycheck Protection Program | 5,050 | 14,484 | ||||||||||||
| SBA 7(a) loans receivable, subject to secured borrowings | 6,857 | 8,786 | ||||||||||||
| SBA 7(a) loans receivable, held for sale | 1,200 | 4,009 | ||||||||||||
| Loans receivable | 73,260 | 83,136 | ||||||||||||
| Deferred capitalized costs, net | 1,226 | 884 | ||||||||||||
| Loan loss reserves | (943) | (885) | ||||||||||||
| Loans receivable, net | $ | 73,543 | $ | 83,135 | ||||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| SBA 7(a) loans receivable, subject to loan-backed notes | $ | 27,598 | $ | 36,847 | ||||
| SBA 7(a) loans receivable, subject to credit risk | 27,290 | 29,385 | ||||||
| SBA 7(a) loans receivable, subject to secured borrowings | 12,644 | 16,409 | ||||||
| Loans receivable | 67,532 | 82,641 | ||||||
| Deferred capitalized costs | 1,145 | 1,309 | ||||||
| Loan loss reserves | (598 | ) | (702 | ) | ||||
| Loans receivable, net | $ | 68,079 | $ | 83,248 | ||||
SBA 7(a) Loans Receivable, Subject to Loan-Backed Notes—Represents the unguaranteed portions of loans originated under the SBA 7(a) Program which were transferred to a trust and are held as collateral in connection with a securitization transaction. The proceeds received from the transfer are reflected as loan-backed notes payable (Note 7)6). These loans are subject to credit risk.
SBA 7(a) Loans Receivable, Subject to Credit RiskPaycheck Protection Program—RepresentsAs an SBA 7(a) licensee, the unguaranteed portions ofCompany originated loans originated under the SBA 7(a) Program which were retainedPPP. As of December 31, 2021, a significant portion of these loans have been either forgiven or repaid, and the Company expects that all of the outstanding PPP loans will be forgiven, either in part or in full, by the CompanySBA or be repaid by the borrower, including both principal and the government guaranteed portions of such loans that have not yet been fully funded or sold.accrued interest.
SBA 7(a) Loans Receivable, Subject to Secured Borrowings—Represents the government guaranteed portions of loans originated under the SBA 7(a) Program which were sold with the proceeds received from the sale reflected as secured borrowings—government guaranteed loans. There is no credit risk associated with these loans since the SBA has guaranteed payment of the principal.
Other
As of December 31, 20192021 and 2018, 99.6%2020, the Company’s loans subject to credit risk were 99.8% and 99.7%99.1%, respectively, concentrated in the hospitality industry. As of December 31, 2021 and 2020, 100.0% and 98.8%, respectively, of ourthe Company’s loans subject to credit risk were current. We classifyThe Company classifies loans with negative characteristics in substandard categories ranging from special mention to doubtful. AtAs of December 31, 20192021 and 2018, $1,362,0002020, $1.1 million and $235,000,$1.4 million, respectively, of loans subject to credit risk were classified in substandard categories.
F-20
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020 (Continued)
AND LIABILITIES
A schedule of our intangible assets and liabilities and related accumulated amortization and accretion as of December 31, 20192021 and 2018,2020, is as follows:
| As of December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Intangible assets: | |||||||||||
| Acquired in-place leases, net of accumulated amortization of $9,030 and $9,228, respectively, with an average useful life of 9 and 8 years, respectively | $ | 2,266 | $ | 3,316 | |||||||
| Acquired above-market leases, net of accumulated amortization of $27 and $15, respectively, both with an average useful life of 6 years | 28 | 40 | |||||||||
| Trade name and license | 2,957 | 2,957 | |||||||||
| Total intangible lease assets, net | $ | 5,251 | $ | 6,313 | |||||||
| Intangible lease liabilities: | |||||||||||
| Acquired below-market leases, net of accumulated amortization of $1,134 and $1,786, respectively, with an average useful life of 5 and 4 years, respectively | $ | 237 | $ | 587 | |||||||
| Assets | Liabilities | |||||||||||||||
| December 31, 2019 | Acquired Above-Market Leases | Acquired In-Place Leases | Trade Name and License | Acquired Below-Market Leases | ||||||||||||
| (in thousands) | ||||||||||||||||
| Gross balance | $ | 74 | $ | 13,653 | $ | 2,957 | $ | (3,521 | ) | |||||||
| Accumulated amortization | (42 | ) | (9,382 | ) | — | 2,239 | ||||||||||
| $ | 32 | $ | 4,271 | $ | 2,957 | $ | (1,282 | ) | ||||||||
| Average useful life (in years) | 5 | 8 | Indefinite | 4 | ||||||||||||
| Assets | Liabilities | |||||||||||||||
| December 31, 2018 | Acquired Above-Market Leases | Acquired In-Place Leases | Trade Name and License | Acquired Below-Market Leases | ||||||||||||
| (in thousands) | ||||||||||||||||
| Gross balance | $ | 146 | $ | 16,210 | $ | 2,957 | $ | (6,618 | ) | |||||||
| Accumulated amortization | (51 | ) | (9,731 | ) | — | 3,746 | ||||||||||
| $ | 95 | $ | 6,479 | $ | 2,957 | $ | (2,872 | ) | ||||||||
| Average useful life (in years) | 3 | 8 | Indefinite | 4 | ||||||||||||
During the years ended December 31, 2019, 20182021 and 2017, respectively. Tax abatement2020, the Company recognized amortization included in rentalrelated to its intangible assets and other property operating expenses was $0, $0 and $276,000 for the years ended December 31, 2019, 2018 and 2017, respectively. The amortization of the acquired below-market ground lease included in rental and other property operating expenses was $0, $0 and $93,000 for the years ended December 31, 2019, 2018 and 2017, respectively. The amortization of the acquired below-market leases included in rental and other property income was $1,590,000, $2,190,000 and $1,066,000 for the years ended December 31, 2019, 2018 and 2017, respectively.liabilities as follows:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Acquired above-market lease amortization | $ | 12 | $ | 10 | |||||||||||||
| Acquired in-place lease amortization | $ | 1,050 | $ | 1,364 | |||||||||||||
| Acquired below-market lease amortization | $ | 350 | $ | 700 | |||||||||||||
A schedule of future amortization and accretion of acquisition relatedacquired intangible assets and liabilities as of December 31, 2019,2021, is as follows:
| Assets | Liabilities | |||||||||||||||||||||||||||||||
| Acquired | Acquired | Acquired | ||||||||||||||||||||||||||||||
| Above-Market | In-Place | Below-Market | ||||||||||||||||||||||||||||||
| Years Ending December 31, | Leases | Leases | Leases | |||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| 2022 | $ | 12 | $ | 813 | $ | (236) | ||||||||||||||||||||||||||
| 2023 | 10 | 470 | (1) | |||||||||||||||||||||||||||||
| 2024 | 5 | 374 | — | |||||||||||||||||||||||||||||
| 2025 | 1 | 171 | — | |||||||||||||||||||||||||||||
| 2026 | — | 123 | — | |||||||||||||||||||||||||||||
| Thereafter | — | 315 | — | |||||||||||||||||||||||||||||
| $ | 28 | $ | 2,266 | $ | (237) | |||||||||||||||||||||||||||
F-21
| Assets | Liabilities | |||||||||||
| Acquired | Acquired | Acquired | ||||||||||
| Above-Market | In-Place | Below-Market | ||||||||||
| Years Ending December 31, | Leases | Leases | Leases | |||||||||
| (in thousands) | ||||||||||||
| 2020 | $ | 9 | $ | 1,349 | $ | (701 | ) | |||||
| 2021 | 5 | 899 | (347 | ) | ||||||||
| 2022 | 5 | 663 | (234 | ) | ||||||||
| 2023 | 6 | 375 | — | |||||||||
| 2024 | 6 | 375 | — | |||||||||
| Thereafter | 1 | 610 | — | |||||||||
| $ | 32 | $ | 4,271 | $ | (1,282 | ) | ||||||
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020 (Continued)
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Mortgage loan with a fixed interest rate of 4.14% per annum, with monthly payments of interest only, and a balance of $97,100,000 due on July 1, 2026. The loan is nonrecourse. On March 1, 2019, mortgage loans with an aggregate outstanding principal balance of $205,500,000 were legally defeased in connection with the sale of the properties that were collateral for the loans. On May 16, 2019, one loan with an outstanding principal balance of $39,500,000 was legally defeased in connection with the sale of the property that was collateral for the loan. | $ | 97,100 | $ | 342,100 | ||||
| Mortgage loan with a fixed interest rate of 4.50% per annum, with monthly payments of interest only for 10 years, and payments of interest and principal starting in February 2022. The loan had a $42,008,000 balance due on January 5, 2027. The loan was nonrecourse. On March 1, 2019, the mortgage loan was prepaid in connection with the sale of the property that was collateral for the loan. | — | 46,000 | ||||||
| 97,100 | 388,100 | |||||||
| Deferred loan costs related to mortgage loans | (174 | ) | (1,177 | ) | ||||
| Total Mortgages Payable | 96,926 | 386,923 | ||||||
| Secured borrowing principal on SBA 7(a) loans sold for a premium and excess spread—variable rate, reset quarterly, based on prime rate with weighted average coupon rate of 5.68% and 5.89% at December 31, 2019 and 2018, respectively. | 7,845 | 11,283 | ||||||
| Secured borrowing principal on SBA 7(a) loans sold for excess spread—variable rate, reset quarterly, based on prime rate with weighted average coupon rate of 3.32% and 3.57% at December 31, 2019 and 2018, respectively. | 4,307 | 4,482 | ||||||
| 12,152 | 15,765 | |||||||
| Unamortized premiums | 629 | 940 | ||||||
| Total Secured Borrowings—Government Guaranteed Loans | 12,781 | 16,705 | ||||||
| Revolving credit facility | 153,000 | 130,000 | ||||||
| SBA 7(a) loan-backed notes with a variable interest rate which resets monthly based on the lesser of the one-month LIBOR plus 1.40% or the prime rate less 1.08%, with payments of interest and principal due monthly. Balance due at maturity in March 20, 2043. | 22,282 | 33,769 | ||||||
| Junior subordinated notes with a variable interest rate which resets quarterly based on the three-month LIBOR plus 3.25%, with quarterly interest only payments. Balance due at maturity on March 30, 2035. | 27,070 | 27,070 | ||||||
| 202,352 | 190,839 | |||||||
| Deferred loan costs related to other debt | (2,867 | ) | (3,941 | ) | ||||
| Discount on junior subordinated notes | (1,771 | ) | (1,855 | ) | ||||
| Total Other Debt | 197,714 | 185,043 | ||||||
| Total Debt | $ | 307,421 | $ | 588,671 | ||||
The mortgagesfollowing table summarizes the debt balances as of December 31, 2021 and 2020, and the debt activity for the year ended December 31, 2021 (in thousands):
| During the Year Ended December 31, 2021 | ||||||||||||||||||||||||||||||||
| Balances as of December 31, 2020 | Debt Issuances & Assumptions | Repayments | Accretion & (Amortization) | Balances as of December 31, 2021 | ||||||||||||||||||||||||||||
| Mortgage Payable: | ||||||||||||||||||||||||||||||||
| Outstanding Balance | $ | 97,100 | $ | — | $ | — | $ | — | $ | 97,100 | ||||||||||||||||||||||
| Deferred debt issuance costs — Mortgage Payable | (147) | — | — | 27 | (120) | |||||||||||||||||||||||||||
| Total Mortgage Payable | 96,953 | — | — | 27 | 96,980 | |||||||||||||||||||||||||||
| Secured Borrowings – Government Guaranteed Loans: | ||||||||||||||||||||||||||||||||
| Outstanding Balance | 8,457 | — | (1,786) | — | 6,671 | |||||||||||||||||||||||||||
| Unamortized premiums | 457 | — | — | (152) | 305 | |||||||||||||||||||||||||||
| Total Secured Borrowings—Government Guaranteed Loans | 8,914 | — | (1,786) | (152) | 6,976 | |||||||||||||||||||||||||||
| Other Debt: | ||||||||||||||||||||||||||||||||
| 2018 revolving credit facility | 166,500 | 25,000 | (131,500) | — | 60,000 | |||||||||||||||||||||||||||
| 2020 unsecured revolving credit facility | — | — | — | — | — | |||||||||||||||||||||||||||
| Junior subordinated notes | 27,070 | — | — | — | 27,070 | |||||||||||||||||||||||||||
| SBA 7(a) loan-backed notes | 14,230 | — | (6,560) | — | 7,670 | |||||||||||||||||||||||||||
| Borrowed funds from the Federal Reserve through the Paycheck Protection Program Liquidity Facility | 14,484 | 10,396 | (19,850) | — | 5,030 | |||||||||||||||||||||||||||
| Deferred debt issuance costs — other | (2,155) | — | — | 1,166 | (989) | |||||||||||||||||||||||||||
| Discount on junior subordinated notes | (1,683) | — | — | 91 | (1,592) | |||||||||||||||||||||||||||
| Total Other Debt | 218,446 | 35,396 | (157,910) | 1,257 | 97,189 | |||||||||||||||||||||||||||
| Total Debt, Net | $ | 324,313 | $ | 35,396 | $ | (159,696) | $ | 1,132 | $ | 201,145 | ||||||||||||||||||||||
Mortgage Payable—The mortgage payable areis secured by deedsa deed of trust on certain of the propertiesa property and assignments of rents.rents receivable. As of December 31, 2021, the Company’s mortgage payable had a fixed interest rate of 4.14% per annum, with monthly payments of interest only, due on July 1, 2026. The junior subordinated notes may be redeemed at par at our option.loan is nonrecourse.
Secured Borrowings—Government Guaranteed Loans—Secured borrowings—government guaranteed loans represent sold loans which are treated as secured borrowings because the loan sales did not meet the derecognition criteria provided for in ASC 860-30, Secured Borrowing and Collateral. These loans included cash premiums that are amortized as a reduction to interest expense over the life of the loan using the effective interest method and are fully amortized when the underlying loan is repaid in full. As of December 31, 2021, the Company’s secured borrowings-government guaranteed loans included $4.0 million of loans sold for a premium and excess spread, with a variable rate, reset quarterly, based on prime rate with weighted average coupon rate of 3.89%, and $2.6 million of loans sold for an excess spread, with a variable rate, reset quarterly, based on prime rate with weighted average coupon rate of 1.56%.
2018 Revolving Credit Facility—In October 2018, the Company entered into a secured revolving credit facility with a bank syndicate that, as amended, allows the Company to borrow up to $209.5 million, subject to a borrowing base calculation (the “2018 revolving credit facility”). In September 2020, the 2018 revolving credit facility was amended (the “2018 Credit Facility Modification”) to remedy the effect that COVID-19 had on the Company’s ability to borrow under the 2018 revolving
F-22
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
credit facility during the period from September 2, 2020 through August 14, 2021 (the “Deferral Period”). The 2018 revolving credit facility bore interest during the Deferral Period at (A) the base rate plus 1.05% or (B) LIBOR plus 2.05% and (ii) bears interest after the Deferral Period, at (A) the base rate plus 0.55% or (B) LIBOR plus 1.55%. As of December 31, 2021 and 2020, the variable interest rate was 2.15% and 2.20%, respectively. The 2018 revolving credit facility is also subject to an unused commitment fee of 0.15% or 0.25% depending on the amount of aggregate unused commitments. The 2018 revolving credit facility is secured by deeds of trust on certain of the Company’s properties. The 2018 revolving credit facility contains customary covenants and is not subject to any financial covenants (though the amount the Company may borrow under the 2018 revolving credit facility is determined by a borrowing base calculation). The 2018 revolving credit facility matures in October 2022 and provides for 1 one-year extension option under certain conditions, including providing notice of the election and paying an extension fee of 0.15% of each lender’s commitment being extended on the effective date of such extension. As of December 31, 2021 and 2020, $60.0 million and $166.5 million, respectively, was outstanding under the 2018 revolving credit facility, and approximately $117.6 million and $28.0 million, respectively, was available for future borrowings.
2020 Unsecured Revolving Credit Facility—In May 2020, the Company entered into an unsecured revolving credit facility with a bank (the “2020 unsecured revolving credit facility”) pursuant to which the Company can borrow up to a maximum of $10.0 million. Outstanding advances under the 2020 unsecured revolving credit facility bear interest at the rate of 1.00%. The Company also pays a revolving credit facility fee of 1.12% with each advance under the 2020 unsecured revolving credit facility, which fee is subject to a cap of $112,000 in the aggregate. The 2020 unsecured revolving credit facility contains certain customary covenants including a maximum leverage ratio and a minimum fixed charge coverage ratio, as well as certain other conditions. The 2020 unsecured revolving credit facility matures in May 2022. As of December 31, 2021, no amounts were outstanding under the 2020 unsecured revolving credit facility and $10.0 million was available for future borrowings.
Junior Subordinated Notes—The Company has junior subordinated notes with a variable interest rate which resets quarterly based on the three-month LIBOR plus 3.25%, with quarterly interest only payments. The junior subordinated balance is due at maturity on March 30, 2035. The junior subordinated notes may be redeemed at par at the Company’s option.
SBA 7(a) Loan-Backed Notes—On May 30, 2018, the Company completed a securitization of the unguaranteed portion of certain of its SBA 7(a) loans receivable with the issuance of $38.2 million of unguaranteed SBA 7(a) loan-backed notes. The SBA 7(a) loan-backed notes are secured by deeds of trust or mortgages.
Paycheck Protection Program Liquidity Facility—In June 2020, the Company commenced borrowing funds relatedfrom the Federal Reserve through the PPP Liquidity Facility (the “PPPLF”) to our SBA 7(a) loan-backed notes.
reduction to total debt.
F-23
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020 (Continued)
Future principal payments on ourthe Company’s debt (face value) at December 31, 2019 are as follows:
| Years Ending December 31, | Mortgages Payable | Secured Borrowings Principal (1) | Other (1) (2) | Total | ||||||||||||
| (in thousands) | ||||||||||||||||
| 2020 | $ | — | $ | 1,893 | $ | 2,650 | $ | 4,543 | ||||||||
| 2021 | — | 459 | 1,349 | 1,808 | ||||||||||||
| 2022 | — | 482 | 154,391 | 154,873 | ||||||||||||
| 2023 | — | 506 | 1,656 | 2,162 | ||||||||||||
| 2024 | — | 532 | 1,036 | 1,568 | ||||||||||||
| Thereafter | 97,100 | 8,280 | 41,270 | 146,650 | ||||||||||||
| $ | 97,100 | $ | 12,152 | $ | 202,352 | $ | 311,604 | |||||||||
| Years Ending December 31, | Mortgage Payable | Secured Borrowings Principal (1) | 2018 Revolving Credit Facility | Other (1) (2) | Total | |||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| 2022 | $ | — | $ | 380 | $ | 60,000 | $ | 2,446 | $ | 62,826 | ||||||||||||||||||||||
| 2023 | — | 391 | — | 1,598 | 1,989 | |||||||||||||||||||||||||||
| 2024 | — | 402 | — | 1,613 | 2,015 | |||||||||||||||||||||||||||
| 2025 | — | 414 | — | 1,704 | 2,118 | |||||||||||||||||||||||||||
| 2026 | 97,100 | 426 | — | 452 | 97,978 | |||||||||||||||||||||||||||
| Thereafter | — | 4,658 | — | 31,957 | 36,615 | |||||||||||||||||||||||||||
| $ | 97,100 | $ | 6,671 | $ | 60,000 | $ | 39,770 | $ | 203,541 | |||||||||||||||||||||||
(1)Principal payments on secured borrowings and 2017SBA 7(a) loan-backed notes, which are included in Other, are generally dependent upon cash flows received from the underlying loans. The Company’s estimate of their repayment is based on scheduled payments on the underlying loans. The Company’s estimate will differ from actual amounts to the extent the Company experiences prepayments and or loan liquidations or charge-offs. No payment is due unless payments are received from the changes duringborrowers on the years ended is as follows:underlying loans.
(2)Represents the junior subordinated notes, SBA 7(a) loan-backed notes, and borrowed funds from the Federal Reserve through the PPPLF.
7. STOCK-BASED COMPENSATION PLANS
| 2019 | ||||||
| Weighted | ||||||
| Average Grant | ||||||
| Number of | Date Fair Value | |||||
| Shares | Per Share | |||||
| Balance, January 1 | 3,378 | $ | 44.40 | |||
| Granted | 3,880 | $ | 56.66 | |||
| Vested | (3,378 | ) | $ | 44.40 | ||
| Balance, December 31 | 3,880 | $ | 56.66 | |||
| 2018 | ||||||
| �� | Weighted | |||||
| Average Grant | ||||||
| Number of | Date Fair Value | |||||
| Shares | Per Share | |||||
| Balance, January 1 | 3,195 | $ | 46.95 | |||
| Granted | 3,378 | $ | 44.40 | |||
| Vested | (3,195 | ) | $ | 46.95 | ||
| Balance, December 31 | 3,378 | $ | 44.40 | |||
| 2017 | ||||||
| Weighted | ||||||
| Average Grant | ||||||
| Number of | Date Fair Value | |||||
| Shares | Per Share | |||||
| Balance, January 1 | 3,615 | $ | 56.26 | |||
| Granted | 3,195 | $ | 46.95 | |||
| Vested | (3,615 | ) | $ | 56.26 | ||
| Balance, December 31 | 3,195 | $ | 46.95 | |||
| Weighted | ||||||||||||||
| Number | Average Grant | |||||||||||||
| of | Date Fair Value | |||||||||||||
Shares (1) | Per Share (1) | |||||||||||||
| Balance, December 31, 2019 | 3,880 | $ | 56.66 | |||||||||||
| Granted | 21,912 | $ | 10.04 | |||||||||||
| Vested | (3,880) | $ | 56.66 | |||||||||||
| Balance, December 31, 2020 | 21,912 | $ | 10.04 | |||||||||||
| Granted | 20,332 | $ | 10.82 | |||||||||||
| Vested | (21,912) | $ | 10.04 | |||||||||||
| Balance, December 31, 2021 | 20,332 | $ | 10.82 | |||||||||||
(1)Amounts have been adjusted to give retroactive effect to the Reverse Stock to each of the independent members of the Board of Directors (3,195 in aggregate) under the 2015 Equity Incentive Plan, which fully vested in June 2018 based on one year of continuous service. In May 2018, we granted awards of 1,126 restricted shares of Common Stock to each of the independent members of the Board of Directors (3,378 in aggregate) under the 2015 Equity Incentive Plan, which fully vested in May 2019 based on one year of continuous service. In May 2019, we granted awards of 889 restricted shares of Common Stock to each of the independent members of the Board of Directors (3,556 in aggregate) under the 2015 Equity Incentive Plan, which vest after one year of continuous service. In July 2019, we granted awards of 81 restricted shares of Common Stock to each of the independent members of the Board of Directors (324 in aggregate) under the 2015 Equity Incentive Plan, which will vest at the same time as the restricted shares of Common Stock granted in May 2019. Split.
Compensation expense related to these restricted shares of Common Stock is recognized over the vesting period. Weperiod, and generally vests based on one year of continuous service. The Company recorded compensation expense related to these
F-24
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and $153,0002020
and for the Years Ended December 31, 2021 and 2020 (Continued)
restricted shares of Common Stock in the amount of $220,000 and $222,000 for the years ended December 31, 2019, 20182021 and 2017, respectively, related to these restricted shares of Common Stock.
2020, respectively.
As of December 31, 2019,2021, there was $75,000$73,000 of total unrecognized compensation expense related to shares of Common Stock which will be recognized ratably over the next year.remaining vesting period. The estimated fair value of restricted shares vested during 2019, 20182021 and 20172020 was $150,000, $150,000$220,000 and $203,000,$220,000, respectively.
The computations of basic EPS are based on ourthe Company’s weighted average shares outstanding. The basic weighted average number of shares of Common Stock outstanding was 14,598,000, 14,597,000 and 23,021,000 for the years ended December 31, 2019, 2018 and 2017, respectively. In order to calculate the diluted weighted average number of shares of Common Stock outstanding for the years ended December 31, 2019 and 2017, the basic weighted average number of shares of Common Stock outstanding was increased by 1,895,000 and 2,000, respectively, to reflect the dilutive effect of certain shares of our Series A Preferred Stock. The computation of diluted EPS does not include outstanding shares of Series A Preferred Stock for the year ended December 31, 2018 because their impact was deemed to be anti-dilutive. Outstanding Series A Preferred Warrants were not included in the computation of diluted EPS for the years ended December 31, 2019, 20182021 and 20172020 because their impact was either anti-dilutive or such warrants were not exercisable during such periods (Note 11)10). No shares of Series D Preferred Stock outstanding as of December 31, 2021 and December 31, 2020 had a dilutive effect. Outstanding shares of Series L Preferred Stock were not included in the computation of diluted EPS for the years ended December 31, 2019, 20182021 and 20172020 because such shares were not redeemable during such periods.
EPS for the year-to-date period may differ from the sum of quarterly EPS amounts due to the required method for computing EPS in the respective periods. In addition, EPS is calculated independently for each component and may not be additive due to rounding.
The following table reconciles the numerator and denominator used in computing ourthe Company’s basic and diluted per-share amounts for net (loss) income (loss) attributable to common stockholders for the years ended December 31, 2019, 20182021 and 2017:2020:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (in thousands, except per share amounts) | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (19,979) | $ | (33,467) | |||||||||||||
| Redeemable preferred stock dividends declared on dilutive shares | — | (1) | |||||||||||||||
| Diluted net (loss) income attributable to common stockholders | $ | (19,979) | $ | (33,468) | |||||||||||||
| Denominator: | |||||||||||||||||
| Basic weighted average shares of Common Stock outstanding | 19,187 | 14,748 | |||||||||||||||
| Effect of dilutive securities—contingently issuable shares | — | — | |||||||||||||||
| Diluted weighted average shares and common stock equivalents outstanding | 19,187 | 14,748 | |||||||||||||||
| Net (loss) income attributable to common stockholders per share: | |||||||||||||||||
| Basic | $ | (1.04) | $ | (2.27) | |||||||||||||
| Diluted | $ | (1.04) | $ | (2.27) | |||||||||||||
F-25
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands, except per share amounts) | |||||||||||
| Numerator: | |||||||||||
| Net income (loss) attributable to common stockholders | $ | 322,696 | $ | (14,298 | ) | $ | 377,813 | ||||
| Redeemable preferred stock dividends declared on dilutive shares | 2,804 | — | 9 | ||||||||
| Diluted net income (loss) attributable to common stockholders | $ | 325,500 | $ | (14,298 | ) | $ | 377,822 | ||||
| Denominator: | |||||||||||
| Basic weighted average shares of Common Stock outstanding | 14,598 | 14,597 | 23,021 | ||||||||
| Effect of dilutive securities—contingently issuable shares | 1,895 | — | 2 | ||||||||
| Diluted weighted average shares and common stock equivalents outstanding | 16,493 | 14,597 | 23,023 | ||||||||
| Net income (loss) attributable to common stockholders per share: | |||||||||||
| Basic | $ | 22.11 | $ | (0.98 | ) | $ | 16.41 | ||||
| Diluted | $ | 19.74 | $ | (0.98 | ) | $ | 16.41 | ||||
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020 (Continued)
The table below provides information regarding the issuances, reclassifications and redemptions of each class of the Company’s preferred stock in permanent equity during the years ended December 31, 2021 and 2020 (dollar amounts in thousands):
| Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Series D | Series L | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2019 | 2,837,094 | $ | 70,633 | — | $ | — | 5,387,160 | $ | 152,834 | 8,224,254 | $ | 223,467 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series D Preferred Stock | — | — | 19,145 | 473 | — | — | 19,145 | 473 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of Series A Preferred Stock to permanent equity | 1,570,421 | 38,837 | — | — | — | — | 1,570,421 | 38,837 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Series A Preferred Stock | (29,753) | (741) | — | — | — | — | (29,753) | (741) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2020 | 4,377,762 | $ | 108,729 | 19,145 | $ | 473 | 5,387,160 | $ | 152,834 | 9,784,067 | $ | 262,036 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series D Preferred Stock | — | — | 37,712 | 923 | — | — | 37,712 | 923 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of Series A Preferred Stock to permanent equity | 2,006,456 | 50,508 | — | — | — | — | 2,006,456 | 50,508 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Series A Preferred Stock | (112,881) | (2,806) | — | — | — | — | (112,881) | (2,806) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2021 | 6,271,337 | $ | 156,431 | 56,857 | $ | 1,396 | 5,387,160 | $ | 152,834 | 11,715,354 | $ | 310,661 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2021, the Company had issued in registered public offerings 7,557,916 shares of Series A Preferred Stock, 4,603,287 Series A Preferred Warrants and 56,857 shares of Series D Preferred Stock and received gross proceeds of $190.3 million ($188.2 million of which was allocated to the Series A Preferred Stock, $761,000 of which was allocated to the Series A Preferred Warrants, and $1.4 million of which was allocated to the Series D Preferred Stock) and, additionally, had issued 568,681 shares of Series A Preferred Stock as payment for services to the Administrator, for which no cash proceeds were received. In connection with such issuance, costs specifically identifiable to the offering of Series A Preferred Stock, Series A Preferred Warrants and Series D Preferred Stock, such as commissions, dealer manager fees and other offering fees and expenses, totaled $15.9 million ($15.7 million of which was allocated to the Series A Preferred Stock, $142,000 of which was allocated to the Series A Preferred Warrants, and $35,000 of which was allocated to the Series D Preferred Stock). In addition, as of December 31, 2021, non-issuance-specific costs related to this offering totaled $8.0 million. As of December 31, 2021, the Company has reclassified and allocated $1.7 million, $5,000 and $13,000 from deferred charges to Series A Preferred Stock, Series A Preferred Warrants and Series D Preferred Stock, respectively, as a reduction to the gross proceeds received. Such reclassification was based on the cumulative number of securities issued relative to the maximum number of securities expected to be issued under the offering. As of December 31, 2021, there were 7,903,302 shares of Series A Preferred Stock outstanding, 4,541,852 Series A Preferred Warrants to purchase 1,178,125 shares of Common Stock outstanding, and 56,857 shares of Series D Preferred Stock outstanding. As of December 31, 2021, 223,295 shares of Series A Preferred Stock and no shares of Series D Preferred Stock have been redeemed.
Series A Preferred Stock—WeThe Company conducted a continuous public offering of Series A Preferred Units from October 2016 through January 2020, where each Series A Preferred Unit consisted of one1 share of Series A Preferred Stock, par value $0.001 per share, of the Company (collectively, the "Series A Preferred Stock") with an initial stated value of $25.00 per share, (the "Series A Preferred Stock Stated Value"), subject to adjustment, and one1 warrant (collectively, the "Series A Preferred Warrants") to purchase 0.25 of a share of Common Stock depending on when such Series A Preferred Warrant was issued (Note 11).Stock. Proceeds and expenses from the sale of the Series A Preferred Units were allocated to the Series A Preferred Stock and Series A Preferred Warrants using their relative fair values on the date of issuance.
Since February 2020, we havethe Company has been conducting a continuous public offering with respect to shares of ourthe Company’s Series A Preferred Stock, which, since such time, is no longer being issued as a unit with an accompanying Series A Preferred Warrant.
F-26
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the payment of dividends, each of the Series A Preferred StockYears Ended December 31, 2021 and Series D Preferred Stock (as defined below) ranks senior to our Series L Preferred Stock (as defined below) and our Common Stock. With respect to the distribution of amounts upon liquidation, dissolution or winding-up, each of the Series A Preferred Stock and Series D Preferred Stock ranks on parity with our Series L Preferred Stock, to the extent of the Series L Preferred Stock Stated Value (as defined below), and otherwise ranks senior to our Series L Preferred Stock and our Common Stock.2020 (Continued)
adjustments.
On the first anniversary of the issuance of a particular share of Series A Preferred Stock, we reclassifythe Company reclassifies such share of Series A Preferred Stock from temporary equity to permanent equity because the feature giving rise to temporary equity classification, the requirement to satisfy redemption requests in cash, lapses on the first anniversary.anniversary date. As of December 31, 2019, we have2021, the Company had reclassified an aggregate of $64,953,000$146.2 million in net proceeds from temporary equity to permanent equity.
Series D Preferred Stock—Since February 2020, the Company has been conducting a continuous public offering with respect to shares of its Series D Preferred Stock, par value $0.001 per share, subject to adjustment. The selling price of the Series D Preferred Stock was $25.00 per share for all sales that occurred from the beginning of the offering to and including June 28, 2020 and is expected to be, and since June 29, 2020, has been, $24.50 per share through the end of the life of the offering. Shares of Series D Preferred Stock are recorded in permanent equity at the time of their issuance.
Series L Preferred Stock—On November 21, 2017, the Company issued 8,080,740 shares of Series L Preferred Stock having an initial stated value of $28.37 per share (“Series L Preferred Stock Stated Value”), subject to adjustment. The Company received gross proceeds of $229.3 million from the sale of the Series L Preferred Stock, which was reduced by issuance-specific offering costs, such as commissions, dealer manager fees, and other offering fees and expenses, totaling $15.9 million, a discount of $2.9 million, and non-issuance-specific costs of $2.5 million. These fees have been recorded as a reduction to the gross proceeds in permanent equity.
On October 22, 2019, the Company commenced a tender offer for the purchase of up to 2,693,580 shares of Series L Preferred Stock (the “Tender Offer”), representing one-third of the then-outstanding shares of Series L Preferred Stock. The Tender Offer was oversubscribed, and pursuant to the terms of the Tender Offer, shares of Series L Preferred Stock were accepted for purchase on a pro rata basis. The Company repurchased 2,693,580 shares of Series L Preferred Stock at a purchase price of $29.12 per share, as converted to and paid in ILS. The shares of Series L Preferred Stock accepted for payment by the Company were restored to the status of authorized but unissued shares of preferred stock without designation as to class or series.
Until the fifth anniversary of the date of original issuance of the Series L Preferred Stock, the Company is prohibited from issuing any shares of preferred stock ranking senior to or on parity with the Series L Preferred Stock with respect to the payment of dividends, other distributions, liquidation, and or dissolution or winding up of the Company unless the Minimum Fixed Charge Coverage Ratio, calculated in accordance with the Articles Supplementary describing the Series L Preferred Stock, is equal to or greater than 1.25:1.00. As of December 31, 2021 and 2020, the Company was in compliance with the Series L Preferred Stock Minimum Fixed Charge Coverage Ratio.
Refer to Note 12 for a discussion of certain payments the Company has made in shares of Common Stock and in shares of Preferred Stock and may make in shares of Preferred Stock in lieu of cash payments in order to remain in compliance with the Series L Preferred Stock Minimum Fixed Charge Coverage Ratio.
Dividends—With respect to the payment of dividends, the Series A Preferred Stock ranks senior to the Series L Preferred Stock and the Common Stock, and on parity with the Series D Preferred Stock. The Series L Preferred Stock ranks senior to the Common Stock (except with respect to and only to the extent of the Initial Dividend) and junior to the Series A Preferred Stock, Series D Preferred Stock and Common Stock (with respect to and only to the extent of the Initial Dividend). With respect to the distribution of amounts upon liquidation, dissolution or winding-up, the Series A Preferred Stock ranks on parity with the Series D Preferred Stock and Series L Preferred Stock, to the extent of the Series L Preferred Stock Stated Value, and otherwise ranks senior to the Series L Preferred Stock and the Common Stock. With respect to the distribution of amounts upon liquidation, dissolution or winding-up, the Series L Preferred Stock ranks senior to the Common Stock, both (i) to the extent of the Series L Preferred Stock Stated Value and (ii) following payment to holders of the Common Stock of an
F-27
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
amount equal to any unpaid Initial Dividend, to the extent of any accrued and unpaid dividends on the Series L Preferred Stock, on parity with the Series A Preferred Stock and Series D Preferred Stock, to the extent of the Series L Preferred Stock Stated Value and junior to the Series A Preferred Stock, Series D Preferred Stock and Common Stock (to the extent of the Initial Dividend), in all instances with respect to any accrued and unpaid dividends on the Series L Preferred Stock.
Holders of Series A Preferred Stock are entitled to receive, if, as and when authorized by ourthe Company’s Board of Directors, and declared by usthe Company out of legally available funds, cumulative cash dividends on each share of Series A Preferred Stock at an annual rate of 5.5%5.50% of the Series A Preferred Stock Stated Value (i.e., the equivalent of $0.34375 per share per quarter) (the "Series“Series A Dividend"Dividend”). Dividends on each share of Series A Preferred Stock begin accruing on, and are cumulative from, the date of issuance.
| Declaration Date | Payment Date | Number of Shares | Cash Dividends | |||||
| (in thousands) | ||||||||
| December 3, 2019 | January 15, 2020 | 4,468,315 | $ | 1,467 | ||||
| August 8, 2019 | October 15, 2019 | 4,091,980 | $ | 1,318 | ||||
| June 4, 2019 | July 15, 2019 | 3,601,721 | $ | 1,150 | ||||
| February 20, 2019 | April 15, 2019 | 3,149,924 | $ | 1,010 | ||||
| December 4, 2018 | January 15, 2019 | 2,847,150 | $ | 890 | ||||
| August 22, 2018 | October 15, 2018 | 2,457,119 | $ | 769 | ||||
| June 4, 2018 | July 16, 2018 | 2,149,863 | $ | 662 | ||||
| March 6, 2018 | April 16, 2018 | 1,674,841 | $ | 493 | ||||
Holders of Series D Preferred Stock are entitled to receive, if, as and when authorized by ourthe Company’s Board of Directors, and declared by usthe Company out of legally available funds, cumulative cash dividends on each share of Series D Preferred Stock at an annual rate of 5.65% of the Series D Preferred Stock Stated Value (i.e., the equivalent of $0.35313 per share per quarter) (the “Series D Dividend”). Dividends on each share of Series A Preferred Stock and Series D Preferred Stock begin accruing on, and are cumulative from, the date of issuance.
The Tender Offer was oversubscribed, and pursuantCompany expects to the terms of the Tender Offer, shares of Series L Preferred Stock were accepted for purchase on a pro rata basis. We repurchased 2,693,580 shares of Series L Preferred Stock at a purchase price of $29.12 per share (of which $1.39, or $3,744,000 in the aggregate, reflects the amount of accrued and unpaidpay dividends on the Series L Preferred Stock asin arrears on an annual basis in accordance with the foregoing provisions, unless the Company’s results of November 20, 2019), as convertedoperations, general financing conditions, general economic conditions, applicable requirements of the MGCL or other factors make it imprudent to do so. If the Company fails to timely declare distributions or fails to timely pay distributions on the Series L Preferred Stock, the annual dividend rate of the Series L Preferred Stock will temporarily increase by 1.00% per year, up to a maximum rate of 8.50% per annum. However, prior to the payment of any distributions on Series L Preferred Stock in respect of a given year, the Company must first declare and paid in ILS. The total cost to repurchasepay dividends on the tendered shares, including professional fees to complete the Tender Offer of $462,000 but excluding the dividends accruedCommon Stock in respect of such year in an aggregate amount equal to the Initial Dividend announced by the Company’s Board of Directors at the end of the prior fiscal year. On December 29, 2021, the Company announced an Initial Dividend on shares was $75,155,000, which was primarily funded from borrowings underof its Common Stock for fiscal year 2021 in the revolving credit facility (Note 7). We recognized $5,873,000aggregate amount of redeemable preferred stock redemptions in our consolidated statement of operations for$7,010,799.
During the year ended December 31, 2019 in connection with the Tender Offer. The shares of Series L Preferred Stock accepted for payment by2021, the Company were restored to the statuspaid $9.6 million, $50,000 and $8.4 million of authorized but unissued shares of preferred stock without designation as to class or series.
Redemptions—The Company’s Series A Preferred Stock and Series D Preferred Stock toare redeemable at the extentoption of the Series L Preferred Stock Stated Value
Stock redeemed prior to the first anniversary of the date of original issuance of such shares must be paid in cash.
From and after the fifth anniversary of the date of original issuance of the Series L Preferred Stock, each holder will have the right to require the Company to redeem, and the Company will also have the option to redeem (subject to certain conditions), such shares of Series L Preferred Stock at a redemption price equal to the Series L Preferred Stock Stated Value, plus, provided certain conditions are met, all accrued and unpaid distributions. Notwithstanding the foregoing, a holder of
F-28
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
shares of ourthe Company’s Series L Preferred Stock may require usthe Company to redeem such shares at any time prior to the fifth anniversary of the date of original issuance of the Series L Preferred Stock if (1) we dothe Company does not declare and pay in full the distribution on the Series L Preferred Stock for any annual period prior to such fifth anniversary or (2) we dothe Company does not declare and pay all accrued and unpaid distributions on the Series L Preferred Stock for all past dividend periods prior to the applicable holder redemption date. The applicable redemption price payable upon redemption of any Series L Preferred Stock will be made, in the Company'sCompany’s sole discretion, in the form of (A) cash in ILS at the then-current currency exchange rate determined in accordance with the Articles Supplementary defining the terms of the Series L Preferred Stock, (B) in equal value through the issuance of shares of Common Stock, with the value of such Common Stock to be deemed the lower of (i) the NAV per share of ourthe Company’s Common Stock as most recently published by the Company as of the effective date of redemption and (ii) the volume-weighted average price of ourthe Company’s Common Stock, determined in accordance with the Articles Supplementary defining the terms of the Series L Preferred Stock, or (C) in a combination of cash in ILS and ourthe Company’s Common Stock, based on the conversion mechanisms set forth in (A) and (B), respectively.
10. STOCKHOLDERS’ EQUITY
Dividends
Holders of Series L Preferredthe Company’s Common Stock are entitled to receive dividends, if, as and when authorized by ourthe Board of Directors and declared by usthe Company out of legally available funds, cumulativefunds. In determining the Company’s dividend policy, the Board of Directors considers many factors including the amount of cash dividends on each share of Series L Preferred Stock at an annual rate of 5.5% ofresources available for dividend distributions, capital spending plans, cash flow, the Series L Preferred Stock Stated Value (i.e., the equivalent of $1.56035 per share per year). Dividends on each share of Series L Preferred Stock began accruing on, and are cumulative from, the date of issuance.
| Declaration Date | Payment Date | Number of Shares | Cash Dividends | |||||
| (in thousands) | ||||||||
| December 3, 2019 | January 16, 2020 | 5,387,160 | $ | 8,406 | (1) | |||
| December 4, 2018 | January 17, 2019 | 8,080,740 | $ | 14,045 | (2) | |||
individual factor. Cash dividends per share of Common Stock paid in respect of the years ended December 31, 20192021 and 20182020 consist of the following:
| Declaration Date | Payment Date | Type | Cash Dividend Per Common Share (1) | |||||
| December 3, 2019 | December 27, 2019 | Regular Quarterly | $ | 0.075 | ||||
| August 8, 2019 | September 18, 2019 | Regular Quarterly | $ | 0.075 | ||||
| August 8, 2019 | August 30, 2019 | Special Cash | $ | 42.000 | ||||
| June 4, 2019 | June 27, 2019 | Regular Quarterly | $ | 0.375 | ||||
| February 20, 2019 | March 25, 2019 | Regular Quarterly | $ | 0.375 | ||||
| December 4, 2018 | December 27, 2018 | Regular Quarterly | $ | 0.375 | ||||
| August 22, 2018 | September 25, 2018 | Regular Quarterly | $ | 0.375 | ||||
| June 4, 2018 | June 28, 2018 | Regular Quarterly | $ | 0.375 | ||||
| March 6, 2018 | March 29, 2018 | Regular Quarterly | $ | 0.375 | ||||
| Payment Date | Type | Cash Dividend Per Share of Common Stock | ||||||||||||||||||
| September 7, 2021 | September 29, 2021 | Regular Quarterly | $ | 0.075 | ||||||||||||||||
| June 7, 2021 | June 30, 2021 | Regular Quarterly | $ | 0.075 | ||||||||||||||||
| March 5, 2021 | March 30, 2021 | Regular Quarterly | $ | 0.075 | ||||||||||||||||
| December 2, 2020 | December 29, 2020 | Regular Quarterly | $ | 0.075 | ||||||||||||||||
| September 2, 2020 | September 29, 2020 | Regular Quarterly | $ | 0.075 | ||||||||||||||||
| June 3, 2020 | June 29, 2020 | Regular Quarterly | $ | 0.075 | ||||||||||||||||
| March 2, 2020 | March 25, 2020 | Regular Quarterly | $ | 0.075 | ||||||||||||||||
On March 2, 2020, weDecember 9, 2021, the Company declared a cash dividend of $0.075 per share of ourits Common Stock, which was paid on January 5, 2022 to stockholders of record at the close of business on December 20, 2021.
On March 8, 2022, the Company declared a cash dividend of $0.085 per share of its Common Stock, to be paid on March 25, 2020April 1, 2022 to stockholders of record at the close of business on March 13, 2020.19, 2022.
Rights Offering
Series A Preferred Warrants
Prior to February 2020, the Series A Preferred Stock was sold as a unit that included one1 share of Series A Preferred Stock (Note 10) and one1 Series A Preferred Warrant (Note 10) which allowed holders of Series A Preferred Warrantsthat could be exercised to purchase 0.25 of a share of Common Stock depending on when such warrants were issued.Stock. The Series A Preferred Warrants are exercisable beginning on the first anniversary of the date of their original issuance until and including the fifth anniversary of the date of such issuance. At the time of issuance, the exercise price of each Series A Preferred Warrant iswas at a 15.0% premium to the per share estimated NAV of ourthe Company’s Common Stock then most recently published and designated as the Applicable NAV by us at the time of issuance of such Series A Preferred Warrants.applicable NAV. However, in accordance with the terms of the Series A Preferred Warrants, the exercise
F-29
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
price of each Series A Preferred Warrant issued prior to the Reverse Stock Split was automatically adjusted to reflect the effect of the Reverse Stock Split and, in the discretion of ourthe Company’s Board of Directors, the exercise price and the number of shares issuable upon exercise of each Series A Preferred Warrant issued prior to the Special Dividend was adjusted to reflect the effect of the Special Dividend.
Proceeds and expenses from the sale of the Series A Preferred Units arewere allocated to the Series A Preferred Stock and Series A Preferred Warrants using their relative fair values on the date of issuance. As of December 31, 2019, we had issued 4,484,3762021, there were 4,541,852 Series A Preferred Warrants outstanding to purchase 1,178,125 shares of Common Stock in connection with ourthe Company’s offering of Series A Preferred Units and allocated net proceeds of $586,000,$610,000 to the warrants outstanding as of December 31, 2021 , after specifically identifiable offering costs and allocated general offering costs, to the Series A Preferred Warrants in permanent equity.
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Accumulated other comprehensive income (loss), at beginning of period | $ | 1,806 | $ | 1,631 | $ | (509 | ) | |||||
| Other comprehensive income before reclassifications | — | 1,973 | 361 | |||||||||
| Amounts reclassified (to) from accumulated other comprehensive income (loss) (1) | (1,806 | ) | (1,798 | ) | 1,779 | |||||||
| Net current period other comprehensive income (loss) | (1,806 | ) | 175 | 2,140 | ||||||||
| Accumulated other comprehensive income, at end of period | $ | — | $ | 1,806 | $ | 1,631 | ||||||
Level 1 Inputs—Quoted prices in active markets for identical assets or liabilities
Level 2 Inputs—Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 Inputs—Unobservable inputs
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value of our derivative financial instruments as well as their classification on our consolidated balance sheets:
| December 31, | Balance Sheet | |||||||||||
| 2019 | 2018 | Level | Location | |||||||||
| (in thousands) | ||||||||||||
| Assets: | ||||||||||||
| Interest rate swaps | $ | — | $ | 1,630 | 2 | Other assets | ||||||
| December 31, 2019 | December 31, 2018 | |||||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||||
| Amount | Fair Value | Amount | Fair Value | Level | ||||||||||||||
| (in thousands) | ||||||||||||||||||
| Assets: | ||||||||||||||||||
| SBA 7(a) loans receivable, subject to loan-backed notes | $ | 27,595 | $ | 30,076 | $ | 37,031 | $ | 38,357 | 3 | |||||||||
| SBA 7(a) loans receivable, subject to credit risk | 27,802 | 29,794 | 29,748 | 30,630 | 3 | |||||||||||||
| SBA 7(a) loans receivable, subject to secured borrowings | 12,682 | 12,780 | 16,469 | 16,706 | 3 | |||||||||||||
| Liabilities: | ||||||||||||||||||
| Mortgages payable (1) | 96,926 | 99,764 | 386,923 | 377,364 | 3 | |||||||||||||
| Junior subordinated notes | 25,299 | 24,406 | 25,215 | 24,462 | 3 | |||||||||||||
In general, estimates of fair value may differ from the carrying amounts of the financial assets and liabilities primarily as a result of the effects of discounting future cash flows. Considerable judgment is required to interpret market data and develop estimates of fair value. Accordingly, the estimates presented are made at a point in time and may not be indicative of the amounts wethe Company could realize in a current market exchange.
The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities.
Debt—The carrying amounts of ourthe Company’s secured borrowings—government guaranteed loans, SBA 7(a) loan-backed notes, and2018 revolving credit facility and borrowed funds from the Federal Reserve through the PPPLF approximate their fair values, as the interest rates on these securities are variable and approximate current market interest rates.
F-30
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
Loans Receivable—The Company determines the fair value of loans receivable we useby performing a present value techniqueanalysis for the anticipated future cash flows using certain assumptions. At December 31, 2019, our assumptions includedan appropriate market discount rates ranging from 5.25% to 7.25% and prepayment rates ranging from 13.41% to 16.80%. At December 31, 2018, our assumptions included discount rates ranging from 6.75% to 9.25% and prepayment rates ranging from 9.59% to 17.50%.
| Year Ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Discount Rate | Prepayment Rate | Discount Rate | Prepayment Rate | ||||||||||||||||||||
| SBA 7(a) loans receivable, subject to credit risk | 6.25% - 8.25% | 5.00% - 17.50% | 6.50% - 8.25% | 4.00% - 17.50% | |||||||||||||||||||
| SBA 7(a) loans receivable, subject to loan-backed notes | 5.75% - 7.75% | 5.00% - 17.50% | 5.50% - 8.00% | 4.88% - 17.50% | |||||||||||||||||||
| SBA 7(a) loans receivable, subject to secured borrowings | 7.00% - 7.75% | 5.00% - 17.50% | 7.00% - 7.75% | 5.00% - 17.50% | |||||||||||||||||||
| SBA 7(a) loans receivable, paycheck protection program | 1.00% | N/A | 1.00% | N/A | |||||||||||||||||||
Other Financial Instruments—The carrying amounts of the Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses approximate their fair values due to their short-term maturities at December 31, 2021 and 2020. Due to the short-term maturities of these instruments, Level 1 inputs are estimated based on current interest rates available for debt instruments with similar terms. The fair value of our mortgages payable is sensitive to fluctuations in interest rates. Discounted cash flow analysis is generally usedutilized to estimate the fair value of our mortgages payable, using a ratethese financial instruments.
The estimated fair values of 3.67%those financial instruments which are not recorded at December 31, 2019, and rates ranging from 4.62% to 4.64% at December 31, 2018.
| December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
| Carrying | Estimated | Carrying | Estimated | ||||||||||||||||||||||||||
| Amount | Fair Value | Amount | Fair Value | Level | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| SBA 7(a) loans receivable, paycheck protection program | $ | 4,903 | $ | 5,050 | $ | 14,089 | $ | 14,484 | 3 | ||||||||||||||||||||
| SBA 7(a) loans receivable, subject to loan-backed notes | $ | 18,077 | $ | 19,635 | $ | 23,606 | $ | 24,850 | 3 | ||||||||||||||||||||
| SBA 7(a) loans receivable, subject to credit risk | $ | 42,416 | $ | 44,399 | $ | 32,509 | $ | 32,397 | 3 | ||||||||||||||||||||
| SBA 7(a) loans receivable, subject to secured borrowings | $ | 6,891 | $ | 6,976 | $ | 8,822 | $ | 8,914 | 3 | ||||||||||||||||||||
| SBA 7(a) loans receivable, held for sale | $ | 1,256 | $ | 1,355 | $ | 4,109 | $ | 4,527 | 3 | ||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
Mortgage payable (1) | $ | 97,100 | $ | 100,838 | $ | 97,100 | $ | 100,799 | 2, 3 | ||||||||||||||||||||
Junior subordinated notes (1) | $ | 27,070 | $ | 24,378 | $ | 27,070 | $ | 24,236 | 3 | ||||||||||||||||||||
(1)The carrying amounts for the mortgage payable and junior subordinated notes is estimated based on current interest rates available forrepresents the principal outstanding amounts, excluding deferred debt instruments with similar terms. Discounted cash flow analysis is generally used to estimate the fair value of our junior subordinated notes. The rate used was 6.16%issuance costs and 7.05% at December 31, 2019 and 2018, respectively. discounts.
Asset Management and Other Fees to Related Parties
F-31
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
controlled company manager, and CIM Capital Real Property Management, LLC, a real property manager. The "Operator"“Operator” refers to CIM Investment Advisors, LLC from December 10, 2015 to December 31, 2018 and to CIM Capital and its four4 wholly-owned subsidiaries on and after January 1, 2019.
subsidiaries.
CIM Urban pays asset management fees to the Operator on a quarterly basis in arrears. The fee is calculated as a percentage of the daily average adjusted fair value of CIM Urban'sUrban’s assets:
| Daily Average Adjusted Fair Value of CIM Urban’s Assets | Quarterly Fee | |||||||||||||
| From Greater of | To and Including | Percentage | ||||||||||||
| (in thousands) | ||||||||||||||
| $ | — | $ | 500,000 | 0.2500% | ||||||||||
| $ | 500,000 | $ | 1,000,000 | 0.2375% | ||||||||||
| $ | 1,000,000 | $ | 1,500,000 | 0.2250% | ||||||||||
| $ | 1,500,000 | $ | 4,000,000 | 0.2125% | ||||||||||
| $ | 4,000,000 | $ | 20,000,000 | 0.1000% | ||||||||||
Daily Average Adjusted Fair Value of CIM Urban's Assets | Quarterly Fee | |||||||
| From Greater of | To and Including | Percentage | ||||||
| (in thousands) | ||||||||
| $ | — | $ | 500,000 | 0.2500% | ||||
| 500,000 | 1,000,000 | 0.2375% | ||||||
| 1,000,000 | 1,500,000 | 0.2250% | ||||||
| 1,500,000 | 4,000,000 | 0.2125% | ||||||
| 4,000,000 | 20,000,000 | 0.1000% | ||||||
In lieu of cash payment of the asset management fee, the Company has issued to the Operator shares of its Common Stock and $22,229,000shares of its Series A Preferred Stock. The Company has issued shares of its Series A Preferred Stock to the Operator as payment for the yearsquarterly asset management fee for the year endedDecember 31, 2019, 2018 and 2017, respectively. At December 31, 2019 and 2018, asset management fees of $2,356,000 and $4,540,000, respectively, were due to the Operator.
Property Management Fees and fourth quarters of 2020 as well (subject to the agreement of the Operator and or the Administrator, as the case may be, and the approval of a special committee consisting of the independent members of the Board of Directors).
Reimbursements—CIM Management, Inc. and certain of its affiliates (collectively, the "CIM“CIM Management Entities"Entities”), all affiliates of CIM REIT and CIM Group, provide property management, leasing, and development services to CIM Urban. TheProperty management fees earned by the CIM Management Entities earned propertyentities and onsite management fees, whichcosts incurred on behalf of CIM Urban are included in rental and other property operating expenses totaling $2,562,000, $4,365,000 and $5,034,000 forin the years ended December 31, 2019, 2018 and 2017, respectively. CIM Urban also reimbursed the CIM Management Entities $5,852,000, $6,065,000 and $8,465,000 for the years ended December 31, 2019, 2018 and 2017, respectively, for onsite management costs incurred on behalfaccompanying consolidated statements of CIM Urban, whichoperations. Leasing commissions earned are included in rental and other property operating expenses. The CIM Management Entities earned leasing commissions of $658,000, $1,548,000 and $982,000 for the years ended December 31, 2019, 2018, and 2017, respectively, which were capitalized to deferred charges. In addition,charges on the CIM Management Entities earned constructionaccompanying consolidated balance sheets. Construction management fees of $525,000, $580,000 and $1,654,000 for the years ended December 31, 2019, 2018 and 2017, respectively, which wereare capitalized to investments in real estate.estate on the accompanying consolidated balance sheets.
In addition, pursuant to the terms of the Master Services Agreement, the Administrator may receive compensation and or reimbursement for performing certain services for CIM Commercialthe Company and its subsidiaries that are not covered by the Base Service Fee.Fee or the Prior Incentive Fee, as the case may be. During the years ended December 31, 2019, 20182021 and 2017,2020, such services performed by the Administrator and its affiliates included accounting, tax, reporting, internal audit, legal, compliance, risk management, IT, human resources, corporate communications, and from and after September 2018, operational and on-going support in connection with our registered publicthe Company’s offering of Series A Preferred Units, where each Series A Preferred Unit consisted of one share of Series A Preferred Stock and one Series
F-32
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
spent on the affairs of CIM Commercialthe Company and its subsidiaries). For the years ended December 31, 2019, 2018 and 2017, we expensed $2,577,000, $2,783,000, and $3,065,000, respectively,The expense for such services which areis included in asset management and other feesexpense reimbursements to related parties. At December 31, 2019 and 2018, $1,673,000 and $1,490,000 was due toparties—corporate in the Administrator, respectively, for such services.accompanying consolidated statements of operations.
On April 9, 2020, the Company entered into Amendment No. 1 to the Second Amended and Restated Dealer Manager Agreement, pursuant to which the selling commissions were increased from up to 5.50% to up to 7.00% of the selling price of each share of Series A Preferred Stock sold thereafter. The Company has been informed that CCO Capital generally reallows 100% of the selling commissions on sales of Series A Preferred Stock and generally reallows substantially all of the upfront dealer manager fee on sales of Series A Preferred Stock and Series D Preferred Stock, to participating broker-dealers.
On September 22, 2021, the Company entered into Amendment No. 2 to the Second Amended and Restated Dealer Manager Agreement, pursuant to which the upfront dealer manager fee payable to the Dealer Manager was changed to up to 3.00% and the trailing dealer manager fee with such agreement,respect to the Wholesalingsale of shares of Series A Preferred Stock sold in the Offering on or after September 9, 2021 was eliminated.
F-33
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
The Company recorded fees and expense reimbursements as shown in the table below for services provided by related parties related to the services described above during the periods indicated:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Asset Management Fees: | ||||||||||||||||||||
Asset management fees (1) | $ | 9,030 | $ | 9,511 | ||||||||||||||||
| Property Management Fees and Reimbursements: | ||||||||||||||||||||
| Property management fees | $ | 1,641 | $ | 1,670 | ||||||||||||||||
| Onsite management and other cost reimbursement | $ | 2,687 | $ | 3,356 | ||||||||||||||||
| Leasing commissions | $ | 162 | $ | 112 | ||||||||||||||||
| Construction management fees | $ | 226 | $ | 344 | ||||||||||||||||
| Administrative Fees and Expenses: | ||||||||||||||||||||
Base service fee (2) | $ | — | $ | 282 | ||||||||||||||||
| Expense reimbursements to related parties - corporate | $ | 2,050 | $ | 2,243 | ||||||||||||||||
| Lending Segment Expenses: | ||||||||||||||||||||
Expense reimbursements to related parties - lending segment (3) | $ | 1,921 | $ | 3,491 | ||||||||||||||||
| Offering-Related Fees: | ||||||||||||||||||||
Upfront dealer manager and trailing dealer manager fees (4) | $ | 690 | $ | 1,149 | ||||||||||||||||
Non-issuance specific offering costs (5) | $ | 106 | $ | 99 | ||||||||||||||||
(1)The Company issued to the Operator an aggregate of 270,209 shares of its Series A Preferred Stock, in lieu of cash payment of the asset management fees incurred during the year ended December 31, 2021. The Company issued to the Operator 203,349 shares of its Common Stock and 287,199 shares of Series A Preferred Stock in lieu of cash payment of the asset management fees incurred during the year ended December 31, 2020.
(2)For the year ended December 31, 2020, the Company issued to the Administrator 11,273 shares of our Series A Preferred Stock, in lieu of cash as payment of the Base Service Fee for the first quarter of 2020.
(3)Expense reimbursements to related parties - lending segment do not include personnel costs capitalized to deferred loan origination costs of $347,000 and $136,000 for the years ended December 31, 2021 and 2020, respectively.
(4)Represents fees earned by CCO Capital and allocated to Series A Preferred Stock and Series D Preferred Stock.
(5)As of December 31, 2021 and 2020, $2.0 million and $1.5 million, respectively, was included in deferred costs as reimbursable expenses incurred pursuant to the Master Services Agreement and the Assignment Agreement were terminated.then applicable dealer manager agreement with CCO Capital. These non-issuance specific costs are allocated against the gross proceeds from the sale of the Series A Preferred Stock and the Series D Preferred Stock on a pro rata basis for each issuance as a percentage of the total offering.
F-34
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
As of December 31, 2021 and 2020, due to related parties consisted of the following:
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| (in thousands) | ||||||||||||||
| Asset management fees | $ | 2,244 | $ | 2,386 | ||||||||||
| Property management fees and reimbursements | 320 | 1,662 | ||||||||||||
| Expense reimbursements - corporate | 692 | 647 | ||||||||||||
| Expense reimbursements - lending segment | 341 | 690 | ||||||||||||
| Upfront dealer manager and trailing dealer manager fees | 638 | 493 | ||||||||||||
| Non-issuance specific offering costs | 143 | 668 | ||||||||||||
| Other amounts due to the CIM Management Entities and certain of its affiliates | 163 | 160 | ||||||||||||
| Total due to related parties | $ | 4,541 | $ | 6,706 | ||||||||||
Fee Waiver
On June 12, 2017, we repurchased,January 5, 2022, the Company and certain of its subsidiaries entered into a Fee Waiver (the “Fee Waiver”) with the Operator and the Administrator with respect to fees that are payable to them. The Fee Waiver is effective retroactively to January 1, 2022 (the “Effective Date”). Pursuant to the Fee Waiver, the Administrator agrees to voluntarily waive any fees in a privately negotiated transaction, canceledexcess of those set forth in the Fee Waiver, to the extent it would otherwise have been entitled to such additional compensation under the Master Service Agreement, and retired 8,727,272 sharesthe Operator agrees to voluntarily waive any fees in excess of Common Stock from Urban II. The aggregate purchase price was $576,000,000, or $66.00 per share (Note 11)those set forth in the Fee Waiver, to the extent it would otherwise have been entitled to such additional compensation under the Investment Management Agreement (the “Existing Methodology).
1.Base Fee: A base asset management fee (the “Base Fee”) is payable quarterly in arrears to the Operator in an amount equal to an annual rate of 1% (or 0.25% per quarter) of the average of the “Net Asset Value Attributable to Common Stockholders” as of the first and last day of the applicable quarter. Net Asset Value Attributable to Common stockholders is defined as (a) the sum of the Company’s (1) investments in real estate at fair value, (2) cash, (3) loans receivable at fair value and (4) the book value of the other assets of the Company, excluding deferred costs and net of other liabilities at book value, less (b) the Company’s (i) debt at face value, (ii) outstanding preferred stock at stated value, and (iii) non-controlling interests at book value; provided, that, non-controlling interests in any UPREIT operating partnership relating to the Company shall not be excluded.
“Adjusted Common Equity” means Common Equity plus Excluded Depreciation and Amortization. “Common Equity” means Total Stockholders’ Equity minus Excluded Equity. “Total Stockholders’ Equity” means the amount reflected as total stockholders’ equity in accordance with GAAP on the consolidated balance sheet of the Company and its subsidiaries as of the last day of a given quarter. “Excluded Equity” means the sum of all preferred securities of the Company and its subsidiaries classified as permanent equity in accordance with GAAP on the consolidated balance sheet of the Company and its subsidiaries as of the last day of a given quarter. “Excluded Depreciation and Amortization” means, for a given quarter, the amount of all accumulated depreciation and amortization of (i) the Company and its subsidiaries and (ii) to the extent allocable to the Company and its subsidiaries, the unconsolidated affiliates, in each case as of the last day of such quarter that corresponds to the periodic depreciation and amortization expense calculated in each case in accordance with GAAP that is a permitted add back to net income calculated in accordance with GAAP when calculating funds from operations.
F-35
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 18, 2017, we repurchased,31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
3.Capital Gains Fee: A capital gains fee (the “Capital Gains Fee”) is payable quarterly in arrears to the Administrator in an amount equal to (i) 15% of the cumulative aggregate realized capital gains minus the cumulative aggregate realized capital losses (in each case since the Effective Date), minus (ii) the aggregate capital gains fees paid since the Effective Date. Realized capital gains and realized capital losses are calculated by subtracting from the sales price of a privately negotiated transaction, canceledproperty: (a) any costs incurred to sell such property, and retired 4,696,969 shares(b) the current gross value of Common Stockthe property (meaning the property’s original acquisition price plus any subsequent, non-reimbursed capital improvements thereon paid for by the Company).
Following the end of each quarter, the Administrator will deliver to the Company (i) a calculation of the cumulative fees earned by the Operator and the Administrator under the methodology prescribed by the Fee Waiver (the “Fee Waiver Methodology”) from Urban II. Thethe Effective Date through the end of such quarter and (ii) a calculation of the cumulative fees that would have been earned, in the absence of the Fee Waiver, by the Operator and the Administrator during such period under the Master Services Agreement and the Investment Management Agreement, without giving effect to the Fee Waiver (the “Pre-Fee Waiver Methodology”).If, in respect of any quarter, the aggregate purchase price was $310,000,000, or $66.00 per share (Note 11)fees that are payable under the Fee Waiver Methodology exceed the aggregate fees that would have been payable under the Pre-Fee Waiver Methodology for the equivalent period, such quarter is deemed an “Excess Quarter”.For any quarter following an Excess Quarter, the Company (upon the direction of the independent members of the Board) may, at its option and upon written notice to Administrator, elect to calculate all fees due to the Administrator and the Operator in accordance with the Pre-Fee Waiver Methodology from and after such Excess Quarter.Any election by the Company to adopt the Pre-Fee Waiver Methodology is irrevocable, and all fees due to the Administrator and the Operator from and after such election will be calculated in accordance with the Pre-Fee Waiver Methodology.
Other
During the year ended December 31, 2020, the Company’s President, Jan F. Salit, retired effective as of September 16, 2020. Mr. Salit received a $450,000 payment, representing one year of his base salary, upon the satisfaction of certain conditions specified therein, including the execution of an agreement with the Company that contains, among other things, mutual release and non-disparagement provisions. Related to this payment, $287,000 was borne by the Company based on the time that Mr. Salit devoted to the Company relative to other matters relating to CIM Group.
On October 1, 2015, an affiliate of CIM Group entered into a 5-yearfive-year lease renewal with respect to a property owned by the Company, which lease was amended to a month-to-month termterminated in February 2019.October 2020. For the years ended December 31, 2019,
On May 15, 2019, CIM Group entered into an approximately eleven-year11-year lease for approximately 32,000 rentable square feet with respect to a property owned by the Company. The lease was amended on August 7, 2019 to reduce the rentable square feet to approximately 30,000 rentable square feet. For the years ended December 31, 2019, 20182021 and 2017, we2020, the Company recorded rental and other property income related to this tenant of $932,000, $0 and $0, respectively.$1.5 million.
Loan Commitments—Commitments to extend credit are agreements to lend to a customer providedwhen the terms established in the contract are met. OurThe Company’s outstanding loan commitments to fund loans were $9,696,000 at$32.6 million as of December 31, 2019 and2021, the majority of which are for prime-based loans to be originated by ourthe Company’s subsidiary engaged in SBA 7(a) Small Business Loan Program lending, the government guaranteed portion of which is intended to be sold. Commitments generally have fixed expiration dates. Since some commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements.
General—In connection with the ownership and operation of real estate properties, we havethe Company has certain obligations for the payment of tenant improvement allowances and lease commissions in connection with new leases and renewals. CIM Commercialthe Company had a total of $7,747,000$8.1 million in future obligations under leases to fund tenant improvements and other future construction obligations atas of December 31, 2019. At2021. As of December 31, 2019, $2,814,0002021, $2.5 million was funded to reserve accounts included in restricted cash on ourthe Company’s consolidated balance sheet for these tenant improvement obligations in connection with the mortgagemortgage loan agreement entered into in June 2016.
Employment Agreements—We haveThe Company has an employment agreementsagreement with two1 of ourits officers. Under certain circumstances, each of thesethis employment agreementsagreement provides for (1) severance payment equal to the annual base salary paid to the
F-36
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
officer and (2) death and disability payments in an amount equal to two2 times and one1 time, respectively, the annual base salary paid to the officers.officer.
Litigation—We areThe Company is not currently involved in any material pending or threatened legal proceedings nor, to ourthe Company’s knowledge, are any material legal proceedings currently threatened against us,the Company, other than routine litigation arising in the ordinary course of business. In the normal course of business, we arethe Company is periodically party to certain legal actions and proceedings involving matters that are generally incidental to ourthe Company’s business. While the outcome of these legal actions and proceedings cannot be predicted with certainty, in management'smanagement’s opinion, the resolution of these legal proceedings and actions will not have a material adverse effect on ourthe Company’s business, financial condition, results of operations, cash flow or ourthe Company’s ability to satisfy ourits debt service obligations or to maintain ourits level of distributions on our Common Stock or Preferred Stock.
In September 2018, wethe Company filed a lawsuit against the City and County of San Francisco seeking a refund of the $11,845,000$11.8 million in penalties, interest and legal fees paid by usthe Company for real property transfer tax allegedly due for a transaction in a prior year. WeThe Company disputed that such penalties, interest and legal fees were payable but, in order to contest the asserted tax obligations, wethe Company had to pay such amounts to the City and County of San Francisco in August 2017. We haveThe Company has been vigorously pursuing this litigation and intendintends to continue to do so.
A subsidiary of the Company is a defendant in a lawsuit in connection with injuries sustained by a third-party contractor at a property previously owned by such subsidiary. While it is possible that a loss may be incurred, we arethe Company is unable to estimate a range of potential losses due to the complexity and current status of the lawsuit. However, we maintainthe Company maintains insurance coverage to mitigate the impact of adverse exposures in lawsuits of this nature and do not expect this lawsuit to have a material adverse effect on ourthe Company’s business, financial condition, results of operations, cash flow or ourthe Company ability to satisfy ourits debt service obligations or to maintain ourthe level of distributions on ourthe Company’s Common Stock or Preferred Stock.
SBA Related—If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced under the PPP or the SBA 7(a) Small Business Loan Program, the SBA may seek recovery of the principal loss related to the deficiency from us.the Company. As of December 31, 2021, the Company serviced an aggregate of $262.4 million of the guaranteed portion of SBA 7(a) loans . With respect to the guaranteed portion of SBA loans that have been sold, the SBA will first honor its guarantee and then seek compensation from usthe Company in the event that a loss is deemed to be attributable to technical deficiencies. Based on historical experience, we dothe Company does not expect that this contingency is probable to be asserted. However, if asserted, it could have a material adverse effect on ourthe Company’s business, financial condition, results of operations, cash flow or ourthe Company’s ability to satisfy ourits debt service obligations or to maintain ourits level of distributions on our Common Stock or Preferred Stock.
Environmental Matters—In connection with the ownership and operation of real estate properties, wethe Company may be potentially liable for costs and damages related to environmental matters, including asbestos-containing materials. We haveThe Company has not been notified by any governmental authority of any noncompliance, liability, or other claim in connection with any of the properties, and we arethe Company is not aware of any other environmental condition with respect to any of the properties that management believes will have a material adverse effect on ourthe Company’s business, financial condition, results of operations, cash flow or ourthe Company’s ability to satisfy ourits debt service obligations or to maintain ourits level of distributions on our Common Stock or Preferred Stock.
F-37
Notes to Consolidated Financial Statements as amended, expires in May 2020. In determining whether this contract constitutes a lease, we determined that the office space is explicitly identified in the contract. Additionally, so long as payments are made timely under this lease, we as the tenant have the right to obtain substantially all the economic benefits from the use of this identified asset and can direct how and for what purpose the office space is used to conduct our operations. In January 2020, CIM Group, as successor in interest to CIM Commercial, entered into an amendment to this office lease, which commences in June 2020 upon the expiration of the existing lease.
and the lease liability is included within other liabilities on our consolidated balance sheet. We recorded rent expense of $294,000, $253,000 and $228,000 for the years endedYears Ended December 31, 2019, 20182021 and 2017, respectively, in general and administrative expenses on our consolidated statements of operations.2020 (Continued)
14. LEASES
Future minimum rental revenue under long-term operating leases atas of December 31, 2019,2021, excluding tenant reimbursements of certain costs, are as follows:follows (in thousands):
| Years Ending December 31, | Total | |||||||
| 2022 | $ | 44,521 | ||||||
| 2023 | 42,101 | |||||||
| 2024 | 40,059 | |||||||
| 2025 | 24,022 | |||||||
| 2026 | 17,246 | |||||||
| Thereafter | 32,937 | |||||||
| $ | 200,886 | |||||||
| Years Ending December 31, | Total | |||
| (in thousands) | ||||
| 2020 | $ | 47,459 | ||
| 2021 | 41,978 | |||
| 2022 | 38,691 | |||
| 2023 | 35,201 | |||
| 2024 | 33,929 | |||
| Thereafter | 50,809 | |||
| $ | 248,067 | |||
| Year Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| California | 80.6 | % | 76.0 | % | 63.3 | % | ||
| Texas | 5.5 | 3.3 | 6.9 | |||||
| Washington, D.C. | 13.9 | 20.7 | 25.1 | |||||
| North Carolina | — | — | 3.1 | |||||
| New York | — | — | 1.6 | |||||
| 100.0 | % | 100.0 | % | 100.0 | % | |||
| December 31, | |||||
| 2019 | 2018 | ||||
| California (1) | 94.4 | % | 70.6 | % | |
| Texas | 5.6 | 2.2 | |||
| Washington, D.C. | — | 27.2 | |||
| 100.0 | % | 100.0 | % | ||
The provision for income taxes results in effective tax rates that differ from federal and state statutory rates. A reconciliation of the provision for income tax attributable to the TRSs'TRSs’ income from continuing operations computed at federal statutory rates to the income tax provision reported in the financial statements is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| (Loss) income from continuing operations before income taxes for TRSs | $ | 9,242 | $ | (7,995) | |||||||||||||
| Expected federal income tax (benefit) provision | $ | 1,941 | $ | (1,679) | |||||||||||||
| State income taxes | (40) | (1,562) | |||||||||||||||
| Change in valuation allowance | (273) | 2,605 | |||||||||||||||
| Other | 1,364 | (86) | |||||||||||||||
| Income tax (benefit) provision | $ | 2,992 | $ | (722) | |||||||||||||
F-38
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Income from continuing operations before income taxes for TRSs | $ | 4,414 | $ | 4,962 | $ | 4,878 | |||||
| Expected federal income tax provision | $ | 927 | $ | 1,042 | $ | 1,658 | |||||
| State income taxes | 21 | 35 | 27 | ||||||||
| Change in valuation allowance | — | — | (37 | ) | |||||||
| Other | (66 | ) | (152 | ) | (272 | ) | |||||
| Income tax provision | $ | 882 | $ | 925 | $ | 1,376 | |||||
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
The components of ourthe Company’s net deferred tax asset, which are included in other assets, are as follows:
| December 31, | December 31, | |||||||||||||||||
| 2019 | 2018 | 2021 | 2020 | |||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||
| Deferred tax assets: | Deferred tax assets: | |||||||||||||||||
| Net operating losses | $ | 39 | $ | 37 | Net operating losses | $ | 2,367 | $ | 2,645 | |||||||||
| Secured borrowings—government guaranteed loans | 132 | 198 | Secured borrowings—government guaranteed loans | 64 | 96 | |||||||||||||
| Other | 166 | 185 | Other | 153 | 160 | |||||||||||||
| Total gross deferred tax assets | 337 | 420 | Total gross deferred tax assets | 2,584 | 2,901 | |||||||||||||
| Valuation allowance | (38 | ) | (38 | ) | Valuation allowance | (2,370) | (2,643) | |||||||||||
| 299 | 382 | 214 | 258 | |||||||||||||||
| Deferred tax liabilities: | Deferred tax liabilities: | |||||||||||||||||
| Loans receivable | (210 | ) | (255 | ) | Loans receivable | (96) | (67) | |||||||||||
| (210 | ) | (255 | ) | |||||||||||||||
| (96) | (67) | |||||||||||||||||
| Deferred tax asset, net | $ | 89 | $ | 127 | Deferred tax asset, net | $ | 118 | $ | 191 | |||||||||
The net operating loss carryforwards atas of December 31, 20192021 and 20182020 were generated by TRSs and are available to offset future taxable income of these TRSs.
The net operating loss carryforwards expire from 2026 to 2033.
decrease in the valuation allowance recorded in 2021 was $273,000.
The periods subject to examination for ourthe Company’s federal and state income tax returns are 20162018 through 2019.2021. As of December 31, 20192021 and 2018,2020, no reserves for uncertain tax positions have been established and we dothe Company does not anticipate any material changes in the amount of unrecognized tax benefits recorded to occur within the next 12 months.
The Tax Cuts and Jobs Act of 2017, signed into law in late December 2017, made sweeping changes to provisions of the Code applicable to businesses. The CARES Act, signed into law in March 2020, made additional changes to provisions on the Code applicable to the businesses. Management has reviewed these statutory changes and determined that the impact to ourthe Company’s consolidated financial statements is not material.
general and administrative level activities, including public company expenses, legal, accounting, and tax preparation that are not considered separate operating segments. The reportable segments are accounted for on the same basis of accounting as described in Note 2.
For ourthe Company’s real estate segments, we definethe Company defines net operating income (loss) as rental and other property income and expense reimbursements less property related expenses, and excludes non-property income and expenses, interest expense, depreciation and amortization, corporate related general and administrative expenses, gain (loss) on sale of real estate, gain (loss) on early extinguishment of debt, impairment of real estate, transaction costs, and provision (benefit) for income taxes. For ourthe Company’s lending segment, we definethe Company defines net operating income as interest income net of interest expense and general overhead expenses.
F-39
CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements asof December 31, 2021 and 2020
and for the Years Ended December 31, 2021 and 2020 (Continued)
The net operating income (loss) of ourthe Company’s segments for the years ended December 31, 2019, 20182021 and 20172020 is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Office: | |||||||||||||||||
| Revenues | $ | 53,289 | $ | 55,468 | |||||||||||||
| Property expenses: | |||||||||||||||||
| Operating | 23,431 | 23,485 | |||||||||||||||
| General and administrative | 347 | 490 | |||||||||||||||
| Total property expenses | 23,778 | 23,975 | |||||||||||||||
| Segment net operating income—office | 29,511 | 31,493 | |||||||||||||||
| Hotel: | |||||||||||||||||
| Revenues | 17,849 | 13,314 | |||||||||||||||
| Property expenses: | |||||||||||||||||
| Operating | 15,841 | 14,059 | |||||||||||||||
| General and administrative | 128 | 64 | |||||||||||||||
| Total property expenses | 15,969 | 14,123 | |||||||||||||||
| Segment net operating income (loss)—hotel | 1,880 | (809) | |||||||||||||||
| Lending: | |||||||||||||||||
| Revenues | 19,787 | 8,322 | |||||||||||||||
| Lending expenses: | |||||||||||||||||
| Interest expense | 408 | 868 | |||||||||||||||
| Expense reimbursements to related parties—lending segment | 1,921 | 3,491 | |||||||||||||||
| General and administrative | 1,788 | 2,006 | |||||||||||||||
| Total lending expenses | 4,117 | 6,365 | |||||||||||||||
| Segment net operating income—lending | 15,670 | 1,957 | |||||||||||||||
| Total segment net operating income | $ | 47,061 | $ | 32,641 | |||||||||||||
F-40
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Office: | |||||||||||
| Revenues | $ | 86,948 | $ | 147,811 | $ | 173,853 | |||||
| Property expenses: | |||||||||||
| Operating | 36,638 | 54,654 | 68,650 | ||||||||
| General and administrative | 521 | 2,350 | 981 | ||||||||
| Total property expenses | 37,159 | 57,004 | 69,631 | ||||||||
| Segment net operating income—office | 49,789 | 90,807 | 104,222 | ||||||||
| Hotel: | |||||||||||
| Revenues | 38,748 | 38,789 | 38,585 | ||||||||
| Property expenses: | |||||||||||
| Operating | 26,290 | 25,263 | 25,059 | ||||||||
| General and administrative | 134 | 32 | 77 | ||||||||
| Total property expenses | 26,424 | 25,295 | 25,136 | ||||||||
| Segment net operating income—hotel | 12,324 | 13,494 | 13,449 | ||||||||
| Multifamily: | |||||||||||
| Revenues | — | — | 13,400 | ||||||||
| Property expenses: | |||||||||||
| Operating | — | — | 7,559 | ||||||||
| General and administrative | — | — | 393 | ||||||||
| Total property expenses | — | — | 7,952 | ||||||||
| Segment net operating income—multifamily | — | — | 5,448 | ||||||||
| Lending: | |||||||||||
| Revenues | 10,964 | 10,870 | 10,221 | ||||||||
| Lending expenses: | |||||||||||
| Interest expense | 1,814 | 1,412 | 414 | ||||||||
| Fees to related party | 2,382 | 2,445 | 3,464 | ||||||||
| General and administrative | 1,630 | 1,857 | 1,010 | ||||||||
| Total lending expenses | 5,826 | 5,714 | 4,888 | ||||||||
| Segment net operating income—lending | 5,138 | 5,156 | 5,333 | ||||||||
| Total segment net operating income | $ | 67,251 | $ | 109,457 | $ | 128,452 | |||||
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020 (Continued)
A reconciliation of ourthe Company’s segment net operating income to net income attributable to the Company for the years ended December 31, 2019, 20182021 and 20172020 is as follows:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2021 | 2020 | ||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||
| Total segment net operating income | $ | 67,251 | $ | 109,457 | $ | 128,452 | Total segment net operating income | $ | 47,061 | $ | 32,641 | |||||||||||||||||
| Interest and other income | 3,329 | — | — | Interest and other income | 1 | 104 | ||||||||||||||||||||||
| Asset management and other fees to related parties | (15,921 | ) | (22,006 | ) | (26,787 | ) | Asset management and other fees to related parties | (9,030) | (9,793) | |||||||||||||||||||
| Expense reimbursements to related parties—corporate | Expense reimbursements to related parties—corporate | (2,050) | (2,243) | |||||||||||||||||||||||||
| Interest expense | (10,361 | ) | (25,482 | ) | (34,070 | ) | Interest expense | (9,005) | (10,547) | |||||||||||||||||||
| General and administrative | (4,069 | ) | (4,928 | ) | (3,018 | ) | General and administrative | (4,581) | (4,212) | |||||||||||||||||||
| Transaction costs | (574 | ) | (938 | ) | (11,862 | ) | Transaction costs | (143) | — | |||||||||||||||||||
| Depreciation and amortization | (27,374 | ) | (53,228 | ) | (58,364 | ) | Depreciation and amortization | (20,112) | (21,406) | |||||||||||||||||||
| Loss on early extinguishment of debt | (29,982 | ) | (808 | ) | (8,215 | ) | Loss on early extinguishment of debt | — | (281) | |||||||||||||||||||
| Impairment of real estate | (69,000 | ) | — | (13,100 | ) | Impairment of real estate | — | — | ||||||||||||||||||||
| Gain on sale of real estate | 433,104 | — | 408,098 | Gain on sale of real estate | — | — | ||||||||||||||||||||||
| Income before provision for income taxes | 346,403 | 2,067 | 381,134 | Income before provision for income taxes | 2,141 | (15,737) | ||||||||||||||||||||||
| Provision for income taxes | (882 | ) | (925 | ) | (1,376 | ) | ||||||||||||||||||||||
| Net income | 345,521 | 1,142 | 379,758 | |||||||||||||||||||||||||
| (Provision) benefit for income taxes | (Provision) benefit for income taxes | (2,992) | 722 | |||||||||||||||||||||||||
| Net (loss) income | Net (loss) income | (851) | (15,015) | |||||||||||||||||||||||||
| Net loss (income) attributable to noncontrolling interests | 152 | (21 | ) | (21 | ) | Net loss (income) attributable to noncontrolling interests | 1 | (1) | ||||||||||||||||||||
| Net income attributable to the Company | $ | 345,673 | $ | 1,121 | $ | 379,737 | ||||||||||||||||||||||
| Net (loss) income attributable to the Company | Net (loss) income attributable to the Company | $ | (850) | $ | (15,016) | |||||||||||||||||||||||
The condensed assets for each of the segments as of December 31, 20192021 and 2018,2020, along with capital expenditures and loan originations for the years ended December 31, 2019, 2018,2021 and 20172020 are as follows:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Condensed assets: | |||||||||||
| Office | $ | 449,843 | $ | 472,544 | |||||||
| Hotel | 101,308 | 100,285 | |||||||||
| Lending | 96,729 | 94,626 | |||||||||
| Non-segment assets | 12,986 | 18,162 | |||||||||
| Total assets | $ | 660,866 | $ | 685,617 | |||||||
F-41
| December 31, | |||||||
| 2019 | 2018 | ||||||
| (in thousands) | |||||||
| Condensed assets: | |||||||
| Office (1) | $ | 460,951 | $ | 1,094,269 | |||
| Hotel | 104,029 | 105,845 | |||||
| Lending | 82,140 | 97,465 | |||||
| Non-segment assets | 20,472 | 44,822 | |||||
| Total assets | $ | 667,592 | $ | 1,342,401 | |||
Notes to Consolidated Financial Statements asof December 31, 20192021 and 20182020
and for the Years Ended December 31, 2019, 20182021 and 20172020 (Continued)
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Capital expenditures (2): | |||||||||||
| Office (1) | $ | 16,006 | $ | 12,669 | $ | 24,907 | |||||
| Hotel | 2,382 | 2,237 | 478 | ||||||||
| Multifamily | — | — | 693 | ||||||||
| Total capital expenditures | 18,388 | 14,906 | 26,078 | ||||||||
| Loan originations | 39,592 | 74,234 | 76,316 | ||||||||
| Total capital expenditures and loan originations | $ | 57,980 | $ | 89,140 | $ | 102,394 | |||||
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
Capital expenditures (1) and loan originations: | |||||||||||||||||
| Office | $ | 5,714 | $ | 8,514 | |||||||||||||
| Hotel | 193 | 821 | |||||||||||||||
| Total capital expenditures | 5,907 | 9,335 | |||||||||||||||
| Loan originations | 133,290 | 53,524 | |||||||||||||||
| Total capital expenditures and loan originations | $ | 139,197 | $ | 62,859 | |||||||||||||
(1)Represents additions and improvements to real estate investments, excluding acquisitions. Includes the activity for dispositions through their respective disposition dates.
Property Acquisitions
In February 2022, the Company and a co-investor acquired from an unrelated third-party a 100% fee-simple interest in an office property located in the Echo Park neighborhood of Los Angeles, California for a purchase price of $51.0 million, which excludes transaction costs of $51,000 that were incurred in connection with this acquisition. The following isproperty has approximately 97,564 square feet of office space and 2,760 square feet of retail space.The Company owns approximately 44% of this property. The Company plans to undertake a summarycapital improvement program to renovate and modernize the building into creative office space as well as a limited number of multifamily units.
In February 2022, the Company acquired from an unrelated third-party a 100% fee-simple interest in a 11,318 square feet land site with a 3,752 square feet building located in Los Angeles, California for a purchase price of $2.3 million, which excludes transaction costs of $8,000 that were incurred in connection with this acquisition. The Company intends to pursue entitlements for residential use and develop into multifamily units.
Dividend Declaration
On March 8, 2022, the Company declared a cash dividend of $0.085 per share of its Common Stock, to be paid on April 1, 2022 to stockholders of record at the close of business on March 19, 2022.
On March 8, 2022, the Company declared a quarterly financial informationcash dividend of $0.34375 per share of the Series A Preferred Stock for the year ended December 31, 2019:second quarter of 2022. The dividend will be payable as follows: $0.114583 per share to be paid on May 16, 2022 to Series A Preferred Stockholders of record on May 5, 2022; $0.114583 per share to be paid on June 15, 2022 to Series A Preferred Stockholders of record on June 5, 2022; and $0.114583 per share to be paid on July 15, 2022 to Series A Preferred Stockholders of record on July 5, 2022. For shares of Series A Preferred Stock issued during the second quarter of 2021, the dividend will be prorated from the date of issuance, and the monthly dividend payments will reflect such proration, as applicable.
On March 8, 2022, the Company declared a quarterly cash dividend of $0.353125 per share of the Series D Preferred Stock for the second quarter of 2022. The dividend will be payable as follows: $0.117708 per share to be paid on May 16, 2022 to Series D Preferred Stockholders of record on May 5, 2022; $0.117708 per share to be paid on June 15, 2022 to Series D Preferred Stockholders of record on June 5, 2022; and $0.117708 per share to be paid on July 15, 2022 to Series D Preferred Stockholders of record on July 5, 2022. For shares of Series D Preferred Stock issued during the second quarter of 2021, the dividend will be prorated from the date of issuance, and the monthly dividend payments will reflect such proration, as applicable.
Fee Waiver
On January 5, 2022, the Company and certain of its subsidiaries entered into the Fee Waiver with the Operator and the Administrator with respect to fees that are payable to them. The Fee Waiver is effective retroactively to January 1, 2022. See Note 12 “Related-Party Transactions— Fee Waiver.”
F-42
| Three Months Ended | |||||||||||||||
| March 31, | June 30, | September 30, | December 31, | ||||||||||||
| (in thousands, except per share amounts) | |||||||||||||||
| 2019 | |||||||||||||||
| Revenues | $ | 47,277 | $ | 36,856 | $ | 29,215 | $ | 26,641 | |||||||
| Loss on early extinguishment of debt | 25,071 | 4,911 | — | — | |||||||||||
| Impairment of real estate | 66,200 | 2,800 | — | — | |||||||||||
| Gain on sale of real estate | 377,581 | 55,221 | 302 | — | |||||||||||
| Net income (loss) | 291,623 | 52,567 | 2,856 | (1,525 | ) | ||||||||||
| Net income (loss) attributable to the Company | 291,797 | 52,566 | 2,848 | (1,538 | ) | ||||||||||
| Redeemable preferred stock dividends declared or accumulated | (4,162 | ) | (4,302 | ) | (4,470 | ) | (4,161 | ) | |||||||
| Redeemable preferred stock redemptions | (4 | ) | (4 | ) | — | (5,874 | ) | ||||||||
| Net income (loss) attributable to common stockholders | 287,631 | 48,260 | (1,622 | ) | (11,573 | ) | |||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE (1) (2): | |||||||||||||||
| Basic | $ | 19.70 | $ | 3.31 | $ | (0.11 | ) | $ | (0.79 | ) | |||||
| Diluted | $ | 18.90 | $ | 3.20 | $ | (0.11 | ) | $ | (0.79 | ) | |||||
| Weighted average shares of common stock outstanding - basic | 14,598 | 14,597 | 14,598 | 14,598 | |||||||||||
| Weighted average shares of common stock outstanding - diluted | 15,245 | 15,284 | 14,599 | 14,599 | |||||||||||
| Three Months Ended | |||||||||||||||
| March 31, | June 30, | September 30, | December 31, | ||||||||||||
| (in thousands except per share amounts) | |||||||||||||||
| 2018 | |||||||||||||||
| Revenues as previously reported (1) | $ | 48,398 | $ | 51,559 | $ | 47,640 | $ | 50,127 | |||||||
| Bad debt expense recorded as adjustment to revenues (1) | (104 | ) | (15 | ) | (33 | ) | (102 | ) | |||||||
| Revenues | 48,294 | 51,544 | 47,607 | 50,025 | |||||||||||
| Loss on early extinguishment of debt | — | — | — | 808 | |||||||||||
| Net income (loss) | 622 | 1,949 | (529 | ) | (900 | ) | |||||||||
| Net income (loss) attributable to the Company | 618 | 1,937 | (528 | ) | (906 | ) | |||||||||
| Redeemable preferred stock dividends declared or accumulated | (3,645 | ) | (3,814 | ) | (3,921 | ) | (4,043 | ) | |||||||
| Redeemable preferred stock redemptions | 1 | 1 | 1 | 1 | |||||||||||
| Net loss attributable to common stockholders | (3,026 | ) | (1,876 | ) | (4,448 | ) | (4,948 | ) | |||||||
| NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE (2) (3): | |||||||||||||||
| Basic | $ | (0.21 | ) | $ | (0.13 | ) | $ | (0.30 | ) | $ | (0.34 | ) | |||
| Diluted | $ | (0.21 | ) | $ | (0.13 | ) | $ | (0.30 | ) | $ | (0.34 | ) | |||
| Weighted average shares of common stock outstanding - basic | 14,595 | 14,597 | 14,598 | 14,598 | |||||||||||
| Weighted average shares of common stock outstanding - diluted | 14,595 | 14,597 | 14,598 | 14,598 | |||||||||||
Schedule III—Real Estate and Accumulated Depreciation
December 31, 20192021
(in thousands)
| Initial Cost | Net Improvements (Write-Offs) Since Acquisition | Gross Amount at Which Carried (2) | ||||||||||||||||||||||||||||||||||
| Property Name, City and State | Encumbrances | Land | Building and Improvements | Land | Building and Improvements | Total | Acc. Deprec. | Year Built / Renovated | Year of Acquisition | |||||||||||||||||||||||||||
| Office | ||||||||||||||||||||||||||||||||||||
| 3601 S Congress Avenue | ||||||||||||||||||||||||||||||||||||
| Austin, TX | $ | — | $ | 9,569 | $ | 18,593 | $ | 9,833 | $ | 9,569 | $ | 28,426 | $ | 37,995 | $ | 9,041 | 1918/2001 | 2007 | ||||||||||||||||||
| 1 Kaiser Plaza | ||||||||||||||||||||||||||||||||||||
| Oakland, CA | 97,100 | 9,261 | 113,619 | 19,802 | 9,261 | 133,421 | 142,682 | 44,659 | 1970/2008 | 2008 | ||||||||||||||||||||||||||
| 2 Kaiser Plaza Parking Lot | ||||||||||||||||||||||||||||||||||||
| Oakland, CA | — | 10,931 | 110 | 1,735 | 10,931 | 1,845 | 12,776 | 117 | N/A | 2015 | ||||||||||||||||||||||||||
| 11600 Wilshire Boulevard | ||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | — | 3,477 | 18,522 | 2,304 | 3,477 | 20,826 | 24,303 | 5,672 | 1955 | 2010 | ||||||||||||||||||||||||||
| 11620 Wilshire Boulevard | ||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | — | 7,672 | 51,999 | 7,242 | 7,672 | 59,241 | 66,913 | 15,731 | 1976 | 2010 | ||||||||||||||||||||||||||
| 4750 Wilshire Boulevard | ||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | — | 16,633 | 28,985 | 3,897 | 16,633 | 32,882 | 49,515 | 4,170 | 1984/2014 | 2014 | ||||||||||||||||||||||||||
| Lindblade Media Center | ||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | — | 6,342 | 11,568 | 24 | 6,342 | 11,592 | 17,934 | 1,480 | 1930 & 1957 / 2010 | 2014 | ||||||||||||||||||||||||||
| 1130 Howard Street | ||||||||||||||||||||||||||||||||||||
| San Francisco, CA | — | 8,290 | 10,480 | 5 | 8,290 | 10,485 | 18,775 | 638 | 1930 / 2016 & 2017 | 2017 | ||||||||||||||||||||||||||
| 9460 Wilshire Boulevard | ||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | — | 52,199 | 76,730 | 620 | 52,199 | 77,350 | 129,549 | 4,644 | 1959 / 2008 | 2018 | ||||||||||||||||||||||||||
| Hotel | ||||||||||||||||||||||||||||||||||||
| Sheraton Grand Hotel | ||||||||||||||||||||||||||||||||||||
| Sacramento, CA | — | 3,497 | 107,447 | 122 | 3,497 | 107,569 | 111,066 | 31,158 | 2001 | 2008 | ||||||||||||||||||||||||||
| Sheraton Grand Hotel Parking & Retail | ||||||||||||||||||||||||||||||||||||
| Sacramento, CA | — | 6,550 | 10,996 | 208 | 6,550 | 11,204 | 17,754 | 3,245 | 2001 | 2008 | ||||||||||||||||||||||||||
| $ | 97,100 | $ | 134,421 | $ | 449,049 | $ | 45,792 | $ | 134,421 | $ | 494,841 | $ | 629,262 | $ | 120,555 | |||||||||||||||||||||
| Initial Cost | Net Improvements (Write-Offs) Since Acquisition | Gross Amount at Which Carried (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property Name, City and State | Encumbrances | Land | Building and Improvements | Land | Building and Improvements | Total | Acc. Deprec. | Year Built / Renovated | Year of Acquisition | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Office | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3601 S Congress Avenue | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Austin, TX | (1) | $ | 9,569 | $ | 18,593 | $ | 12,532 | $ | 9,569 | $ | 31,125 | $ | 40,694 | $ | 8,857 | 1918 / 2001 & 2020 | 2007 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 1 Kaiser Plaza | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Oakland, CA | $ | 97,100 | 9,261 | 113,619 | 19,048 | 9,261 | 132,667 | 141,928 | 52,113 | 1970 / 2008 | 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2 Kaiser Plaza Parking Lot | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Oakland, CA | — | 10,931 | 110 | 3,153 | 10,931 | 3,263 | 14,194 | 42 | N/A | 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 11600 Wilshire Boulevard | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | (1) | 3,477 | 18,522 | 2,090 | 3,477 | 20,612 | 24,089 | 6,584 | 1955 | 2010 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 11620 Wilshire Boulevard | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | (1) | 7,672 | 51,999 | 6,457 | 7,672 | 58,456 | 66,128 | 17,940 | 1976 | 2010 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4750 Wilshire Boulevard | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | (1) | 16,633 | 28,985 | 5,375 | 16,633 | 34,360 | 50,993 | 6,367 | 1984 / 2014 | 2014 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lindblade Media Center | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | (1) | 6,342 | 11,568 | (101) | 6,342 | 11,467 | 17,809 | 2,198 | 1930 & 1957 / 2010 | 2014 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1037 N Sycamore | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | — | 1,839 | 1,094 | 48 | 1,839 | 1,142 | 2,981 | 14 | 2000 / 2021 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1130 Howard Street | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| San Francisco, CA | (1) | 8,290 | 10,480 | 131 | 8,290 | 10,611 | 18,901 | 1,297 | 1930 / 2016 & 2017 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 9460 Wilshire Boulevard | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | (1) | 52,199 | 76,730 | 1,681 | 52,199 | 78,411 | 130,610 | 8,738 | 1959 / 2008 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1021 E 7th Street | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Austin, TX | — | 4,976 | 733 | — | 4,976 | 733 | 5,709 | 113 | 1972 / 2001 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hotel | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sheraton Grand Hotel | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sacramento, CA | (1) | 3,497 | 107,447 | (99) | 3,497 | 107,348 | 110,845 | 36,612 | 2001 | 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sheraton Grand Hotel Parking & Retail | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sacramento, CA | — | 6,550 | 10,996 | 275 | 6,550 | 11,271 | 17,821 | 3,843 | 2001 | 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 97,100 | $ | 141,236 | $ | 450,876 | $ | 50,590 | $ | 141,236 | $ | 501,466 | $ | 642,702 | $ | 144,718 | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1)These properties collateralize the revolving credit facility, which had a $60.0 million outstanding balance as of December 31, 2021.
(2)The aggregate gross cost of property included above for federal income tax purposes approximates $695.1 million (unaudited) as of December 31, 2021.
F-43
Schedule III—Real Estate and Accumulated Depreciation (Continued)
December 31, 2021
(in thousands)
The following table reconciles ourthe Company’s investments in real estate from January 1, 20172020 to December 31, 2019:2021:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2021 | 2020 | ||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||
| Investments in Real Estate | Investments in Real Estate | |||||||||||||||||||||||||||
| Balance, beginning of period | $ | 1,344,636 | $ | 1,228,780 | $ | 2,021,494 | Balance, beginning of period | $ | 637,205 | $ | 629,262 | |||||||||||||||||
| Additions: | Additions: | |||||||||||||||||||||||||||
| Improvements | 18,388 | 14,906 | 26,078 | Improvements | 5,907 | 9,335 | ||||||||||||||||||||||
| Property acquisitions | — | 128,928 | 18,770 | Property acquisitions | 2,933 | 5,709 | ||||||||||||||||||||||
| Deductions: | Deductions: | |||||||||||||||||||||||||||
| Assets held for sale | — | (24,832 | ) | — | Assets held for sale | — | — | |||||||||||||||||||||
| Asset sales | (659,849 | ) | — | (815,357 | ) | Asset sales | — | — | ||||||||||||||||||||
| Impairment | (69,000 | ) | — | (13,100 | ) | Impairment | — | — | ||||||||||||||||||||
| Retirements | (4,913 | ) | (3,146 | ) | (9,105 | ) | Retirements | (3,343) | (7,101) | |||||||||||||||||||
| Balance, end of period | $ | 629,262 | $ | 1,344,636 | $ | 1,228,780 | Balance, end of period | $ | 642,702 | $ | 637,205 | |||||||||||||||||
The following table reconciles the accumulated depreciation from January 1, 20172020 to December 31, 2019:2021:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Accumulated Depreciation | |||||||||||||||||
| Balance, beginning of period | $ | (131,165) | $ | (120,555) | |||||||||||||
| Additions: depreciation | (16,896) | (17,711) | |||||||||||||||
| Deductions: | |||||||||||||||||
| Assets held for sale | — | — | |||||||||||||||
| Asset sales | — | — | |||||||||||||||
| Retirements | 3,343 | 7,101 | |||||||||||||||
| Balance, end of period | $ | (144,718) | $ | (131,165) | |||||||||||||
F-44
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Accumulated Depreciation | |||||||||||
| Balance, beginning of period | $ | (303,699 | ) | $ | (271,055 | ) | $ | (414,552 | ) | ||
| Additions: depreciation | (22,209 | ) | (43,499 | ) | (49,427 | ) | |||||
| Deductions: | |||||||||||
| Assets held for sale | — | 7,709 | — | ||||||||
| Asset sales | 200,440 | — | 183,819 | ||||||||
| Retirements | 4,913 | 3,146 | 9,105 | ||||||||
| Balance, end of period | $ | (120,555 | ) | $ | (303,699 | ) | $ | (271,055 | ) | ||
Schedule IV—Mortgage Loans on Real Estate
December 31, 20192021
(dollars in thousands, except footnotes)
| Principal | ||||||||||||||||||||||||||||||||
| Amount of | ||||||||||||||||||||||||||||||||
| Loans Subject | ||||||||||||||||||||||||||||||||
| Geographic | Number | Final | Carrying | to Delinquent | ||||||||||||||||||||||||||||
| Dispersion of | of | Size of Loans | Maturity | Amount of | Principal or | |||||||||||||||||||||||||||
| Collateral | Loans | From | To | Interest Rate | Date Range | Mortgages (1) | "Interest" | |||||||||||||||||||||||||
| SBA 7(a) Loans - States 2% or greater (2) (3): | ||||||||||||||||||||||||||||||||
| Indiana | 17 | $ | 110 | $ | 1,000 | 6.50% | to | 7.75% | 05/14/36 | — | 09/27/44 | $ | 8,620 | $ | — | |||||||||||||||||
| Texas | 25 | $ | — | $ | 1,020 | 5.88% | to | 7.75% | 01/01/21 | — | 10/24/44 | 8,086 | — | |||||||||||||||||||
| Ohio | 24 | $ | — | $ | 800 | 6.75% | to | 7.75% | 10/16/20 | — | 07/17/44 | 7,000 | — | |||||||||||||||||||
| Michigan | 17 | $ | 10 | $ | 1,000 | 6.25% | to | 7.75% | 10/10/33 | — | 11/22/44 | 5,138 | — | |||||||||||||||||||
| Florida | 10 | $ | 80 | $ | 1,110 | 6.75% | to | 7.75% | 06/29/32 | — | 01/26/44 | 4,007 | — | |||||||||||||||||||
| Pennsylvania (4) | 5 | $ | 170 | $ | 760 | 6.75% | to | 7.75% | 03/05/40 | — | 11/29/43 | 2,388 | 284 | |||||||||||||||||||
| Illinois | 7 | $ | 50 | $ | 550 | 6.75% | to | 7.75% | 09/17/35 | — | 08/20/44 | 1,779 | — | |||||||||||||||||||
| Louisiana | 4 | $ | 110 | $ | 610 | 6.75% | to | 7.75% | 11/17/41 | — | 05/21/44 | 1,551 | — | |||||||||||||||||||
| South Carolina | 4 | $ | 280 | $ | 400 | 6.75% | to | 7.75% | 11/06/40 | — | 07/30/44 | 1,358 | — | |||||||||||||||||||
| Wisconsin (5) | 7 | $ | — | $ | 530 | 6.75% | to | 8.25% | 04/23/20 | — | 02/27/43 | 1,355 | 80 | |||||||||||||||||||
| North Carolina | 4 | $ | 70 | $ | 630 | 6.75% | to | 7.75% | 09/08/32 | — | 11/25/44 | 1,319 | — | |||||||||||||||||||
| Colorado | 4 | $ | 60 | $ | 540 | 6.50% | to | 7.75% | 01/21/36 | — | 07/26/43 | 1,309 | — | |||||||||||||||||||
| Virginia | 4 | $ | 240 | $ | 470 | 7.00% | to | 7.75% | 07/20/37 | — | 12/27/44 | 1,283 | — | |||||||||||||||||||
| Mississippi | 4 | $ | 150 | $ | 520 | 7.00% | to | 7.75% | 08/31/29 | — | 08/31/43 | 1,206 | — | |||||||||||||||||||
| Alabama | 5 | $ | 30 | $ | 490 | 6.75% | to | 7.75% | 07/25/25 | — | 08/31/44 | 1,130 | — | |||||||||||||||||||
| Kentucky | 5 | $ | 100 | $ | 430 | 7.00% | to | 7.75% | 04/09/35 | — | 07/25/44 | 1,099 | — | |||||||||||||||||||
| Other | 29 | $ | 10 | $ | 550 | 6.25% | to | 7.75% | 05/23/20 | — | 02/27/45 | 6,148 | — | |||||||||||||||||||
| Government guaranteed portions (6) | 1,601 | — | ||||||||||||||||||||||||||||||
| SBA 7(a) loans, subject to secured borrowings (7) | 12,152 | — | ||||||||||||||||||||||||||||||
| General reserves | (450 | ) | — | |||||||||||||||||||||||||||||
| 175 | 68,079 | (8) | 364 | |||||||||||||||||||||||||||||
| Principal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount of | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans Subject | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Geographic | Number | Final | Carrying | to Delinquent | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dispersion of | of | Size of Loans | Maturity | Amount of | Principal or | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collateral | Loans | From | To | Interest Rate | Date Range | Mortgages (1) | “Interest” | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SBA 7(a) Loans - States 2% or greater (2) (3): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Texas | 21 | $ | 10 | $ | 980 | 4.75% | to | 6.00% | 05/22/23 | — | 08/20/46 | $ | 7,861 | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ohio | 23 | $ | 70 | $ | 890 | 4.75% | to | 6.00% | 03/26/37 | — | 12/07/46 | 7,672 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Indiana | 16 | $ | 100 | $ | 970 | 4.75% | to | 6.00% | 05/14/36 | — | 08/26/46 | 6,873 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Michigan | 20 | $ | 10 | $ | 970 | 4.75% | to | 6.00% | 10/10/33 | — | 10/27/46 | 5,859 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Florida | 12 | $ | 90 | $ | 1,070 | 5.00% | to | 6.00% | 06/29/32 | — | 08/19/46 | 5,173 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Illinois | 11 | $ | 50 | $ | 530 | 5.00% | to | 6.00% | 09/08/39 | — | 10/15/46 | 2,278 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| West Virginia | 6 | $ | 20 | $ | 870 | 4.75% | to | 6.00% | 09/25/31 | — | 09/20/46 | 2,107 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pennsylvania | 4 | $ | 310 | $ | 690 | 5.00% | to | 6.00% | 03/05/40 | — | 11/29/43 | 2,077 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Louisiana | 6 | $ | 90 | $ | 590 | 5.00% | to | 6.00% | 11/22/31 | — | 02/22/46 | 1,801 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Mexico | 5 | $ | 100 | $ | 770 | 4.75% | to | 6.00% | 11/17/34 | — | 08/09/46 | 1,720 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Virginia | 5 | $ | 110 | $ | 650 | 5.00% | to | 5.75% | 02/27/43 | — | 09/08/46 | 1,640 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Colorado | 4 | $ | 320 | $ | 520 | 4.75% | to | 5.50% | 11/16/39 | — | 09/15/45 | 1,515 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Kentucky | 6 | $ | 130 | $ | 420 | 5.00% | to | 6.00% | 01/04/41 | — | 10/29/46 | 1,498 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Alabama | 7 | $ | 30 | $ | 480 | 5.00% | to | 5.75% | 07/27/25 | — | 09/10/46 | 1,473 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| North Carolina | 7 | $ | 60 | $ | 350 | 5.25% | to | 6.00% | 09/08/32 | — | 09/30/46 | 1,358 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| South Carolina | 4 | $ | 270 | $ | 390 | 5.00% | to | 6.00% | 11/06/40 | — | 07/30/44 | 1,308 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other (4) | 42 | $ | 1 | $ | 510 | 4.75% | to | 6.00% | 03/29/22 | — | 12/14/46 | 9,415 | 85 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government guaranteed portions (5) | 1,199 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SBA 7(a) loans, subject to secured borrowings (6) | 6,671 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Paycheck Protection Program loans, net (7) | 4,903 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General reserves | (858) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 199 | $ | 73,543 | (8) | $ | 85 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Excludes general reserves of $858,000 since not specifically identified.
(2)Includes $359,000 of loans with subordinate lien positions.
(3)Interest rates are variable at spreads over the prime rate unless otherwise noted.
(4)Includes a loan with a retained face value of $85,000, a valuation reserve of $85,000 and a fixed interest rate of 6.00%.
(5)Represents the government guaranteed portions of the Company’s SBA 7(a) loans detailed above retained by us. As there is no risk of loss to us related to these portions of the guaranteed loans, the geographic information is not presented as it is not meaningful.
(6)Represents the guaranteed portion of SBA 7(a) loans which were sold with the proceeds received from the sale reflected as secured borrowings. For Federal income tax purposes, these proceeds are treated as sales and reduce the carrying value of loans receivable.
(7)PPP loans are 100% guaranteed. As there is no risk of loss to us related to these loans, the geographic information is not presented as it is not meaningful. Face value of these loans is $5.1 million.
(8)For Federal income tax purposes, the aggregate cost basis of the Company’s loans was approximately $66.4 million (unaudited).
F-45
Schedule IV—Mortgage Loans on Real Estate (Continued)
December 31, 20192021
(in thousands)
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Balance, beginning of period | $ | 83,135 | $ | 68,079 | ||||||||||||||||
| Additions during period: | ||||||||||||||||||||
| New loans | 133,290 | 53,524 | ||||||||||||||||||
| Other - deferral of loan origination costs | 2,559 | 382 | ||||||||||||||||||
| Other - accretion of loan discounts, net of amortization of deferred origination costs | 1,424 | 933 | ||||||||||||||||||
| Deductions during period: | ||||||||||||||||||||
| Collections of principal | (32,370) | (11,580) | ||||||||||||||||||
| Foreclosures | — | (174) | ||||||||||||||||||
| Cost of mortgages sold, net | (114,437) | (27,609) | ||||||||||||||||||
| Other - bad debt expense | (58) | (420) | ||||||||||||||||||
| Balance, end of period | $ | 73,543 | $ | 83,135 | ||||||||||||||||
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Balance, beginning of period | $ | 83,248 | $ | 81,056 | $ | 75,740 | ||||||
| Additions during period: | ||||||||||||
| New loans | 39,592 | 74,234 | 76,316 | |||||||||
| Other - deferral for collection of commitment fees, net of costs | 802 | 1,587 | 1,706 | |||||||||
| Other - accretion of loan fees and discounts | 1,303 | 1,026 | 676 | |||||||||
| Deductions during period: | ||||||||||||
| Collections of principal | (13,886 | ) | (16,468 | ) | (17,557 | ) | ||||||
| Foreclosures | (241 | ) | — | (127 | ) | |||||||
| Cost of mortgages sold, net | (42,663 | ) | (57,947 | ) | (54,973 | ) | ||||||
| Other - reclassification from secured borrowings | — | — | (534 | ) | ||||||||
| Other - bad debt expense | (76 | ) | (240 | ) | (191 | ) | ||||||
| Balance, end of period | $ | 68,079 | $ | 83,248 | $ | 81,056 | ||||||