UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019 | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-13610
CIM COMMERCIAL TRUST CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland (State or Other Jurisdiction of Incorporation or Organization) | 75-6446078 (I.R.S. Employer Identification No.) |
17950 Preston Road, Suite 600, Dallas, Texas (Address of Principal Executive Offices) | 75252 (Zip Code) |
(972) 349-3200 (Registrant's telephone number, including area code) | |
Securities Registered Pursuant to Section 12(b) of the Act: | ||||
Common Stock, $0.001 Par Value | CMCT | Nasdaq Global Market | ||
Common Stock, $0.001 Par Value | CMCT-L | Tel Aviv Stock Exchange | ||
Series L Preferred Stock, $0.001 Par Value | CMCTP | Nasdaq Global Market | ||
Series L Preferred Stock, $0.001 Par Value | CMCTP | Tel Aviv Stock Exchange | ||
(Title of each class) | (Trading symbol) | (Name of each exchange on which registered) | ||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o |
Smaller reporting company ý | Emerging growth company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act.) Yes o No x
As of June 30, 2019, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the average high and low sales prices on the Nasdaq Global Market as of the close of business on June 30, 2019, was approximately $81.4 million. The registrant does not have any nonvoting common equities.
As of March 12, 2020, the registrant had outstanding 14,602,149 shares of common stock, par value $0.001 per share.
Documents Incorporated by Reference
Part III of this Annual Report on Form 10-K incorporates by reference specified portions of CIM Commercial Trust Corporation’s Proxy Statement for its 2020 Annual Meeting of Stockholders, which the registrant anticipates will be filed with the Securities and Exchange Commission no later than April 29, 2020.
CIM COMMERCIAL TRUST CORPORATION
2019 ANNUAL REPORT ON FORM 10-K
Page | |||
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Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created thereby. These statements include the plans and objectives of management for future operations, including plans and objectives relating to future growth of our business and availability of funds. Such forward-looking statements can be identified by the use of forward-looking terminology such as "may," "will," "project," "target," "expect," "intend," "might," "believe," "anticipate," "estimate," "could," "would" "continue," "pursue," "potential," "forecast," "seek," "plan," or "should" or the negative thereof or other variations or similar words or phrases. The forward-looking statements expressed or implied herein are based on current expectations that involve numerous risks and uncertainties identified in this Annual Report on Form 10-K, including, without limitation, the risks identified under the caption "Item 1A—Risk Factors." Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements expressed or implied in this Annual Report on Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements expressed or implied herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made. We do not undertake to update them to reflect changes that occur after the date they are made, except to the extent required by applicable securities laws.
Important Note
On September 3, 2019, we effected a 1-for-3 reverse stock split (the “Reverse Stock Split”) on our common stock, par value $0.001 per share (“Common Stock”). Unless otherwise specified, all Common Stock and per share of Common Stock amounts set forth in this Annual Report on Form 10-K have been adjusted to give retroactive effect to the Reverse Stock Split.
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PART I
Item 1. Business
Business Overview
The principal business of CIM Commercial Trust Corporation and its subsidiaries (which may be referred to in this Annual Report on Form 10-K as "we," "us," "our," "our company", "CIM Commercial" or the "Company") is to acquire, own, and operate Class A and creative office assets in vibrant and improving metropolitan communities throughout the United States (including improving and developing such assets). These communities are located in areas that include traditional downtown areas and suburban main streets, which have high barriers to entry, high population density, positive population trends and a propensity for growth. We believe that the critical mass of redevelopment in such areas creates positive externalities, which enhance the value of real estate assets in the area. We believe that these assets will provide greater returns than similar assets in other markets as a result of the population growth, public commitment, and significant private investment that characterize these areas.
We are operated by affiliates of CIM Group, L.P. ("CIM Group" or "CIM"). CIM Group is a vertically-integrated owner and operator of real assets with multi-disciplinary expertise and in-house research, acquisition, credit analysis, development, finance, leasing, and onsite property management capabilities. CIM Group is headquartered in Los Angeles, California and has offices in Chicago, Illinois; Dallas, Texas; New York, New York; Orlando, Florida; Phoenix, Arizona; the San Francisco Bay Area; the Washington D.C. Metro Area; and Tokyo, Japan. See the sections "Overview and History of CIM Group", "CIM Urban Partnership Agreement" and "Investment Management Agreement" in "Item 1—Business" of this Annual Report on Form 10-K.
We seek to utilize the CIM Group platform to acquire, improve and or develop real estate assets within CIM Group’s qualified communities (“Qualified Communities”). We believe that these assets will provide greater returns than similar assets in other markets, as a result of the population growth, public commitment, and significant private investment that characterize these areas. Over time, we seek to expand our real estate assets in communities targeted by CIM Group, supported by CIM Group’s broad real estate capabilities, as part of our plan to prudently grow net asset value ("NAV") and cash flow per share of Common Stock.
We primarily acquire Class A and creative office assets located in areas that CIM Group has targeted. These areas include traditional downtown areas and suburban main streets, which have high barriers to entry, high population density, positive population trends and a propensity for growth. CIM Group believes that the critical mass of redevelopment in such areas creates positive externalities, which enhance the value of real estate assets in the area. CIM Group targets acquisitions of diverse types of real estate assets, including retail, residential, office, parking, hotel, signage and mixed-use through CIM Group’s extensive network and its current opportunistic activities.
Our reportable segments consist of two types of commercial real estate properties, namely office and hotel, as well as a segment for our lending business, which primarily originates loans to small businesses. As of December 31, 2019, our real estate portfolio consisted of 11 assets, all of which were fee-simple properties. As of December 31, 2019, our 9 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% occupied and our one hotel with an ancillary parking garage, which has a total of 503 rooms, had revenue per available room ("RevPAR") of $127.09 for the year ended December 31, 2019. For the year ended December 31, 2019, our office portfolio contributed approximately 63.6% of revenue from our segments, while our hotel contributed approximately 28.4%, and our lending segment contributed approximately 8.0%.
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Our office and hotel assets are located in five U.S. markets. The breakdown by segment, market and submarket, as of December 31, 2019, is as follows:
Overview of our Real Estate Portfolio as of December 31, 2019
Office | ||||||||||
and Retail | ||||||||||
Rentable | ||||||||||
Square | Hotel | |||||||||
Property | Market | Sub-Market | Feet | Rooms | ||||||
Office | ||||||||||
1 Kaiser Plaza | Oakland, CA | Lake Merritt | 540,175 | — | ||||||
11620 Wilshire Boulevard | Los Angeles, CA | West Los Angeles | 195,357 | — | ||||||
3601 S Congress Avenue (1) | Austin, TX | South | 183,885 | — | ||||||
4750 Wilshire Boulevard | Los Angeles, CA | Mid-Wilshire | 141,310 | — | ||||||
9460 Wilshire Boulevard | Los Angeles, CA | Beverly Hills | 97,037 | — | ||||||
11600 Wilshire Boulevard | Los Angeles, CA | West Los Angeles | 56,697 | — | ||||||
Lindblade Media Center (2) | Los Angeles, CA | West Los Angeles | 32,428 | — | ||||||
1130 Howard Street | San Francisco, CA | South of Market | 21,194 | — | ||||||
Total Office (8 Properties) | 1,268,083 | — | ||||||||
Other Ancillary Properties within Office Portfolio (1 Property) | ||||||||||
2 Kaiser Plaza Parking Lot (3) | Oakland, CA | Lake Merritt | — | — | ||||||
Total Office including Other Ancillary (9 Properties) | 1,268,083 | — | ||||||||
Hotel Portfolio (1 Property) | ||||||||||
Sheraton Grand Hotel | Sacramento, CA | Downtown/Midtown | — | 503 | ||||||
Other Ancillary Properties within Hotel Portfolio (1 Property) | ||||||||||
Sheraton Grand Hotel Parking Garage & Retail (4) | Sacramento, CA | Downtown/Midtown | 9,453 | — | ||||||
Total Portfolio (11 Properties) | 1,277,536 | 503 | ||||||||
(1) | 3601 S Congress Avenue consists of ten buildings. The Company expects to complete the development of an existing surface parking lot into approximately 42,000 square feet of additional rentable office space by mid-2020. |
(2) | Lindblade Media Center consists of three buildings. |
(3) | 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 a building, which we are in the process of designing, having between 425,000 and 800,000 rentable square feet. |
(4) | The site of the Sheraton Grand Hotel Parking Garage & Retail is being evaluated for potential redevelopment. |
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Completion of the Program to Unlock Embedded Value in Our Portfolio and Improve Trading Liquidity of Our Common Stock
The Company completed the previously announced program to unlock embedded value in its portfolio, enhance growth prospects and improve the trading liquidity of our Common Stock (the "Program to Unlock Embedded Value in Our Portfolio and Improve Trading Liquidity of Our Common Stock"):
• | Sale of Assets. During 2019, the Company sold eight properties in accordance with the approval of its then‑principal stockholder, and an additional two properties (one office property and one development site in Washington, D.C.) after evaluating each asset within its portfolio and the intrinsic value of each property (such sales, collectively, the “Asset Sale”). The Asset Sale generated an aggregate gross sales price to the Company of $990,996,000. |
• | Repayment of Certain Indebtedness. We used a portion of the net proceeds from the Asset Sale to repay balances on certain of the Company’s indebtedness. |
• | Return of Capital to Holders of Common Stock. On August 30, 2019, we paid a special dividend of $42.00 per share of Common Stock ($14.00 per share of Common Stock prior to the Reverse Stock Split) (the "Special Dividend"), or $613,294,000 in the aggregate, to stockholders of record of our Common Stock at the close of business on August 19, 2019. |
• | CIM REIT Liquidation. In connection with its liquidation process, CIM Urban REIT, LLC, the former indirect principal stockholder of the Company ("CIM REIT"), (i) distributed during the year ended December 31, 2019 approximately 10,624,000 shares of our Common Stock formerly indirectly held by CIM REIT, representing approximately 72.8% of the outstanding shares of our Common Stock, to a diverse group of institutional investors that were former members of CIM REIT and (ii) sold, in October 2019, 2,468,390 shares of our Common Stock formerly indirectly held by CIM REIT, representing approximately 16.9% of the outstanding shares of our Common Stock, for $19.1685 per share to an affiliate of CIM Group in a private transaction. As of March 12, 2020, CIM Group, its affiliates, and our officers and directors have an aggregate economic interest in approximately 19.6% of the outstanding shares of our Common Stock. |
On October 22, 2019, the Company commenced a tender offer (the "Tender Offer") for the purchase of up to 2,693,580 shares of Series L preferred stock, par value $0.001 per share ("Series L Preferred Stock"), 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. 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 unpaid dividends on the Series L Preferred Stock as of November 20, 2019), as converted to and paid in Israeli New Shekels ("ILS"). The total cost to repurchase the tendered shares, including professional fees to complete the Tender Offer of $462,000 but excluding the dividends accrued in respect of such shares, was $75,155,000, which was primarily funded from borrowings under the revolving credit facility. We recognized $5,873,000 of redeemable preferred stock redemptions in our consolidated statement of operations for the year ended December 31, 2019 in connection with the Tender Offer. 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.
Business Objectives and Growth Strategies
Our strategy is principally focused on the acquisition of Class A and creative office assets in vibrant and improving metropolitan communities throughout the United States (including improving and developing such assets) in a manner that will prudently grow our NAV and cash flow per share of Common Stock. We primarily acquire Class A and creative office assets located in areas that CIM Group has targeted. These areas include traditional downtown areas and suburban main streets, which have high barriers to entry, high population density, positive population trends and a propensity for growth. CIM Group believes that the critical mass of redevelopment in such areas creates positive externalities, which enhance the value of real estate assets in the area. CIM Group targets acquisitions of diverse types of real estate assets, including retail, residential, office, parking, hotel, signage and mixed-use through CIM Group’s extensive network and its current opportunistic activities.
We seek to utilize the CIM Group platform to acquire, improve and or develop real estate assets within CIM Group’s Qualified Communities. We believe that these assets will provide greater returns than similar assets in other markets, as a result of the population growth, public commitment, and significant private investment that characterize these areas. Over time, we seek to expand our real estate assets in communities targeted by CIM Group, supported by CIM Group’s broad real estate capabilities, as part of our plan to prudently grow NAV and cash flow per share of Common Stock.
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CIM Group seeks to maximize the value of its holdings through active onsite property management and leasing. CIM Group has extensive in-house research, acquisition, credit analysis, development, finance, leasing and onsite property management capabilities, which leverage its deep understanding of metropolitan communities to position properties for multiple uses and to maximize operating income. As a vertically-integrated owner and operator, CIM Group has in-house onsite property management and leasing capabilities. Property managers prepare annual capital and operating budgets and monthly operating reports, monitor results and oversee vendor services, maintenance and capital improvement schedules. In addition, they ensure that revenue objectives are met, lease terms are followed, receivables are collected, preventative maintenance programs are implemented, vendors are evaluated and expenses are controlled. In addition, CIM Group's real assets management committee (the "Real Assets Management Committee") reviews and approves strategic plans for each asset, including financial, leasing, marketing, property positioning and disposition plans. The Real Assets Management Committee reviews and approves the annual business plan for each property, including its capital and operating budget. CIM Group's organizational structure provides for continuity through multi-disciplinary teams responsible for an asset from the time of the original investment recommendation, through the implementation of the asset's business plan, and any disposition activities.
CIM Group's Investments and Development teams are separate groups that work very closely together on transactions requiring development expertise. While the Investments team is responsible for acquisition analysis, both the Investments and Development teams perform due diligence, evaluate and determine underwriting assumptions and participate in the development management and ongoing asset management of CIM Group’s opportunistic assets. The Development team is also responsible for the oversight and or execution of securing entitlements and the development/repositioning process. In instances where CIM Group is not the lead developer, CIM Group's in-house Development team continues to provide development and construction oversight to co-sponsors through a shadow team that oversees the progress of the development from beginning to end to ensure adherence to the budgets, schedules, quality and scope of the project in order to maintain CIM Group’s vision for the final product. The Investments and Development teams interact as a cohesive team when sourcing, underwriting, acquiring, executing and managing the business plan of an opportunistic acquisition.
Competitive Advantages
We believe that CIM Group’s experienced team and vertically-integrated and multi-disciplinary organization, coupled with its community-focused and disciplined real estate approach, results in a beneficial competitive advantage. Additionally, CIM Group’s community-focused strategy is complemented by a number of other competitive advantages including CIM Group's prudent use of leverage, underwriting approach, disciplined capital deployment, and strong network of relationships. CIM Group’s competitive advantages include:
· Vertically-Integrated Organization and Team
CIM Group is managed by its senior management team, which is composed of its three founders, Shaul Kuba, Richard Ressler and Avraham Shemesh, and includes 11 other principals. CIM Group is vertically-integrated and organized into 13 functional groups including Compliance; Operations; Human Resources; Legal; Finance & Capital Markets; Onsite Property Management; Real Estate Services; Hospitality Services; Development; Investments; Portfolio Oversight; Partner & Co-Investor Relations; and Marketing & Communications.
To support CIM Group’s organic growth and related platforms, CIM Group has invested substantial time and resources in building a strong and integrated team of approximately 600 experienced professionals. Each of CIM Group’s teams is managed by seasoned professionals and CIM Group continues to expand and develop its management team, to include the next generation of CIM Group’s leaders. In addition to developing a core team of principals and senior level management, CIM Group has proactively managed its growth through career development and mentoring at both the mid and junior staffing levels, and has hired ahead of its needs, thus ensuring appropriate management and staffing.
CIM Group leverages the deep operating and industry experience of its principals and professionals, as well as their extensive relationships, to source and execute opportunistic, core, and infrastructure acquisitions. Each opportunity is overseen by a dedicated Investment team including an oversight principal (one of Richard Ressler, Avraham Shemesh, Shaul Kuba, Charles E. Garner II (our former Chief Executive Officer), Jennifer Gandin, David Thompson, John Bruno and Jason Schreiber), a team lead (vice president level and above), associate vice presidents and associates, who are responsible for managing the asset from sourcing, underwriting, acquisition, development (if required), onsite property management, and disposition. As part of this process, the team draws upon CIM Group’s extensive in-house expertise in legal, finance, development, leasing, and onsite property management. Each dedicated Investment team is purposefully staffed with professionals from multiple CIM Group offices, regardless of the
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location of the asset being evaluated. As a result, all investment professionals work across a variety of Qualified Communities and CIM Group’s knowledge base is shared across its offices.
· Community Qualification
Since inception, CIM Group’s proven community qualification process has served as the foundation for its investing strategy. CIM Group targets high barrier to entry markets and submarkets with high population density and applies rigorous research to designate the market as a CIM Group Qualified Community for potential acquisitions. Since 1994, CIM Group has identified 135 Qualified Communities and has deployed capital in 75 of them. As part of the community qualification process, CIM Group examines the characteristics of a market to determine whether the district possesses certain characteristics prior to the extensive efforts CIM Group's investment professionals undertake when reviewing potential acquisitions. Qualified Communities generally fall into one of two categories: (i) transitional metropolitan districts that have dedicated resources to become vibrant metropolitan communities and (ii) well-established, thriving metropolitan areas (typically major central business districts).
Once a community is qualified, CIM Group believes it continues to differentiate itself through the following business principles: (i) product non-specific— CIM Group has extensive experience owning and operating a diverse range of property types, including retail, residential, office, parking, hotel, signage and mixed-use, which gives CIM Group the ability to effectively execute and capitalize on its strategy; (ii) community-based tenanting— CIM Group’s strategy focuses on the entire community and the best use of assets in that community; owning a significant number of key properties in an area better enables CIM Group to meet the co-tenancy needs of national retailers and office tenants and thus optimize the value of these real estate properties; (iii) local market leadership with North American footprint— CIM Group maintains local market knowledge and relationships, along with a diversified North American presence, through its 135 Qualified Communities (thus, CIM Group has the flexibility to deploy capital in its Qualified Communities only when the market environment meets CIM Group’s underwriting standards); and (iv) deploying capital across the capital stack— CIM Group has extensive experience structuring transactions across the capital stack including equity, preferred equity, debt and mezzanine positions, giving it the flexibility to structure transactions in efficient and creative ways.
· Discipline
CIM Group’s strategy relies on its sound business plan and value creation execution to produce returns, rather than financial engineering. CIM Group’s underwriting of its potential acquisitions is performed generally both on a leveraged and unleveraged basis. Additionally, with certain exceptions, CIM Group has generally not utilized recourse or cross-collateralized debt due to its conservative underwriting standards.
CIM Group employs multiple underwriting scenarios when evaluating potential acquisition opportunities. CIM Group generally underwrites potential acquisitions utilizing long-term average exit capitalization rates for similar product types and long-term average interest rates. Where possible, these long-term averages cross multiple market cycles, thereby mitigating the risk of cyclical volatility. CIM Group’s “long-term average” underwriting is based on its belief, reinforced by its experience through multiple market cycles, that over the life of any given fund that it manages, such fund should be able to exit its holdings at long-term historical averages. CIM Group also underwrites a “current market case” scenario, which generally utilizes current submarket specific exit assumptions and interest rates, in order to reflect anticipated results under current market conditions. CIM Group believes that utilizing multiple underwriting scenarios enables CIM Group to assess potential returns relative to risk within a range of potential outcomes.
Strategy
Our strategy is principally focused on the acquisition of Class A and creative office assets in vibrant and improving metropolitan communities throughout the United States (including improving and developing such assets) in a manner that will prudently grow our NAV and cash flow per share of Common Stock.
Our strategy is centered around CIM Group's community qualification process. We believe this strategy provides us with a significant competitive advantage when making real estate acquisitions. The qualification process generally takes between six months and five years and is a critical component of CIM Group's evaluation. As part of the community qualification process, CIM Group examines the characteristics of a market to determine whether the district possesses certain characteristics prior to the extensive efforts CIM Group's investment professionals undertake when reviewing potential acquisitions in its Qualified Communities. Qualified Communities generally fall into one of two categories: (i) transitional
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metropolitan districts that have dedicated resources to become vibrant metropolitan communities and (ii) well-established, thriving metropolitan areas (typically major central business districts). Qualified Communities are distinct districts which have dedicated resources to become or are currently vibrant communities where people can live, work, shop and be entertained, all within walking distance or close proximity to public transportation. These areas also generally have high barriers to entry, high population density, positive population trends and support for investment. CIM Group believes that a vast majority of the risks associated with acquiring real estate are mitigated by accumulating local market knowledge of the community where the asset is located. CIM Group typically spends significant time and resources qualifying targeted communities prior to making any acquisitions. Since 1994, CIM Group has identified 135 Qualified Communities and has deployed capital in 75 of them. Although we may not deploy capital exclusively in Qualified Communities, it is expected that most of our assets will be identified through this systematic process.
CIM Group seeks to maximize the value of its holdings through active onsite property management and leasing. CIM Group has extensive in-house research, acquisition, credit analysis, development, finance, leasing and onsite property management capabilities, which leverage its deep understanding of metropolitan communities to position properties for multiple uses and to maximize operating income. As a vertically-integrated owner and operator, CIM Group has in-house onsite property management and leasing capabilities. Property managers prepare annual capital and operating budgets and monthly operating reports, monitor results, and oversee vendor services, maintenance and capital improvement schedules. In addition, they ensure that revenue objectives are met, lease terms are followed, receivables are collected, preventative maintenance programs are implemented, vendors are evaluated and expenses are controlled. In addition, CIM Group's Real Assets Management Committee reviews and approves strategic plans for each asset, including financial, leasing, marketing, property positioning and disposition plans. The Real Assets Management Committee reviews and approves the annual business plan for each property, including its capital and operating budget. CIM Group's organizational structure provides for continuity through multi-disciplinary teams responsible for an asset from the time of the original investment recommendation, through the implementation of the asset's business plan, and any disposition activities.
CIM Group's Investments and Development teams are separate groups that work very closely together on transactions requiring development expertise. While the Investments team is responsible for acquisition analysis, both the Investments and Development teams perform due diligence, evaluate and determine underwriting assumptions, and participate in the development management and ongoing asset management of CIM Group’s opportunistic assets. The Development team is also responsible for the oversight and or execution of securing entitlements and the development/repositioning process. In instances where CIM Group is not the lead developer, CIM Group's in-house Development team continues to provide development and construction oversight to co-sponsors through a shadow team that oversees the progress of the development from beginning to end to ensure adherence to the budgets, schedules, quality and scope of the project in order to maintain CIM Group’s vision for the final product. The Investments and Development teams interact as a cohesive team when sourcing, underwriting, acquiring, executing and managing the business plan of an opportunistic acquisition.
We seek to utilize the CIM Group platform to acquire, improve and or develop real estate assets within CIM Group's Qualified Communities. We believe that these assets will provide greater returns than similar assets in other markets, as a result of the population growth, public commitment, and significant private investment that characterize these areas. Over time, we seek to expand our real estate assets in communities targeted by CIM Group, supported by CIM Group's broad real estate capabilities, as part of our plan to prudently grow NAV and cash flow per share of Common Stock. As a matter of prudent management, we also regularly evaluate each asset within our portfolio as well as our strategies. Such review may result in dispositions when an asset no longer fits our overall objectives or strategies, or when our view of the market value of such asset is equal to or exceeds its intrinsic value.
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 actively in other CIM Group real estate strategies and product types 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.
2019 Acquisitions
There were no acquisitions during the year ended December 31, 2019.
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2019 Dispositions
The following is a schedule of our dispositions during the year ended December 31, 2019. We sold 100% fee-simple interests in the following properties to unrelated third-parties. Transaction costs related to these sales were expensed as incurred.
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 | ||||||||||||||
(1) | The "March Oakland Properties" consist of 1901 Harrison Street, 2100 Franklin Street, 2101 Webster Street, and 2353 Webster Street Parking Garage. |
(2) | The "Union Square Properties" consist of 899 North Capitol Street, 901 North Capitol Street and 999 North Capitol Street. Prior to the sale, we determined that the book values of such properties exceeded their estimated fair values and recognized an impairment charge of $69,000,000 for the year ended December 31, 2019. Our determination of the fair values of these properties was based on negotiations with the third-party buyer and the contract sales price. The gain on sale includes $113,000 of extinguishment of noncontrolling interests as a result of the sale. |
Financing Strategy
We currently have substantial borrowing capacity, and may finance our future activities through one or more of the following methods: (i) offerings of shares of Common Stock, preferred stock, senior unsecured securities, and or other equity and debt securities; (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. During the prior three years, we have not paid for property or services using shares of our Common Stock in lieu of cash, but may engage in such transactions in the future. We expect to employ indebtedness levels that are comparable to those of other commercial real estate investment trusts ("REITs") engaged in business strategies similar to our own.
Risk Management
As part of its risk management strategy, CIM Group continually evaluates our assets and actively manages the risks involved in our business strategies. CIM Group's Investments and Portfolio Oversight teams share asset management responsibilities, setting the strategy for and monitoring the performance of our assets relative to market and industry benchmarks and internal underwriting assumptions using direct knowledge of local markets provided by CIM Group's in-house onsite property management, and leasing professionals. In-house onsite property management capabilities include monthly and annual budgeting and reporting as well as vendor services management, property maintenance and capital expenditures management. Property management seeks to ensure that revenue objectives are met, lease terms are followed, receivables are collected, preventative maintenance programs are implemented, vendors are evaluated and expenses are controlled. The Real Assets Management Committee oversees onsite property management and consists of certain of the Oversight Principals, each of whom has extensive experience in acquisitions, development, onsite property management and leasing, who are ultimately responsible for the performance of the asset, and the chief compliance officer. The Oversight Principals work with each CIM Group team to ensure that every asset benefits from the full range of CIM Group's real estate expertise. CIM Group believes that empowering its most seasoned investment professionals to bring their breadth of experience to bear directly on assets will optimize returns.
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The Oversight Principals meet informally on a frequent basis, generally weekly, to review and discuss the performance of assets, and meet formally at least annually to review and approve strategic plans for our assets based on their review of: financial and operational analyses, operating strategies and agreements, tenant composition and marketing, asset positioning, market conditions affecting our assets, hold/sell analyses and timing considerations, and the annual business plan for each asset, including its capital and operating budget.
The size, composition, and policies of the Real Assets Management Committee may change from time to time.
Regulatory Matters
Environmental Matters
Environmental laws regulate, and impose liability for, the release 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 properties, 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 (as defined in "Item 1A. Risk Factors") could be materially adversely affected.
Americans with Disabilities Act of 1990
Under the Americans with Disabilities Act of 1990, as amended (the "ADA"), all public accommodations must meet federal requirements related to access and use by disabled persons. Although we believe that our properties, to the extent such properties are "public accommodations" as defined under the ADA, 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 may be required to take remedial action which would require us to incur additional costs to bring the property into compliance. We cannot predict the ultimate amount, if any, of the cost of compliance with the ADA or the cost of any damages or attorney's fees to private litigants or any fines imposed by the federal government in respect of any failure to comply with the ADA.
Competition
We compete with others engaged in the acquisition, origination, development, and operation of real estate and real estate-related assets. Our competitors include REITs, insurance companies, pension funds, private equity funds, sovereign wealth funds, hedge funds, mortgage banks, investment banks, commercial banks, savings and loan associations, specialty finance companies, and private and institutional investors and financial companies that pursue strategies similar to ours. Some of our competitors may be larger than us with greater access to capital and other resources and may have other advantages over us. In addition, some of our competitors may have higher risk tolerances or lower profitability targets than us, which could allow them to pursue new business more aggressively than us. We believe that our relationship with CIM Group gives us a competitive advantage that allows us to operate more effectively in the markets in which we conduct our business.
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Overview and History of CIM Group
CIM Group was founded in 1994 by Shaul Kuba, Richard Ressler and Avraham Shemesh and has approximately $29.1 billion of assets owned and operated across its vehicles as of December 31, 2019.1 CIM Group's successful track record is anchored by CIM Group's community-oriented approach to acquisitions as well as a number of other competitive advantages including its prudent use of leverage, underwriting approach, disciplined capital deployment, vertically-integrated capabilities and strong network of relationships.
CIM Group is headquartered in Los Angeles, California and has offices in Chicago, Illinois; Dallas, Texas; New York, New York; Orlando, Florida; Phoenix, Arizona; the San Francisco Bay Area; the Washington D.C. Metro Area; and Tokyo, Japan. CIM Group has generated strong risk-adjusted returns across multiple market cycles by focusing on improved asset and community performance, and capitalizing on market inefficiencies and distressed situations.
Principles
As described in "Item 1—Business—Competitive Advantages" of this Annual Report on Form 10-K, the community qualification process is one of CIM Group's core competencies, which demonstrates a disciplined investing program and strategic outlook on metropolitan communities. Once a community is qualified, CIM Group believes it continues to differentiate itself through the following business principles:
• | Product Non-Specific: CIM Group has extensive experience owning and operating a diverse range of property types, including retail, residential, office, parking, hotel, signage, and mixed-use, which gives CIM Group the ability to execute and capitalize on its strategy effectively. Successful acquisitions require selecting the right markets coupled with providing the right product. CIM Group's experience with multiple asset types does not predispose CIM Group to select certain asset types, but instead ensures that they deliver a product mix that is consistent with the market's requirements and needs. Additionally, there is a growing trend towards developing mixed-use real estate properties in metropolitan markets which requires a diversified platform to successfully execute. |
• | Community-Based Tenanting: CIM Group's strategy focuses on the entire community and the best use of assets in that community. Owning a significant number of key properties in an area better enables CIM Group to meet the needs of national retailers and office tenants and thus optimize the value of these real estate properties. CIM Group believes that its community perspective gives it a significant competitive advantage in attracting tenants to its retail, office and mixed-use properties and creating synergies between the different tenant types. |
1 Assets owned and operated (“AOO”) represents the aggregate assets owned and operated by CIM Group on behalf of partners (including where CIM Group contributes alongside for its own account) and co-investors, whether or not CIM Group has discretion, in each case without duplication. AOO includes total gross assets at fair value, with real assets presented at Book Value (as defined below) and operating companies presented at gross assets less debt, as of December 31, 2019 (the “Report Date”) (including the shares of such assets owned by joint venture partners and co-investments), plus binding unfunded commitments. The “Book Value” for each investment generally represents the investment’s book value as reflected in the applicable fund’s unaudited financial statements as of the Report Date prepared in accordance with U.S. generally accepted accounting principles on a fair value basis. These book values generally represent the asset’s third-party appraised value as of the Report Date, but in the case of CIM Group’s Cole Net-Lease Asset strategy, book values generally represent undepreciated cost (as reflected in SEC-filed financial statements). The only investment held by CIM Urban REIT, LLC (“CIM REIT”), as of the Report Date consisted of shares of Common Stock, and the Book Value of CIM REIT was determined by assuming the underlying assets of the Company were liquidated based upon the third-party appraised value. The AOO of CIM Group also includes the $0.3 billion of AOO attributable to CIM Compass Latin America (CCLA), which is 50% owned and jointly operated by CIM Group. The AOO of CMMT Partners, L.P. (which represents assets under management), a perpetual-life real estate debt fund, is $1.0 billion as of the Report Date. Equity Owned and Operated (“EOO”) representing the Net Asset Value (as defined below) before incentive fee allocation, plus binding unfunded commitments, is $17.5 billion as of the Report Date, inclusive of $0.3 billion of EOO attributable to CCLA (as described above) and $0.9 billion of EOO for CMMT (which represents equity under management). Net Asset Value represents the distributable amount based on a “hypothetical liquidation” assuming that on the date of determination that: (i) investments are sold at their Book Values; (ii) debts are paid and other assets are collected; and (iii) appropriate adjustments and or allocations between equity partners are made in accordance with applicable documents, as determined in accordance with applicable accounting guidance.
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• | Local Market Leadership with North American Footprint: CIM Group maintains local market knowledge and relationships, along with a diversified North American presence, through its 135 Qualified Communities. Thus, CIM Group has the flexibility to deploy capital in its Qualified Communities only when the market environment meets CIM Group's underwriting standards. CIM Group does not need to acquire assets in a given community or product type at a specific time due to its broad proprietary pipeline of communities. |
• | Deploying Capital Across the Capital Stack: CIM Group has extensive experience structuring transactions across the capital stack including equity, preferred equity, debt and mezzanine positions, giving it the flexibility to structure transactions in efficient and creative ways. |
CIM Urban Partnership Agreement
Our subsidiary, CIM Urban Partners, L.P. ("CIM Urban"), is governed by CIM Urban's partnership agreement (as amended and restated, the "CIM Urban Partnership Agreement"). The general partner of CIM Urban, Urban Partners GP, LLC ("CIM Urban GP"), is an affiliate of CIM Group and has the full, exclusive and complete right, power, authority, discretion and responsibility vested in or assumed by a general partner of a limited partnership under the Delaware Revised Uniform Limited Partnership Act and as otherwise provided by law and is vested with the full, exclusive and complete right, power and discretion to operate, manage and control the affairs of CIM Urban, subject to the terms of the CIM Urban Partnership Agreement.
Liability for Acts and Omissions
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' 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
In December 2015, CIM Urban and CIM Capital, LLC (formerly CIM Investment Advisors, LLC), an affiliate of CIM REIT and CIM Group ("CIM Capital"), entered into an investment management agreement, pursuant to which CIM Urban engaged CIM Capital to provide certain services to CIM Urban (the “Investment Management Agreement”). On January 1, 2019, CIM Capital assigned its duties under the Investment Management Agreement to its four wholly-owned subsidiaries: CIM Capital Securities Management, LLC, a securities manager, CIM Capital RE Debt Management, LLC, a debt manager, CIM Capital Controlled Company Management, LLC, a controlled company manager, and CIM Capital Real Property Management, LLC, a real property manager. The "Operator" refers to CIM Investment Advisors, LLC from December 10, 2015 to December 31, 2018 and to CIM Capital and its four wholly-owned subsidiaries on and after January 1, 2019.
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'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% | ||||||
For the years ended December 31, 2019, 2018 and 2017, the Operator earned asset management fees of $12,019,000, $17,880,000 and $22,229,000, respectively.
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For the first and second quarters of 2020, the Company will, subject to applicable laws and regulations under Nasdaq and the Tel Aviv Stock Exchange (the "TASE") and the agreement of the Operator and or the Administrator (as defined below), as the case may be, seek to pay some or all of the asset management fees, fees for Base Services (as defined below) and or reimbursements under the Master Services Agreement (as defined below) in respect of such quarter in shares of Common Stock. The Company may seek to do so for the third 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).
The Operator is responsible for the payment of all costs and expenses relating to the general operation of its 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'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
On March 11, 2014, CIM Commercial and its subsidiaries entered into a master services agreement (the "Master Services Agreement") with CIM Service Provider, LLC (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 (the "Base Services") to CIM Commercial and its subsidiaries. Pursuant to the Master Services Agreement, we appointed an affiliate of CIM Group as the administrator of CIM Urban GP ("Urban GP Administrator"). Under the Master Services Agreement, CIM Commercial pays a base service fee (the "Base Service Fee") to the Administrator initially set at $1,000,000 per year (subject to an annual escalation by a specified inflation factor beginning on January 1, 2015), payable quarterly in arrears. For the years ended December 31, 2019, 2018 and 2017, the Administrator earned a Base Service Fee of $1,102,000, $1,079,000 and $1,060,000, respectively. 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 the Base Service Fee. During the years ended December 31, 2019, 2018 and 2017, 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 public offering of units ("Series A Preferred Units"), where each Series A Preferred Unit consisted of one share of Series A preferred 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"). The Administrator's compensation is based on the salaries and benefits of the employees of the Administrator and or its affiliates who performed these services (allocated based on the percentage of time spent on the affairs of CIM Commercial 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, for such services which are included in asset management and other fees to related parties.
Other Services
CIM Management, Inc. and certain of its affiliates (collectively, the "CIM Management Entities"), all affiliates of CIM REIT and CIM Group, provide property management, leasing, and development services to CIM Urban. The 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 behalf of CIM Urban, which is 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
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addition, the CIM Management Entities earned construction management fees of $525,000, $580,000 and $1,654,000 for the years ended December 31, 2019, 2018 and 2017, respectively, which were capitalized to investments in real estate.
On January 1, 2015, we entered into a Staffing and Reimbursement Agreement with CIM SBA Staffing, LLC ("CIM SBA"), an affiliate of CIM Group, and our subsidiary, PMC Commercial Lending, LLC. The agreement provides that CIM SBA will provide personnel and resources to us and that we will reimburse CIM SBA for the costs and expenses of providing such personnel and resources. For the years ended December 31, 2019, 2018, and 2017, we incurred expenses related to services subject to reimbursement by us under this agreement of $2,382,000, $2,445,000, and $3,464,000, respectively, which are included in asset management and other fees to related parties for lending segment costs, and $223,000, $264,000, and $433,000, respectively, for corporate services, which are included in asset management and other fees to related parties. In addition, for the years ended December 31, 2019, 2018 and 2017, we deferred personnel costs of $112,000, $330,000 and $429,000, respectively, associated with services provided for originating loans.
On May 10, 2018, the Company executed a wholesaling agreement (the "Wholesaling Agreement") with International Assets Advisors, LLC ("IAA") and CCO Capital, LLC ("CCO Capital"). CCO Capital is a registered broker dealer and is under common control with the Operator and the Administrator. IAA was the exclusive dealer manager for the Company’s public offering of Series A Preferred Units until May 31, 2019. Under the Wholesaling Agreement, among other things, CCO Capital, in its capacity as the wholesaler for the offering, assisted IAA with the sale of Series A Preferred Units. In exchange for such services, IAA paid CCO Capital a fee equal to 2.75% of the selling price of each Series A Preferred Unit for which a sale was completed, reduced by any applicable fee reallowances payable to soliciting dealers pursuant to separate soliciting dealer agreements between IAA and soliciting dealers. The foregoing fee was reduced, and could have been exceeded, by a fixed monthly payment by CCO Capital to IAA for IAA’s services in connection with periodic closings and settlements for the offering.
On May 31, 2019, the Company, IAA and CCO Capital entered into an Amendment, Assignment and Assumption Agreement (the “Assignment Agreement”), pursuant to which CCO Capital assumed all of the rights and obligations of IAA under the dealer manager agreement, dated as of June 28, 2016, as amended, by and between the Company and IAA. As a result of the Assignment Agreement, CCO Capital became the exclusive dealer manager for the Company’s public offering of the Series A Preferred Units effective as of May 31, 2019. In connection with the execution of the Assignment Agreement, the Company terminated the Wholesaling Agreement effective as of May 31, 2019. The Company’s offering of the Series A Preferred Units ended at the end of January 2020. On January 28, 2020, the Company entered into the Second Amended and Restated Dealer Manager Agreement, pursuant to which CCO Capital acts as the exclusive dealer manager for the Company’s public offering of Series A Preferred Stock and Series D preferred stock, $0.001 per share ("Series D Preferred Stock"). In connection with such agreement, the Wholesaling Agreement and the Assignment Agreement were terminated.
Lending Segment
Through our loans originated under the Small Business Administration's ("SBA") 7(a) Guaranteed Loan Program ("SBA 7(a) 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.
During 2019, 2018 and 2017, we funded an aggregate of $39,592,000, $74,234,000 and $76,316,000, respectively, of loans in our lending business and received principal payments (including prepayments) of $13,886,000, $16,468,000 and $17,557,000, respectively.
In addition to our retained SBA 7(a) portfolio described above, we service $179,193,000 of aggregate principal balance remaining on secondary market loan sales.
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 will be adversely affected by our ongoing renovations 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. In addition, the hotel industry is cyclical and demand generally follows, on a lagged basis, key macroeconomic factors.
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Tenants accounting for over 10% of revenues
Rental and other property income from Kaiser Foundation Health Plan, Incorporated ("Kaiser"), which occupied space in two of our Oakland, California properties, accounted for approximately 10.8%, 9.7% and 8.0% of total revenues for the years ended December 31, 2019, 2018 and 2017, respectively, and approximately 17.3%, 12.9% and 10.8% of our office segment revenues for the years ended December 31, 2019, 2018 and 2017, respectively.
Rental and other property income from the U.S. General Services Administration and other government agencies (collectively, "Governmental Tenants"), which primarily occupied space in our properties located in Washington, D.C., accounted for approximately 10.6%, 18.4% and 21.6% of total revenues for the years ended December 31, 2019, 2018 and 2017, respectively, and approximately 17.1%, 24.6% and 29.4% of our office segment revenues for the years ended December 31, 2019, 2018 and 2017, respectively. However, due to the Asset Sale, we do not expect such tenant revenue concentration to exceed 10% for the year ending December 31, 2020.
Employees
As of December 31, 2019, we had five employees.
Offices
We are headquartered in Dallas, Texas.
Available Information
The public can access free of charge through the "Shareholders" section of our corporate website, www.cimcommercial.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 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, 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.
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Item 1A. Risk Factors
The following information 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. A wide range of factors could materially affect our future developments and performance. In addition to the factors described elsewhere in this report, management has identified the following important factors that could cause actual results to differ materially from those reflected in forward-looking statements or from our historical results. These factors, which are not all-inclusive, 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, to maintain our level of distributions on our Common Stock, Series A Preferred Stock, Series D Preferred Stock and Series L Preferred Stock (collectively with the Series A Preferred Stock and Series D Preferred Stock, the "Preferred Stock"). 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.
Risks Related to Our Business
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.
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 may reduce 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.
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
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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 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
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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, 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.
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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.
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 Base Service 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 continues in full force and effect until December 31, 2019, and thereafter will renew 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 the Base Service 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 the Base Service Fee, regardless of our performance, and additional fees for the provision of 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 the adjusted fair value of CIM Urban's assets, including any assets acquired by CIM Urban in the future. 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.
The Operator may undertake transactions that are motivated, in whole or in part, by a desire to increase its compensation.
The Operator's fees are based on the adjusted fair value of CIM Urban's assets, including any assets acquired by CIM Urban in the future, which may provide an incentive for the Operator to deploy our capital to assets that are riskier than we would otherwise acquire, regardless of the anticipated long-term performance of such assets. For instance, if CIM Urban, or we on its behalf, incurs debt or uses leverage to acquire an asset, the adjusted fair value of our assets will increase by an amount greater than the amount of cash used in such levered acquisition, which leads to greater compensation payable to the Operator. In this manner, the Operator may seek to maximize its compensation by recommending a deployment of capital to assets that are not necessarily in the best interest of our stockholders. 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, disposition or 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
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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.
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.
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.
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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 Corporate Structure
Certain provisions of the Maryland General Corporation Law (the "MGCL") could inhibit changes in control.
Certain provisions of the MGCL, if applied to us, would 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, including:
• | "business combination" provisions that, subject to limitations, prohibit certain business combinations between us and an "interested stockholder" (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special appraisal rights and special stockholder voting requirements on these combinations; and |
• | "control share" provisions that provide that "control shares" of our Company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a "control share acquisition" (defined as the direct or indirect acquisition of ownership or control of "control shares") have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. |
We have elected to opt out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL, by resolution of our Board of Directors and, in the case of the control share provisions of the MGCL, pursuant to a provision in our bylaws. However, our Board of Directors may by resolution elect to repeal the foregoing opt-outs from the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
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.
If we were to be deemed an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), applicable restrictions could make it impractical for us to continue our business as contemplated and could have an adverse effect on our business.
We are not an investment company under the Investment Company Act and intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the Investment Company Act, including limitations on the nature of assets and ability to transact with affiliates, could make it impractical for us to continue our business as contemplated. In addition, the Investment Company Act imposes certain requirements on companies deemed to be within its regulatory scope, including registration as an investment company, adoption of a specific form of corporate structure and compliance with certain burdensome reporting, record keeping, voting, proxy, disclosure and other rules and regulations. In the event we were to be characterized as an investment company, the failure by us to satisfy such regulatory requirements, whether on a timely basis or at all, would, under certain circumstances, also have a material adverse effect on us.
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 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 the outbreak of the novel strain of the Coronavirus (COVID-19) that began in the fourth quarter of 2019); |
• | 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; |
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• | 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 may lead to an economic slowdown in the United States or even a recession. During periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of 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. Rental and other property income from Kaiser, which occupied space in two of our Oakland, California properties, accounted for approximately 10.8%, 9.7% and 8.0% of total revenues for the years ended December 31,
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2019, 2018 and 2017, respectively, and approximately 17.3%, 12.9% and 10.8% of our office segment revenues for the years ended December 31, 2019, 2018 and 2017, respectively. 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 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, 2019, 13.0% of the rentable square footage of our office portfolio was available for lease, and 15.5% of the occupied square footage of such office properties was scheduled to expire in 2020. 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.
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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.
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. With COVID-19 now spreading in the United States and travel restrictions and cancellations increasing, we believe that the operations of our hotel in Sacramento, California will be adversely impacted. However, the Company cannot predict the magnitude of the adverse effect on our business, financial condition, results of operations and cash flows.
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.
Our hotel has an ongoing need for renovations and potentially significant capital expenditures and the costs of such activities may exceed our expectations.
From time to time we will need to make capital expenditures to comply with applicable laws and regulations, to remain competitive with other hotels and to maintain the economic value of our hotel. Occupancy and average daily rate (“ADR”) are often affected by the maintenance and capital improvements at a hotel, especially in the event that the maintenance or improvements are not completed on schedule or if the improvements require significant closures at the hotel. The costs of capital improvements we need or choose to make could harm our financial condition and reduce amounts available for distribution to our stockholders. These capital improvements may give rise to the following additional risks, among others:
• | construction cost overruns and delays; |
• | a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms; |
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• | uncertainties as to market demand or a loss of market demand after capital improvements have begun; |
• | disruption in service and room availability causing reduced demand, occupancy and rates; |
• | possible environmental problems; and |
• | disputes with our manager/franchise owner regarding our compliance with the requirements under our management or franchise agreements. |
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 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; |
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• | 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.
We may deploy capital outside of the United States, which would subject us to additional risks that may affect our operations unfavorably.
We may deploy some of our capital outside of the United States. Such deployment of capital in foreign countries could be affected unfavorably by changes in exchange rates due to political and economic factors, including inflation. Because non-U.S. companies are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable with those applicable to U.S. companies, there may be different types of, and lower quality, information available about non-U.S. companies and their assets. This may affect our ability to underwrite and evaluate proposed deployment of capital in foreign countries or to obtain appropriate financial reports relating to such deployment. In addition, with respect to certain countries, there may be an increased potential for corrupt business practices, or the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments that could affect our deployment of capital in those countries. Moreover, individual economies could differ unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, changes in currency rates and exchange control regulations and capital reinvestment. As a result of the factors described in this paragraph, any capital deployed outside of the United States may be subject to a higher degree of risk; there can also be no assurance that any such deployment will generate returns comparable to similar deployment of capital made in the United States.
We are subject to risks and liabilities unique to joint venture relationships.
We may contemplate acquisitions of properties through joint ventures and sales to institutions of partial ownership of properties that we wholly own. Joint venture involves certain risks, including for example:
• | disputes with joint venture partners might affect our ability to develop, operate or dispose of a property; |
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• | the refinancing of unconsolidated joint venture debt may require additional equity commitments on our part; |
• | joint venture partners may control or share certain approval rights over major decisions or might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property; |
• | we may be forced to fulfill the obligations of a joint venture or of joint venture partners who default on their obligations including those related to debt or interest rate swaps; and |
• | there may be conflicts of interests because our joint venture partners may have varying interests such as different needs for liquidity, different assessments of the market, different tax objectives or ownership of competing interests in properties in our markets. |
The occurrence of one or more of the foregoing events 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.
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, and as such, we have recorded $69,000,000, $0 and $13,100,000 of impairment of long-lived assets for the years ended December 31, 2019, 2018 and 2017, respectively. 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.
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
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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, senior unsecured securities, and or other equity and debt securities; (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 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
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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 ("CMBS") 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 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.
Our operating results may be negatively affected by development and construction delays and the resultant increased costs and risks.
If we engage in development or construction projects, we will be subject to uncertainties associated with re-zoning for development, environmental and land use concerns of governmental entities and or community groups, and our builder's ability to build in conformity with plans, specifications, budgeted costs, and timetables. If a builder fails to perform, we may resort to legal action to rescind the breached agreement or to compel performance. A builder's performance may also be affected or delayed by conditions beyond the builder's control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks if we make periodic progress payments or other advances to builders before they complete construction. These and other such factors can result in increased costs of a project or loss of our asset. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also 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, we may pay too much for a property, and our return on our assets could suffer.
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We may deploy capital in unimproved real property. Returns from development of unimproved properties are also subject to risks associated with re-zoning the land for development and environmental and land use concerns of governmental entities and or community groups.
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.
Terrorism and war could harm our operating results.
The strength and profitability of our business depends on demand for and the value of our properties. Future terrorist attacks in the United States, such as the attacks that occurred in New York and the District of Columbia on September 11, 2001 and in Boston on April 15, 2013, and other acts of terrorism or war may have a negative impact on our operations. Terrorist attacks in the United States and elsewhere may result in declining economic activity, which could 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. Such terrorist attacks could have an adverse impact on our business even if they are not directed at our properties.
Previous terrorist attacks and subsequent terrorist alerts have adversely affected the U.S. travel and hospitality industries since 2001, often disproportionately 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 potentially 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.
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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.
Changes in U.S. accounting standards regarding operating leases may make the leasing of our properties less attractive to our potential tenants, which could reduce overall demand for our leasing services.
Previously, tenants were required to classify a lease of real property as a capital lease, with the leased asset and liability reflected on its balance sheet, only if the significant risks and rewards of ownership were considered to reside with the tenant; otherwise, the lease was considered an operating lease not reflected on the balance sheet (except that the contractual future minimum payment obligations of such lease were disclosed in the footnotes to the financial statements). Thus, entering into an operating lease could have appeared to enhance a tenant’s balance sheet in comparison to direct ownership.
The U.S. Financial Accounting Standards Board (the "FASB") and the International Accounting Standards Board conducted a joint project to re-evaluate lease accounting. In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases ("ASU 2016-02"), which applies to fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Under ASU 2016-02, tenants must recognize assets and liabilities on the balance sheet for all leases with a lease term of more than 12 months, with the result being the recognition of a right of use asset and a lease liability and the disclosure of key information about the entity's leasing arrangements. These and other changes to the accounting guidance could affect both our accounting for leases as well as that of our current and potential tenants. These changes may affect how our real estate leasing 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.
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 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.
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
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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.
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; |
• | 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; |
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• | 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.
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.
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. To the extent that we incur variable rate debt and do not hedge our exposure thereunder, increases in interest rates would increase the amounts payable under such indebtedness, which could reduce our operating cash flows and our ability to pay distributions to our stockholders. 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; |
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• | 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 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.
We may in the future enter into hedging transactions that could expose us to contingent liabilities in the future and materially 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.
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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.
Risks Related to Our Lending Operations
Our lending operations expose us 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; 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 risks related 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
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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.
Our loans secured by real estate and our real estate owned ("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. At December 31, 2019, our loans subject to credit risk were 98.7% 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
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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 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 the federal 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, 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.
Mezzanine loans are subject to delinquency, foreclosure and loss, any or all of which could result in losses.
We may originate mezzanine loans, which are loans made to entities that have subsidiaries which own real property and are secured by pledges of such entity's equity ownership in its property-owning subsidiary. Mezzanine loans are by their nature structurally and legally subordinated to more senior property-level financings. Accordingly, if a borrower defaults on our mezzanine loan or if there is a default by our borrower's subsidiary on debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the property-level debt and other senior debt is paid in full.
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We may also retain, from whole loans we originate, subordinate interests referred to as B-notes. B-notes are commercial real estate loans secured by a first mortgage on a single large commercial property or group of related properties and subordinated to a senior interest, referred to as an A-note. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-note owners after payment to the A-note owners.
Moreover, under the terms of intercreditor arrangements governing mezzanine loans, B-notes and other similar subordinated loans originated by us, we may have to satisfy certain liquidity and capital requirements before we can step into a borrower's position after it has defaulted. There can be no assurance that we will be able to satisfy such requirements, resulting in potentially lower recovery. After a foreclosure on the pledged equity interest has been completed, a lack of funds may force us to sell the underlying property without developing it further (which sale may result in a lower recovery) instead of injecting funds into and developing the property prior to a sale (which may result in a higher recovery).
As a result of the factors described above, defaults on commercial real estate 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.
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.
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.
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, which regulates LIBOR, announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after December 31, 2021. In the event that 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, 2019, we had $153,000,000 of outstanding indebtedness that was indexed to LIBOR under our revolving credit facility, which allows us to borrow up to $250,000,000, subject to a borrowing base calculation. Additionally, as of December 31, 2019, we had $27,070,000 of junior subordinated notes and $22,282,000 of SBA 7(a) loan-backed notes that were indexed to LIBOR. The full impact of the expected transition away from LIBOR and the potential discontinuation of LIBOR after 2021 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.
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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 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.
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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, 2019. 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 our cash 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 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
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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 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”
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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
Management Agreement”, the Company intends to seek to pay some or all fees payable to the Operator and the Administrator,
subject to their consent, in respect of the fiscal year ending December 31, 2020 in shares of Common Stock at prices equal to the then most recent consolidated closing bid price of our Common Stock on the Nasdaq Global Market. Currently, the trading price of our Common Stock is substantially below our NAV. As a result, any issuance of shares of our Common Stock to pay the Operator and or the Administrator will result in an immediate reduction of our NAV per share. Because the number of future shares of our Common Stock that may be issued below our NAV per share and the price and timing of such issuances are otherwise not currently known or anticipated, we cannot predict the resulting reduction in our NAV per share of any such issuance.
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 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" 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'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 L Preferred Stock Stated 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.
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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 Directors announced an Initial Dividend on shares of our Common Stock for fiscal year 2020 in the aggregate amount of $4,380,644.70. 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 Series A Preferred Warrant Agreement 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, 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 terms of the Series L Preferred
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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'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 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.
If market interest rates go up, prospective purchasers of shares of our Common Stock or 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 available for distributions, and higher interest rates will not change the distribution rate on our Preferred Stock. Thus, higher market interest rates could cause the market price of our Common Stock and Preferred Stock to decline.
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 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 Agreement provides that Warrants may not be exercised to the extent such exercise would result in the holder'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 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. At December 31, 2019, 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 during the year ending December 31, 2020, for the first and second quarters of 2020, we will, subject to applicable laws and regulations under Nasdaq and the TASE and the agreement of the Operator and or the Administrator, seek to pay some or all of the asset management fees, the Base Service Fee and or reimbursements under the Master Services Agreement in respect of such quarter in shares of Common Stock. The Company may seek to do so for the third and fourth quarters of 2020 as well (su
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bject 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).
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 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
48
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.
49
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2019, our real estate portfolio consisted of 11 assets, all of which were fee-simple properties. As of December 31, 2019, our 9 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% occupied and our one hotel with an ancillary parking garage, which has a total of 503 rooms, had RevPAR of $127.09 for the year ended December 31, 2019.
Office Portfolio Summary as of 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 | ||||||||||
(1) | Based on leases signed as of December 31, 2019. |
(2) | Represents gross monthly base rent, as of December 31, 2019, 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. |
(3) | 3601 S Congress Avenue consists of ten buildings. The Company expects to complete the development of an existing surface parking lot into approximately 42,000 square feet of additional rentable office space by mid-2020. |
(4) | Lindblade Media Center consists of three buildings. |
(5) | 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 a building, which we are in the process of designing, having between 425,000 and 800,000 rentable square feet. |
50
Office Portfolio Detail by Property, Market, and Submarket as of December 31, 2019
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 | ||||||||
(1) | Based on leases signed as of December 31, 2019. |
(2) | Represents gross monthly base rent, as of December 31, 2019, 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. |
(3) | 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 a building, which we are in the process of designing, having between 425,000 and 800,000 rentable square feet. |
(4) | Lindblade Media Center consists of three buildings. |
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(5) | 3601 S Congress Avenue consists of ten buildings. The Company expects to complete the development of an existing surface parking lot into approximately 42,000 square feet of additional rentable office space by mid-2020. |
Hotel Portfolio Summary as of December 31, 2019
Revenue Per | ||||||||||||
% | Available | |||||||||||
Property | Market | Rooms | Occupied (1) | Room (2) | ||||||||
Sheraton Grand Hotel (3) | Sacramento, CA | 503 | 78.2 | % | $ | 127.09 | ||||||
Total Hotel (1 Property) | 503 | 78.2 | % | $ | 127.09 | |||||||
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 | ||||||||
(1) | Represents trailing 12-month occupancy as of December 31, 2019, calculated as the number of occupied rooms divided by the number of available rooms. |
(2) | Represents trailing 12-month RevPAR as of December 31, 2019, calculated as room revenue divided by the number of available rooms. |
(3) | The Sheraton Grand Hotel is part of the Sheraton franchise and is managed by Sheraton Operating Corporation, a subsidiary of Marriott International, Inc. |
(4) | Based on leases commenced as of December 31, 2019. |
(5) | Represents gross monthly contractual rent under parking and retail leases commenced as of December 31, 2019, 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. |
(6) | The site of the Sheraton Grand Hotel Parking Garage & Retail is being evaluated for potential redevelopment. |
52
Office Portfolio—Top 5 Tenants by Annualized Rental Revenue as of December 31, 2019
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 | % | ||||||||||||
(1) | Represents gross monthly base rent, as of December 31, 2019, 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. |
(2) | Prior to February 28, 2023, the tenant may terminate up to 140,000 square feet of space in the aggregate (of which no more than 100,000 rentable square feet may be terminated with respect to the rentable square feet expiring in 2027), effective as of any date specified by the tenant in a written notice given to us at least 12 months prior to the termination, in exchange for a termination penalty. From and after February 28, 2023 with respect to the rentable square feet expiring in 2025, and February 28, 2025 with respect to rentable square feet expiring in 2027, the tenant has the right to terminate all or any portions of its lease with 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 to the 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. |
53
Office Portfolio—Diversification by NAICS Code as of December 31, 2019
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 | % | ||||||
(1) | Represents gross monthly base rent, as of December 31, 2019, 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. |
54
Office Portfolio—Lease Expiration as of December 31, 2019
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 | ||||||||||||||||
(1) | Represents gross monthly base rent, as of December 31, 2019, 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. |
(2) | Includes 22,416 square feet of month-to-month leases as of December 31, 2019. |
55
Office Portfolio—Historical Occupancy
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 | % | |||||||
(1) | Historical occupancy rates for office properties are shown as a percentage of rentable square feet and are based on leases commenced as of December 31st of each historical year. |
(2) | 3601 S Congress Avenue consists of ten buildings. The Company expects to complete the development of an existing surface parking lot into approximately 42,000 square feet of additional rentable office space by mid-2020. |
(3) | 9460 Wilshire Boulevard was acquired on January 18, 2018. |
(4) | Lindblade Media Center consists of three buildings. |
(5) | 1130 Howard Street was acquired on December 29, 2017. |
(6) | 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 a building, which we are in the process of designing, having between 425,000 and 800,000 rentable square feet. |
(7) | 211 Main Street, 200 S College Street, 980 9th Street, 1010 8th Street Parking Garage & Retail, 800 N Capitol Street, 7083 Hollywood Boulevard, 370 L'Enfant Promenade, 1901 Harrison Street, 2100 Franklin Street, 2101 Webster Street, 2353 Webster Street Parking Garage, 830 1st Street, 260 Townsend Street, 1333 Broadway, 899 N Capitol |
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Street, 901 N Capitol Street (a parcel of land located between 899 and 999 N Capitol Street) and 999 N Capitol Street, were sold on March 28, 2017, June 8, 2017, June 20, 2017, June 20, 2017, August 31, 2017, September 21, 2017, October 17, 2017, March 1, 2019, March 1, 2019, March 1, 2019, March 1, 2019, March 1, 2019, March 14, 2019, May 16, 2019, July 30, 2019, July 30, 2019, and July 30, 2019, respectively.
Office Portfolio—Historical Annualized Rents
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 | ||||||||||||
(1) | Other than as set forth in (5) below, Annualized Rent Per Occupied Square Foot represents gross monthly base rent as of December 31 of each historical year, multiplied by twelve and divided by the respective total occupied square feet. This amount reflects total cash rent before abatements. Where applicable, annualized rent has been grossed up by adding annualized expense reimbursements to base rent. |
(2) | 3601 S Congress Avenue consists of ten buildings. The Company expects to complete the development of an existing surface parking lot into approximately 42,000 square feet of additional rentable office space by mid-2020. |
(3) | 9460 Wilshire Boulevard was acquired on January 18, 2018. |
(4) | Lindblade Media Center consists of three buildings. |
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(5) | 1130 Howard Street was acquired on December 29, 2017. The annualized rent as of December 31, 2017 for 12,944 rentable square feet of the building is presented using the actual rental income under a signed lease with a different tenant who took possession in March 2018, as the space was occupied by the prior owner and annualized rent under the short-term lease was de minimis. |
(6) | 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 a building, which we are in the process of designing, having between 425,000 and 800,000 rentable square feet. |
(7) | 211 Main Street, 200 S College Street, 980 9th Street, 1010 8th Street Parking Garage & Retail, 800 N Capitol Street, 7083 Hollywood Boulevard, 370 L'Enfant Promenade, 1901 Harrison Street, 2100 Franklin Street, 2101 Webster Street, 2353 Webster Street Parking Garage, 830 1st Street, 260 Townsend Street, 1333 Broadway, 899 N Capitol Street, 901 N Capitol Street (a parcel of land located between 899 and 999 N Capitol Street) and 999 N Capitol Street, were sold on March 28, 2017, June 8, 2017, June 20, 2017, June 20, 2017, August 31, 2017, September 21, 2017, October 17, 2017, March 1, 2019, March 1, 2019, March 1, 2019, March 1, 2019, March 1, 2019, March 14, 2019, May 16, 2019, July 30, 2019, July 30, 2019, and July 30, 2019, respectively. |
Multifamily Portfolio—Historical Occupancy
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 | |||||||
(1) | 3636 McKinney Avenue, 3839 McKinney Avenue, 4649 Cole Avenue, 47 E 34th Street, and 4200 Scotland Street were sold on May 30, 2017, May 30, 2017, June 23, 2017, September 26, 2017, and December 15, 2017, respectively. |
(2) | Historical occupancies for multifamily properties are based on leases commenced as of December 31st of each historical year and were calculated using units and not square feet. |
(3) | 4649 Cole Avenue consisted of fifteen buildings. |
(4) | 3839 McKinney Avenue consisted of two buildings. |
Multifamily Portfolio—Historical Annualized Rents
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 | |||||||||
(1) | 3636 McKinney Avenue, 3839 McKinney Avenue, 4649 Cole Avenue, 47 E 34th Street, and 4200 Scotland Street were sold on May 30, 2017, May 30, 2017, June 23, 2017, September 26, 2017, and December 15, 2017, respectively. |
(2) | Represents gross monthly base rent under leases commenced divided by occupied units as of December 31st of each historical year. This amount reflects total cash rent before concessions. |
(3) | 4649 Cole Avenue consisted of fifteen buildings. |
(4) | 3839 McKinney Avenue consisted of two buildings. |
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Hotel Portfolio—Historical Occupancy Rates as of December 31, 2019
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 | % | |||||||||
(1) | Historical occupancies for hotel properties are shown as a percentage of rentable rooms and represent the trailing 12-months occupancy as of December 31st of each historical year. For sold properties, occupancy is presented for our period of ownership only. |
(2) | This property was sold on July 19, 2016. |
(3) | This property was sold on February 2, 2016. |
Hotel Portfolio—Historical Average Daily Rates as of December 31, 2019
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 | ||||||||||||||
(1) | Represents the trailing 12-months average daily rate as of December 31st of each historical year, calculated by dividing the amount of room revenue by the number of occupied rooms. For sold properties, the average daily rate is presented for our period of ownership only. |
(2) | This property was sold on July 19, 2016. |
(3) | This property was sold on February 2, 2016. |
Hotel Portfolio—Historical Revenue per Available Room/Suite as of December 31, 2019
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 | ||||||||||||||
(1) | Represents the trailing 12-months RevPAR as of December 31st of each historical year, calculated by dividing the amount of room revenue by the number of available rooms. For sold properties, RevPAR is presented for our period of ownership only. |
(2) | This property was sold on July 19, 2016. |
(3) | This property was sold on February 2, 2016. |
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Property Indebtedness as of December 31, 2019
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. |
Key Properties
1 Kaiser Plaza
Built in 1970 and renovated in 2008, 1 Kaiser Plaza is a Class A office property located in Oakland, California. The Company acquired a 100% fee-simple interest in the property on October 8, 2008 from an unrelated third-party.
In June 2016, the Company entered into a mortgage loan agreement with JPMorgan Chase Bank, National Association relating to this property. The mortgage loan agreement consists of two promissory notes, both having a fixed interest rate of 4.14% per annum, with monthly payments of interest only and combined principal totaling $97,100,000 due on July 1, 2026, and are secured by deeds of trust on the property and assignments of rents. The obligations under the mortgage loan agreement are non-recourse and are generally not prepayable prior to April 1, 2026.
The following table sets forth the principal provisions of the leases of tenants occupying 10% or more of the rentable square footage:
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 | % | ||||||||||||
(1) | Represents gross monthly base rent, as of December 31, 2019, 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. |
(2) | The Kaiser Foundation Health Plan, Inc. lease agreements include a renewal option, except with respect to 30,481 of the occupied square feet. |
(3) | Includes 7,161 square feet of month-to-month leases as of December 31, 2019. |
(4) | Prior to February 28, 2023, the tenant may terminate up to 140,000 square feet of space in the aggregate (of which no more than 100,000 rentable square feet may be terminated with respect to the rentable square feet expiring in 2027), effective as of any date specified by the tenant in a written notice given to us at least 12 months prior to the termination, in exchange for a termination penalty. From and after February 28, 2023 with respect to the rentable square feet expiring in 2025, and February 28, 2025 with respect to rentable square feet expiring in 2027, the tenant has the right to terminate all or any portions of its lease with 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 to the 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. |
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The following table sets forth the lease expirations for leases at 1 Kaiser Plaza for the next 10 years, assuming that tenants do not exercise any renewal options or early termination options:
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 | ||||||||||||||||
(1) | Represents gross monthly base rent, as of December 31, 2019, 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. |
(2) | Includes 20,030 square feet of month-to-month leases as of December 31, 2019. |
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9460 Wilshire Boulevard
Built in 1959 and renovated in 2008, 9460 Wilshire Boulevard is a Class A office property located in Beverly Hills, California. The Company acquired a 100% fee-simple interest in the property on January 18, 2018 from an unrelated third-party.
The following table sets forth the principal provisions of the leases of tenants occupying 10% or more of the rentable square footage:
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 | % | ||||||||||||
(1) | Represents gross monthly base rent, as of December 31, 2019, 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. |
(2) | Includes 300 square feet of month-to-month leases as of December 31, 2019. |
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The following table sets forth the lease expirations at 9460 Wilshire Boulevard for leases for the next 10 years, assuming that tenants do not exercise any renewal options or early termination options:
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 | ||||||||||||||||
(1) | Represents gross monthly base rent, as of December 31, 2019, 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. |
(2) | Includes 300 square feet of month-to-month leases as of December 31, 2019. |
Sheraton Grand Hotel
Built in 2001, the Sheraton Grand Hotel is a full service hotel comprised of a 26-story tower with 503 rooms which is part of the Sheraton franchise and is managed by Sheraton Operating Corporation, a subsidiary of Marriott International, Inc. The property is adjacent to the Sacramento Convention Center, and is three blocks from the State Capitol. The Company purchased the hotel from an unrelated third-party on May 2, 2008, and the seller retained a non-controlling interest of less than 0.5% in the property. The Company has 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. As of December 31, 2019, the Company had incurred costs of $2,423,000 for the renovation.
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'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.
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PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Marketplace Designation, Sales Price Information and Holders
Shares of our Common Stock trade on Nasdaq, under the ticker symbol "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 | $ | — | ||||
(1) | Amounts have been adjusted to give retroactive effect to the Reverse Stock Split. |
(2) | On August 30, 2019, in connection with the Program to Unlock Embedded Value in Our Portfolio and Improve Trading Liquidity of Our Common Stock, as defined in "Item 1—Business" of this Annual Report on Form 10-K, we paid a special cash dividend of $42.00 per share of Common Stock ($14.00 per share of Common Stock prior to the Reverse Stock Split), or $613,294,000 in the aggregate, to stockholders of record at the close of business on August 19, 2019. The Special Dividend was funded primarily by the net proceeds (after the repayment of debt) received from the sale of ten properties during 2019 and borrowings on our revolving credit facility. |
On March 12, 2020, there were approximately 335 holders of record of our Common Stock, excluding stockholders whose shares were held by brokerage firms, depositories and other institutional firms in "street name" for their customers. The closing price of our Common Stock on March 12, 2020 was $9.57 as reported on Nasdaq.
Approximately 80.4% of shares of our Common Stock as of March 12, 2020 were held by non-affiliated stockholders.
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 1A—Risk Factors" of this Annual Report on Form 10-K.
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Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information at December 31, 2019 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.
Number of shares of | ||||||||
Common Stock remaining | ||||||||
Number of shares of | available for future | |||||||
Common Stock to be | issuances under equity | |||||||
issued upon exercise | Weighted average | compensation plans | ||||||
of outstanding | exercise price of | (all in restricted shares | ||||||
Plan Category | options | outstanding options | of Common Stock) (1) | |||||
Equity incentive plan | — | N/A | 92,014 | |||||
(1) | All share amounts have been adjusted to give retroactive effect to the Reverse Stock Split. |
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Performance Graph
The information below is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 ("Exchange Act") or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such a filing.
The line graph below compares the percentage change in the cumulative total stockholder return on our Common Stock with the cumulative total return of the S&P 500 and the FTSE NAREIT Equity REIT Index. The FTSE NAREIT Equity REIT Index is a free-float adjusted, market capitalization-weighted index of U.S. Equity REITs. The Index includes all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property. All returns assume an investment of $100 on December 31, 2014 and the reinvestment of dividends. The stock price performance shown on the graph is not necessarily indicative of future price performance.
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 | ||||||||||||||||||
Source: SNL Financial LC
Recent Sales of Unregistered Securities and Use of Proceeds
None.
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Repurchases of Equity Securities
The following table summarizes all purchases of Common Stock by or on behalf of us or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) in each of the three months ended December 31, 2019.
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 | — | ||||||||||
(1) | Reflects shares of Common Stock that were purchased by the Administrator for its own account from Urban Partners II, LLC, a Delaware limited liability company and affiliate of CIM Group, on October 11, 2019 in a private transaction. |
The following table summarizes all purchases of Series L Preferred Stock by or on behalf of us or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) in each of the three months ended December 31, 2019.
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 | — | ||||||||||
(1) | Reflects shares of Series L Preferred Stock that were repurchased by the Company pursuant to a tender offer commenced on October 22, 2019 for the purchase of up to 2,693,580 shares of Series L Preferred Stock, representing one‑third of the then‑outstanding shares of Series L Preferred Stock. The tender offer was oversubscribed and expired on November 20, 2019. |
(2) | The purchase price of $29.12 per share was converted to ILS prior to payment to the tendering stockholders and includes $1.39 of accrued and unpaid dividends on the Series L Preferred Stock as of November 20, 2019. |
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Item 6. Selected Financial Data
The following is a summary of our selected financial data as of and for each of the years in the five year period ended December 31, 2019. The following data should be read in conjunction with our consolidated financial statements and the notes thereto and "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K. The selected financial data presented below has been derived from our audited consolidated financial statements.
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 | ||||||||||||||
(1) | To conform with the current period presentation, consistent with ASU 2016-02, bad debt expense associated with changes in the Company's collectability assessment for operating leases has been reclassified as an adjustment to rental and other property income rather than rental and other property operating expenses. The impact of this reclassification resulted in a $254,000, $317,000, $360,000 and $1,013,000 decrease in total expenses and total revenues for the years ended December 31, 2018, 2017, 2016 and 2015, respectively. |
(2) | To conform with the current period presentation, we reclassified $6,361,000 from gain on sale of real estate to loss on early extinguishment of debt, which is included with total expenses on the consolidated statement of operations for the year ended December 31, 2017. |
(3) | Net income from discontinued operations represents revenues and expenses from the parts of our lending segment acquired in March 2014 in connection with the merger, which were discontinued during 2015 and 2016. On December 17, 2015, we sold substantially all of our commercial mortgage loans with a carrying value of $77,121,000 to an unrelated third-party and recognized a gain of $5,151,000. On December 29, 2016, we sold our commercial real estate lending subsidiary, which was classified as held for sale and had a carrying value of $27,587,000, which was equal to management's estimate of fair value, to a fund managed by an affiliate of CIM Group. We did not recognize any gain or loss in connection with the transaction. Management's estimate of fair value was determined with assistance from an independent third-party valuation firm. |
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(4) | See “—Funds from Operations” below for a discussion of why we believe funds from operations ("FFO") is a useful supplemental measure of operating performance and the limitations of FFO as a measurement tool and a reconciliation of net income (loss) attributable to common stockholders to FFO attributable to common stockholders. |
(5) | To conform with the current period presentation, we reclassified $6,361,000 from gain on sale of real estate to loss on early extinguishment of debt, which reduced FFO for the year ended December 31, 2017. |
(6) | Cash dividends in 2019 do not include the Special Dividend of $42.00 per share of Common Stock paid to stockholders of record at the close of business on August 19, 2019. Cash dividends in 2017 do not include the special cash dividends that allowed the common stockholders that did not participate in the September 14, 2016, June 12, 2017 and December 18, 2017 private share repurchases to receive the economic benefit of such repurchases. Urban II, an affiliate of CIM REIT and CIM Urban, waived its right to receive these special cash dividends as to its shares of our Common Stock owned as of the applicable record dates. |
(7) | All share and per share amounts have been adjusted to give retroactive effect to the Reverse Stock Split. |
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 | |||||||||
Funds from Operations
We believe that FFO is a widely recognized and appropriate measure of the performance of a REIT and that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO represents net income (loss) attributable to common stockholders, computed in accordance with GAAP, which reflects the deduction of redeemable preferred stock dividends accumulated, excluding gains (or losses) from sales of real estate, impairment of real estate, and real estate depreciation and amortization. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (the "NAREIT").
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 standards 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 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.
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The following table sets forth a reconciliation of net income (loss) attributable to common stockholders to FFO attributable to common stockholders:
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 | ||||||||
(1) | During the years ended December 31, 2019, 2018, 2017 and 2016, we recognized $29,982,000, $808,000, $8,215,000, and $417,000, respectively, of loss on early extinguishment of debt. Such losses are included in, and have the effect of reducing, net income (loss) attributable to common stockholders and FFO attributable to common stockholders, because loss on early extinguishment of debt is not an adjustment prescribed by NAREIT. |
(2) | During the year ended December 31, 2019, the Company recognized redeemable preferred stock redemptions of $5,882,000 primarily in connection with the Tender Offer. Such amount is included in, and has the effect of reducing, net income (loss) attributable to common stockholders and FFO attributable to common stockholders, because redeemable preferred stock redemptions are not an adjustment prescribed by NAREIT. |
Item 7. Management'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" at the beginning of this report immediately prior to "Item 1—Business" in this Annual Report on Form 10-K.
Executive Summary
Business Overview
CIM Commercial is a Maryland corporation and REIT. Our principal business is to acquire, own, and operate Class A and creative office assets in vibrant and improving metropolitan communities throughout the United States (including improving and developing such assets). These communities are located in areas that include traditional downtown areas and suburban main streets, which have high barriers to entry, high population density, positive population trends and a propensity for growth. We believe that the critical mass of redevelopment in such areas creates positive externalities, which enhance the value of real estate assets in the area. We believe that these assets will provide greater returns than similar assets in other markets, as a result of the population growth, public commitment, and significant private investment that characterize these areas.
We are operated by affiliates of CIM Group. CIM Group is a vertically-integrated owner and operator of real assets with multi-disciplinary expertise and in-house research, acquisition, credit analysis, development, finance, leasing, and onsite property management capabilities. CIM Group is headquartered in Los Angeles, California and has offices in Chicago, Illinois; Dallas, Texas; New York, New York; Orlando, Florida; Phoenix, Arizona; the San Francisco Bay Area; the Washington D.C. Metro Area; and Tokyo, Japan.
Properties
As of December 31, 2019, our real estate portfolio consisted of 11 assets, all of which were fee-simple properties. As of December 31, 2019, our 9 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% occupied and our one hotel with an ancillary parking garage, which has a total of 503 rooms, had RevPAR of $127.09 for the year ended December 31, 2019.
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Strategy
Our strategy is principally focused on the acquisition of Class A and creative office assets in vibrant and improving metropolitan communities throughout the United States (including improving and developing such assets) in a manner that will prudently grow our NAV and cash flow per share of Common Stock.
Our strategy is centered around CIM Group's community qualification process. We believe this strategy provides us with a significant competitive advantage when making real estate acquisitions. The qualification process generally takes between six months and five years and is a critical component of CIM Group's evaluation. As part of the community qualification process, CIM Group examines the characteristics of a market to determine whether the district possesses certain characteristics prior to the extensive efforts CIM Group's investment professionals undertake when reviewing potential acquisitions in its Qualified Communities. Qualified Communities generally fall into one of two categories: (i) transitional metropolitan districts that have dedicated resources to become vibrant metropolitan communities and (ii) well-established, thriving metropolitan areas (typically major central business districts). Qualified Communities are distinct districts which have dedicated resources to become or are currently vibrant communities where people can live, work, shop and be entertained, all within walking distance or close proximity to public transportation. These areas also generally have high barriers to entry, high population density, positive population trends and support for investment. CIM Group believes that a vast majority of the risks associated with acquiring real estate are mitigated by accumulating local market knowledge of the community where the asset is located. CIM Group typically spends significant time and resources qualifying targeted communities prior to making any acquisitions. Since 1994, CIM Group has identified 135 Qualified Communities and has deployed capital in 75 of them. Although we may not deploy capital exclusively in Qualified Communities, it is expected that most of our assets will be identified through this systematic process.
CIM Group seeks to maximize the value of its holdings through active onsite property management and leasing. CIM Group has extensive in-house research, acquisition, credit analysis, development, finance, leasing and onsite property management capabilities, which leverage its deep understanding of metropolitan communities to position properties for multiple uses and to maximize operating income. As a vertically-integrated owner and operator, CIM Group has in-house onsite property management and leasing capabilities. Property managers prepare annual capital and operating budgets and monthly operating reports, monitor results, and oversee vendor services, maintenance and capital improvement schedules. In addition, they ensure that revenue objectives are met, lease terms are followed, receivables are collected, preventative maintenance programs are implemented, vendors are evaluated and expenses are controlled. In addition, CIM Group's Real Assets Management Committee reviews and approves strategic plans for each asset, including financial, leasing, marketing, property positioning and disposition plans. The Real Assets Management Committee reviews and approves the annual business plan for each property, including its capital and operating budget. CIM Group's organizational structure provides for continuity through multi-disciplinary teams responsible for an asset from the time of the original investment recommendation, through the implementation of the asset's business plan, and any disposition activities.
CIM Group's Investments and Development teams are separate groups that work very closely together on transactions requiring development expertise. While the Investments team is responsible for acquisition analysis, both the Investments and Development teams perform due diligence, evaluate and determine underwriting assumptions and participate in the development management and ongoing asset management of CIM Group’s opportunistic assets. The Development team is also responsible for the oversight and or execution of securing entitlements and the development/repositioning process. In instances where CIM Group is not the lead developer, CIM Group's in-house Development team continues to provide development and construction oversight to co-sponsors through a shadow team that oversees the progress of the development from beginning to end to ensure adherence to the budgets, schedules, quality and scope of the project in order to maintain CIM Group’s vision for the final product. The Investments and Development teams interact as a cohesive team when sourcing, underwriting, acquiring, executing and managing the business plan of an opportunistic acquisition.
We seek to utilize the CIM Group platform to acquire, improve and or develop real estate assets within CIM Group's Qualified Communities. We believe that these assets will provide greater returns than similar assets in other markets, as a result of the population growth, public commitment, and significant private investment that characterize these areas. Over time, we seek to expand our real estate assets in communities targeted by CIM Group, supported by CIM Group's broad real estate capabilities, as part of our plan to prudently grow NAV and cash flow per share of Common Stock. As a matter of prudent management, we also regularly evaluate each asset within our portfolio as well as our strategies. Such review may result in dispositions when an asset no longer fits our overall objectives or strategies, or when our view of the market value of such asset is equal to or exceeds its intrinsic value.
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 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.
Completion of the Program to Unlock Embedded Value in Our Portfolio and Improve Trading Liquidity of Our Common Stock
The Company completed the previously announced Program to Unlock Embedded Value in Our Portfolio and Improve Trading Liquidity of Our Common Stock:
• | Sale of Assets. During 2019, the Company sold eight properties in accordance with the approval of its then‑principal stockholder, and an additional two properties (one office property and one development site in Washington, D.C.) after evaluating each asset within its portfolio and the intrinsic value of each property. The Asset Sale generated an aggregate gross sales price to the Company of $990,996,000. |
• | Repayment of Certain Indebtedness. We used a portion of the net proceeds from the Asset Sale to repay balances on certain of the Company’s indebtedness. |
• | Return of Capital to Holders of Common Stock. On August 30, 2019, we paid a Special Dividend of $42.00 per share of Common Stock ($14.00 per share of Common Stock prior to the Reverse Stock Split), or $613,294,000 in the aggregate, to stockholders of record of our Common Stock at the close of business on August 19, 2019. |
• | CIM REIT Liquidation. In connection with its liquidation process, CIM REIT, the former indirect principal stockholder of the Company, (i) distributed during the year ended December 31, 2019 approximately 10,624,000 shares of our Common Stock formerly indirectly held by CIM REIT, representing approximately 72.8% of the outstanding shares of our Common Stock, to a diverse group of institutional investors that were former members of CIM REIT and (ii) sold, in October 2019, 2,468,390 shares of our Common Stock formerly indirectly held by CIM REIT, representing approximately 16.9% of the outstanding shares of our Common Stock, for $19.1685 per share to an affiliate of CIM Group in a private transaction. As of March 12, 2020, CIM Group, its affiliates, and our officers and directors have an aggregate economic interest in approximately 19.6% of the outstanding shares of our Common Stock. |
On October 22, 2019, the Company commenced the Tender Offer for the purchase of up to 2,693,580 shares of Series L Preferred Stock, 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. 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 unpaid dividends on the Series L Preferred Stock as of November 20, 2019), as converted to and paid in ILS. The total cost to repurchase the tendered shares, including professional fees to complete the Tender Offer of $462,000 but excluding the dividends accrued in respect of such shares, was $75,155,000, which was primarily funded from borrowings under the revolving credit facility. We recognized $5,873,000 of redeemable preferred stock redemptions in our consolidated statement of operations for the year ended December 31, 2019 in connection with the Tender Offer. 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.
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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 | |||||
(1) | The information presented in this table represents historical information as of the date indicated without giving effect to any property sales occurring thereafter. We sold eight office properties, one development site and one parking garage during the year ended December 31, 2019, we acquired one office property during the year ended December 31, 2018, and we sold six office properties and one parking garage during the year ended December 31, 2017. Excluding these properties, the occupancy and annualized rent per occupied square foot were 86.7% and $43.83 as of December 31, 2019, 94.7% and $39.90 as of December 31, 2018 and 94.9% and $37.89 as of December 31, 2017. |
(2) | Other than as set forth in (3) below, 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 for the years ended December 31, 2019, 2018 and 2017 were $1,816,000, $5,146,000 and $3,128,000, 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. |
(3) | 1130 Howard Street was acquired on December 29, 2017. The annualized rent as of December 31, 2017 for 12,944 rentable square feet of the building is presented using the actual rental income under a signed lease with a different tenant who took possession in March 2018, as the space was occupied by the prior owner and annualized rent under the short-term lease was de minimis. |
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 | |||||||
(1) | Month-to-month tenants occupying a total of 22,416 square feet are included in the expiring leases in the first quarter listed. |
(2) | Represents gross monthly base rent, as of December 31, 2019, 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. |
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During the year ended December 31, 2019, we executed leases with terms longer than 12 months totaling 128,687 square feet. The table below sets forth information on certain of our executed leases during the year ended December 31, 2019, 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 | |||||||
(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, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Occupancy | 78.2 | % | 80.1 | % | 81.5 | % | |||||
ADR | $ | 162.54 | $ | 161.95 | $ | 157.64 | |||||
RevPAR | $ | 127.09 | $ | 129.73 | $ | 128.43 | |||||
Lending Segment
Through our SBA 7(a) lending platform, 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.
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Results of Operations
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
Net Income
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 | — | |||||||
Net income increased to $345,521,000, or by $344,379,000, for the year ended December 31, 2019, compared to $1,142,000 for the year ended December 31, 2018, primarily due to the Asset Sale. The increase is primarily attributable to the gain on sale of real estate of $433,104,000 recognized in 2019, a decrease of $25,854,000 in depreciation and amortization, a decrease of $15,121,000 in interest expense not allocated to our operating segments, a decrease of $6,085,000 in asset management and other fees to related parties not allocated to our operating segments, an increase of $3,329,000 in interest and other income not allocated to our operating segments, a decrease of $859,000 in general and administrative expense not allocated to our operating segments, and a decrease of $364,000 in transaction costs, partially offset by $69,000,000 in impairment of real estate recognized in 2019, a decrease of $42,206,000 in segment net operating income, and an increase of $29,174,000 in loss on early extinguishment of debt.
Funds From Operations
See “Item 6—Selected Financial Data—Funds from Operations” in this Annual Report on Form 10-K for a discussion of why we believe FFO is a useful supplemental measure of operating performance and the limitations of FFO as a measurement tool.
The following table sets forth a reconciliation of net income (loss) attributable to common stockholders to FFO attributable to common stockholders:
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 | ||
(1) | During the years ended December 31, 2019 and 2018, we recognized $29,982,000 and $808,000, respectively, of loss on early extinguishment of debt. Such losses are included in, and have the effect of reducing, net income (loss) attributable to common stockholders and FFO attributable to common stockholders, because loss on early extinguishment of debt is not an adjustment prescribed by NAREIT. |
(2) | During the year ended December 31, 2019, the Company recognized redeemable preferred stock redemptions of $5,882,000 primarily in connection with the Tender Offer. Such amount is included in, and has the effect of reducing, net income (loss) attributable to common stockholders and FFO attributable to common stockholders, because redeemable preferred stock redemptions are not an adjustment prescribed by NAREIT. |
FFO attributable to common stockholders was $(14,034,000) for the year ended December 31, 2019, a decrease of $52,964,000 compared to $38,930,000 for the year ended December 31, 2018, primarily due to the Asset Sale. The decrease in
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FFO is primarily attributable to a decrease of $42,206,000 in segment net operating income, an increase of $29,174,000 in loss on early extinguishment of debt, an increase of $5,886,000 in redeemable preferred stock redemptions primarily in connection with the Tender Offer, and an increase of $1,672,000 in redeemable preferred stock dividends declared or accumulated, partially offset by a decrease of $15,121,000 in interest expense not allocated to our operating segments, a decrease of $6,085,000 in asset management and other fees to related parties not allocated to our operating segments, an increase of $3,329,000 in interest and other income not allocated to our operating segments, a decrease of $859,000 in general and administrative expense not allocated to our operating segments, and a decrease of $364,000 in transaction costs.
Summary Segment Results
During the years ended December 31, 2019 and 2018, CIM Commercial operated in three segments: office and hotel properties and lending. Set forth and described below are summary segment results for our operating segments.
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 | % | ||||||
Revenues
Office Revenue: Office revenue includes rental revenue, expense reimbursements and lease termination income from office properties. Office revenue decreased to $86,948,000, or by 41.2%, for the year ended December 31, 2019 compared to $147,811,000 for the year ended December 31, 2018. The decrease is primarily due to the sale of three office properties and a parking garage in Oakland, California, the sale of an office property in Washington, D.C., and the sale of an office property in San Francisco, California, all of which were consummated in March 2019, the sale of an office property in Oakland, California, which was consummated in May 2019, the sale of two office properties in Washington, D.C., which was consummated in July 2019, and lower revenues at an office property in Los Angeles, California, partially offset by increases in rental revenue at certain of our properties due to increases in rental rates as a result of leasing activity and an increase in expense reimbursements at one of our properties. The office property in Los Angeles, California is being repositioned into vibrant, collaborative office space after the expiration in April 2019 of a lease agreement for 100% of such property, which space has been partially occupied by an affiliate of the Company since May 2019. The aforementioned sales are expected to cause office revenue to decline materially during the year ending December 31, 2020 as compared to the year ended December 31, 2019.
Hotel Revenue: Hotel revenue decreased to $38,748,000, or by 0.1%, for the year ended December 31, 2019 compared to $38,789,000 for the year ended December 31, 2018. Renovations of the guest rooms, food and beverage amenities, public areas, meeting rooms and other amenities at the hotel during 2020, as well as the outbreak of COVID-19 that began in the fourth quarter of 2019, are expected to cause hotel revenue to decline materially during the year ending December 31, 2020 as compared to the year ended December 31, 2019.
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 $10,964,000, or by 0.9%, for the year ended December 31, 2019 compared to $10,870,000 for the year ended December 31, 2018. The increase is primarily due to an increase in servicing asset income and interest income, partially offset by a decrease in premium income from the sale of the guaranteed portion of our SBA 7(a) loans.
Interest and Other Income: Interest and other income represents revenue generated outside of our reportable segments. Interest and other income for the year ended December 31, 2019 was $3,329,000, compared to $0 for the year ended
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December 31, 2018. The increase was primarily due to interest earned on the proceeds from the Asset Sale received during the year ended December 31, 2019 until the payment of the Special Dividend in August 2019, as well as interest earned during the fourth quarter of 2019 on the funds used for the Tender Offer.
Expenses
Office Expenses: Office expenses decreased to $37,159,000, or by 34.8%, for the year ended December 31, 2019 compared to $57,004,000 for the year ended December 31, 2018. The decrease is primarily due to the sale of three office properties and a parking garage in Oakland, California, the sale of an office property in Washington, D.C., and the sale of an office property in San Francisco, California, all of which were consummated in March 2019, the sale of an office property in Oakland, California, which was consummated in May 2019, and the sale of two office properties in Washington, D.C., which was consummated in July 2019, partially offset by an increase in real estate taxes at certain of our properties in California due to real estate tax refunds related to prior years recognized during the year ended December 31, 2018, an increase in payroll costs at most of our properties, and higher expenses at an office property in Los Angeles, California that is being repositioned into vibrant, collaborative office space. The aforementioned sales are expected to cause office expenses to decline materially during the year ending December 31, 2020 as compared to the year ended December 31, 2019.
Hotel Expenses: Hotel expenses increased to $26,424,000, or by 4.5%, for the year ended December 31, 2019 compared to $25,295,000 for the year ended December 31, 2018, primarily due to an increase in payroll costs. Renovations of the guest rooms, food and beverage amenities, public areas, meeting rooms and other amenities at the hotel during 2020 are expected to cause hotel expenses to decline materially during the year ending December 31, 2020 as compared to the year ended December 31, 2019.
Lending Expenses: Lending expenses represent expenses from our lending subsidiaries, including interest expense, general and administrative expenses and fees to related party. Lending expenses increased to $5,826,000, or by 2.0%, for the year ended December 31, 2019 compared to $5,714,000 for the year ended December 31, 2018. The increase is primarily due to an increase in interest expense as a result of the issuance of the SBA 7(a) loan-backed notes in May 2018, partially offset by a decrease in general and administrative expenses.
Asset Management and Other Fees to Related Parties: Asset management fees and other fees to related parties, which have not been allocated to our operating segments, were $15,921,000 for the year ended December 31, 2019, a decrease of $6,085,000, compared to $22,006,000 for the year ended December 31, 2018. Asset management fees totaled $12,019,000 for the year ended December 31, 2019 compared to $17,880,000 for the year ended December 31, 2018. Asset management fees are calculated based on a percentage of the daily average adjusted fair value of CIM Urban'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's assets due to assets sold in the Asset Sale, including the sale of three office properties and a parking garage in Oakland, California, the sale of an office property in Washington, D.C., and the sale of an office property in San Francisco, California, all of which were consummated in March 2019, the sale of an office property in Oakland, California, which was consummated in May 2019, and the sale of two office properties and one development site in Washington, D.C., which was consummated in July 2019, partially offset by net increases in the fair value of CIM Urban’s real estate assets based on the December 31, 2018 appraised values as well as incremental capital expenditures during 2019. CIM Commercial also pays a Base Service Fee to the Administrator, a related party, which totaled $1,102,000 for the year ended December 31, 2019 compared to $1,079,000 for the year ended December 31, 2018. In addition, the Administrator received compensation and or reimbursement for performing certain services for CIM Commercial and its subsidiaries that are not covered by the Base Service Fee. For the years ended December 31, 2019 and 2018, we expensed $2,577,000 and $2,783,000 for such services, respectively. For the years ended December 31, 2019 and 2018, we also expensed $223,000 and $264,000, respectively, related to corporate services subject to reimbursement by us under the CIM SBA Staffing and Reimbursement Agreement. The properties sold as part of the Asset Sale will cause asset management fees to decline materially during the year ending December 31, 2020 as compared to the year ended December 31, 2019, and, as discussed in "Item 1––Business" of this Annual Report on Form 10-K, for the first and second quarters of 2020, we will, subject to applicable laws and regulations under Nasdaq and the TASE and the agreement of the Operator and or the Administrator, as applicable, seek to pay some or all of the asset management fees, the Base Service Fee and or reimbursements under the Master Services Agreement in respect of such quarter in shares of Common Stock. The Company may seek to do so for the third 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).
Interest Expense: Interest expense, which has not been allocated to our operating segments, was $10,361,000 for the year ended December 31, 2019, a decrease of $15,121,000, compared to $25,482,000 for the year ended December 31, 2018. The decrease is primarily due to the legal defeasance of mortgage loans with an aggregate outstanding principal balance of
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$205,500,000 in connection with the sale of three office properties and a parking garage in Oakland, California, the prepayment of a $46,000,000 mortgage loan in connection with the sale of an office property in Washington, D.C., and the assumption of a $28,200,000 mortgage loan by the buyer of an office property in San Francisco, California, all of which were consummated in March 2019, the legal defeasance of a mortgage loan with an outstanding principal balance of $39,500,000 in connection with the sale of an office property in Oakland, California, which was consummated in May 2019, a decrease in interest expense, including the impact of interest rate swaps, as a result of the lower average outstanding principal balance on our revolving credit facility during 2019 compared to the average outstanding principal balance on our unsecured credit and term loan facilities during 2018, and due to higher income during 2019 received in connection with the termination of interest rate swaps as compared to 2018. The aforementioned reductions in our debt are expected to cause interest expense to decline materially during the year ending December 31, 2020 as compared to the year ended December 31, 2019. However, the magnitude of any such decrease cannot be predicted as it will depend on a number of factors such as the amount and timing of future borrowings on our revolving credit facility, and the terms and amount of any new borrowings we may enter into.
General and Administrative Expenses: General and administrative expenses, which have not been allocated to our operating segments, were $4,069,000 for the year ended December 31, 2019, a decrease of $859,000, compared to $4,928,000 for the year ended December 31, 2018. The decrease is primarily due to certain expenses related to our multifamily properties sold during the year ended December 31, 2017, which were expensed in 2018.
Transaction Costs: Transaction costs were $574,000 for the year ended December 31, 2019, a decrease of $364,000 compared to $938,000 for the year ended December 31, 2018.
Depreciation and Amortization Expense: Depreciation and amortization expense was $27,374,000 for the year ended December 31, 2019, a decrease of $25,854,000, compared to $53,228,000 for the year ended December 31, 2018. The decrease is primarily due to the sale of three office properties and a parking garage in Oakland, California that were held for sale starting in mid-January 2019 and sold in March 2019, the sale of an office property in Washington, D.C. that was held for sale starting in late January 2019 and sold in March 2019, the sale of an office property in San Francisco, California that was held for sale starting in late December 2018 and sold in mid-March 2019, the sale of an office property in Oakland, California that was held for sale in mid-March 2019 and sold in mid-May 2019, the impairment of two office properties and one development site in Washington, D.C., which decreased the carrying amounts of such properties and the depreciation thereon through late June 2019, when they were held for sale and sold in late July 2019, and the early renewal of a large tenant at one of our California properties, which increased the life over which certain acquisition-related assets are depreciated. The aforementioned sales are expected to cause depreciation and amortization expense to decline materially during the year ending December 31, 2020 as compared to the year ended December 31, 2019.
Loss on Early Extinguishment of Debt: Loss on early extinguishment of debt was $29,982,000 for the year ended December 31, 2019, an increase of $29,174,000, compared to $808,000 for the year ended December 31, 2018. In March 2019, we legally defeased mortgage loans with an aggregate outstanding principal balance of $205,500,000 in connection with the sale of three office properties and a parking garage in Oakland, California, we prepaid a $46,000,000 mortgage loan in connection with the sale of an office property in Washington, D.C., and a $28,200,000 mortgage loan was assumed by the buyer of an office property in San Francisco, California. In May 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. Loss on early extinguishment of debt for the year ended December 31, 2019 consists of the costs associated with the aforementioned legal defeasances, repayment, and assumption of mortgage loans, the write-off of unamortized deferred loan costs, and, with regards to the legal defeasances, the difference between the purchase price of the U.S. government securities and the outstanding principal balance of the mortgage loans that were legally defeased. 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.
Impairment of Real Estate: Impairment of real estate was $69,000,000 for the year ended December 31, 2019 and $0 for the year ended December 31, 2018. In connection with our negotiation of an agreement with an unrelated third-party for the sale of 100% fee-simple interests in two office properties and one development site in Washington, D.C., we determined that the book values of such properties exceeded their estimated fair values and recognized impairment charges totaling $69,000,000 for the year ended December 31, 2019. Our determination of the fair value of such properties was based on the sales price negotiated with the third-party buyer.
Gain on sale of real estate: Gain on sale of real estate was $433,104,000 for the year ended December 31, 2019 and $0 for the year ended December 31, 2018. We recognized a gain on sale of real estate of $289,779,000 in connection with the sale of three office properties and a parking garage in Oakland, California, $45,710,000 in connection with the sale of an office
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property in Washington, D.C., and $42,092,000 in connection with the sale of an office property in San Francisco, California, all of which were consummated in March 2019, a gain on sale of real estate of $55,221,000 in connection with the sale of an office property in Oakland, California, which was consummated in May 2019, and a gain on sale of real estate of $302,000 in connection with the sale of two office properties and one development site in Washington, D.C., which was consummated in July 2019.
Provision for Income Taxes: Provision for income taxes was $882,000 for the year ended December 31, 2019, a decrease of $43,000, compared to $925,000 for the year ended December 31, 2018.
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Net Income
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 | ) | — | ||||||
Net income decreased to $1,142,000, or by $378,616,000, for the year ended December 31, 2018, compared to $379,758,000 for the year ended December 31, 2017. The decrease was primarily attributable to the gain on sale of real estate of $408,098,000 recognized in 2017, a decrease of $18,995,000 in segment net operating income, and an increase of $1,910,000 in general and administrative expenses not allocated to our operating segments, partially offset by $13,100,000 in impairment of real estate recognized in 2017, a decrease of $10,924,000 in transaction costs, a decrease of $8,588,000 in interest expense not allocated to our operating segments, a decrease of $7,407,000 in loss on early extinguishment of debt, a decrease of $5,136,000 in depreciation and amortization, and a decrease of $4,781,000 in asset management and other fees to related parties not allocated to our operating segments.
Funds from Operations
See “Item 6—Selected Financial Data—Funds from Operations” in this Annual Report on Form 10-K for a discussion of why we believe FFO is a useful supplemental measure of operating performance and the limitations of FFO as a measurement tool.
The following table sets forth a reconciliation of net (loss) income attributable to common stockholders to FFO attributable to common stockholders:
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 | |||
(1) | During the years ended December 31, 2018 and 2017, we recognized $808,000 and $8,215,000, respectively, of loss on early extinguishment of debt. Such losses are included in, and have the effect of reducing, net income (loss) attributable to common stockholders and FFO attributable to common stockholders, because loss on early extinguishment of debt is not an adjustment prescribed by NAREIT. |
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FFO attributable to common stockholders was $38,930,000 for the year ended December 31, 2018, a decrease of $2,249,000 compared to $41,179,000 for the year ended December 31, 2017. The decrease in FFO was primarily attributable to a decrease of $18,995,000 in segment net operating income, an increase of $13,497,000 in redeemable preferred stock dividends declared or accumulated, and an increase of $1,910,000 in general and administrative expenses not allocated to our operating segments, partially offset by a decrease of $10,924,000 in transaction costs, a decrease of $8,588,000 in interest expense not allocated to our operating segments, a decrease of $7,407,000 in loss on early extinguishment of debt, and a decrease of $4,781,000 in asset management and other fees to related parties not allocated to our operating segments.
Summary Segment Results
During the year ended December 31, 2018, CIM Commercial 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 | ||||||||||||||
December 31, | Change | |||||||||||||
2018 | 2017 | $ | % | |||||||||||
(dollars in thousands) | ||||||||||||||
Revenues: | ||||||||||||||
Office | $ | 147,811 | $ | 173,853 | $ | (26,042 | ) | (15.0 | )% | |||||
Hotel | $ | 38,789 | $ | 38,585 | $ | 204 | 0.5 | % | ||||||
Multifamily | $ | — | $ | 13,400 | $ | (13,400 | ) | — | ||||||
Lending | $ | 10,870 | $ | 10,221 | $ | 649 | 6.3 | % | ||||||
Expenses: | ||||||||||||||
Office | $ | 57,004 | $ | 69,631 | $ | (12,627 | ) | (18.1 | )% | |||||
Hotel | $ | 25,295 | $ | 25,136 | $ | 159 | 0.6 | % | ||||||
Multifamily | $ | — | $ | 7,952 | $ | (7,952 | ) | — | ||||||
Lending | $ | 5,714 | $ | 4,888 | $ | 826 | 16.9 | % | ||||||
Revenues
Office Revenue: Office revenue includes rental revenues, expense reimbursements and lease termination income from office properties. Office revenue decreased to $147,811,000, or by 15.0%, for the year ended December 31, 2018 compared to $173,853,000 for the year ended December 31, 2017. The decrease was primarily due 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 in 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 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, an increase in revenue at certain of our California and Washington, D.C. properties due to increases in occupancy and or rental rates, and an increase from real estate tax refunds related to prior years received during the year ended December 31, 2018 for the property in Washington, D.C. that we sold in October 2017.
Hotel Revenue: Hotel revenue increased to $38,789,000, or by 0.5%, for the year ended December 31, 2018 compared to $38,585,000 for the year ended December 31, 2017.
Multifamily Revenue: Multifamily revenue of $13,400,000 for the year ended December 31, 2017 was related to three multifamily properties in Dallas, Texas, which were sold in May and June 2017, one multifamily property in New York, New York, which was sold in September 2017, and one multifamily property in Houston, Texas, which was sold in December 2017. As a result of the aforementioned sales, there was no multifamily revenue during 2018.
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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%, for the year ended December 31, 2018 compared to $10,221,000 for the year ended December 31, 2017. The increase was 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 and a decrease related to a break-up fee received during the year ended December 31, 2017.
Expenses
Office Expenses: Office expenses decreased to $57,004,000, or by 18.1%, for the year ended December 31, 2018 compared to $69,631,000 for the year ended December 31, 2017. The decrease was primarily due 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.
Hotel Expenses: Hotel expenses increased to $25,295,000, or by 0.6%, for the year ended December 31, 2018 compared to $25,136,000 for the year ended December 31, 2017.
Multifamily Expenses: Multifamily expenses of $7,952,000 for the year ended December 31, 2017 were related to three multifamily properties in Dallas, Texas, which were sold in May and June 2017, one multifamily property in New York, New York, which was sold in September 2017, and one multifamily property in Houston, Texas, which was sold in December 2017. As a result of the aforementioned sales, there were no multifamily expenses during 2018.
Lending Expenses: Lending expenses represent expenses from our lending subsidiaries, including interest expense, general and administrative expenses and fees to related party. Lending expenses increased to $5,714,000, or by 16.9%, for the year ended December 31, 2018 compared to $4,888,000 for the year ended December 31, 2017. The increase is 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 with our secured borrowings, partially offset by a decrease in payroll related expenses.
Asset Management and Other Fees to Related Parties: Asset management fees and other fees to related parties, which have not been allocated to our operating segments, were $22,006,000 for the year ended December 31, 2018, a decrease of $4,781,000, compared to $26,787,000 for the year ended December 31, 2017. Asset management fees totaled $17,880,000 for the year ended December 31, 2018 compared to $22,229,000 for the year ended December 31, 2017. Asset management fees are calculated based on a percentage of the daily average adjusted fair value of CIM Urban'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's assets 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 increases in the fair value of CIM Urban’s real estate assets based on the December 31, 2017 appraisals as well as incremental capital expenditures during 2018. CIM Commercial also pays a Base Service Fee to the Administrator, a related party, which totaled $1,079,000 for the year ended December 31, 2018 compared to $1,060,000 for the year ended December 31, 2017. In addition, the Administrator received compensation and or reimbursement for performing certain services for CIM Commercial and its subsidiaries that are not covered by the Base Service Fee. For the years ended December 31, 2018 and 2017, we expensed $2,783,000 and $3,065,000 for such services, respectively. For the years ended December 31, 2018 and 2017, we also expensed $264,000 and $433,000, respectively, related to corporate services subject to reimbursement by us under the CIM SBA Staffing and Reimbursement Agreement.
Interest Expense: Interest expense, which has not been allocated to our operating segments, was $25,482,000 for the year ended December 31, 2018, a decrease of $8,588,000 compared to $34,070,000 for the year ended December 31, 2017. The decrease in interest expense, which includes the impact of interest rate swaps and loan fee amortization expense, is primarily due to lower average outstanding balances under the unsecured credit and term loan facilities, and revolving credit facility as a
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result of aggregate repayments of $215,000,000 of outstanding borrowings on our unsecured term loan facility in August and November 2017, the payoff of 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.
General and Administrative Expenses: General and administrative expenses, which have not been allocated to our operating segments, were $4,928,000 for the year ended December 31, 2018, an increase of $1,910,000 compared to $3,018,000 for the year ended December 31, 2017. The increase was primarily due to certain expenses related to our multifamily properties sold during the year ended December 31, 2017, which were expensed in 2018, and an increase in legal and other professional fees and shareholder services expenses.
Transaction Costs: Transaction costs were $938,000 for the year ended December 31, 2018, a decrease of $10,924,000 compared to $11,862,000 for the year ended December 31, 2017. The decrease was primarily due to the payments totaling $11,845,000 that we made in August 2017 in connection with a lawsuit filed by the City and County of San Francisco claiming past due real property transfer tax relating to a transaction in a prior year, partially offset by an increase in abandoned project costs. In September 2018, we filed a lawsuit against the City and County of San Francisco seeking a refund of the $11,845,000 in penalties, interest and legal fees paid. We disputed that such penalties, interest and legal fees were payable but, in order to contest the asserted tax obligations, we had to pay such amounts to the City and County of San Francisco in August 2017. We have been vigorously pursuing this litigation and intend to continue to do so.
Depreciation and Amortization Expense: Depreciation and amortization expense was $53,228,000 for the year ended December 31, 2018, a decrease of $5,136,000 compared to $58,364,000 for the year ended December 31, 2017. The decrease was primarily due to the sale of one office property in San Francisco, California that was held for sale starting in February 2017 and sold in March 2017, the sale of three multifamily properties in Dallas, Texas that were held for sale in May 2017 and sold in May and June 2017, the sale of two office properties and a parking garage in Sacramento, California and Charlotte, North Carolina, that were held for sale in April 2017 and sold in June 2017, the sale of one office property in Los Angeles, California that was held for sale in May 2017 and sold in September 2017, the sale of two multifamily properties in New York, New York and Houston, Texas that were held for sale in July 2017 and sold in September and December 2017, respectively, the sale of two office properties in Washington, D.C. that were held for sale in August 2017 and sold in August and October 2017, and the acceleration of tenant improvement depreciation and lease commission amortization during the year ended December 31, 2017 in connection with the early termination of a large tenant at one of our California properties who vacated in December 2017, partially offset by depreciation expense related to two office properties in San Francisco, California and Beverly Hills, California, which were acquired in December 2017 and January 2018, respectively, as well as incremental capital expenditures in 2018.
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.
Impairment of Real Estate: Impairment of real estate was $0 for the year ended December 31, 2018 and $13,100,000 for the year ended December 31, 2017. In August 2017, we negotiated an agreement with an unrelated third-party for the sale of one office property in Washington, D.C., which was sold in October 2017. We determined the book value of this property exceeded its estimated fair value less costs to sell, and as such, an impairment charge of $13,100,000 was recognized for the year ended December 31, 2017. Our determination of the fair value of such property was based on the sale price negotiated with the third-party buyer.
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Gain on sale of real estate: Gain on sale of real estate was $0 for the year ended December 31, 2018 and $408,098,000 for the year ended December 31, 2017. We recognized a gain on sale of real estate 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 of real estate of $11,613,000 in connection with the sale 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 property and a parking garage in Sacramento, California, and $28,648,000 in connection with the sale of a multifamily property in Dallas, Texas, all of which were consummated 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, 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, 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.
Provision for Income Taxes: Provision for income taxes was $925,000 for the year ended December 31, 2018, a decrease of $451,000, compared to $1,376,000 for the year ended December 31, 2017, due to a decrease in taxable income at one of our taxable REIT subsidiaries.
Liquidity and Capital Resources
Sources and Uses of Funds
In September 2014, CIM Commercial entered into an $850,000,000 unsecured credit facility with a bank syndicate which consisted of a $450,000,000 revolver, a $325,000,000 term loan and a $75,000,000 delayed-draw term loan. Outstanding advances under the revolver bore interest at (i) the base rate plus 0.20% to 1.00% or (ii) LIBOR plus 1.20% to 2.00%, depending on the maximum consolidated leverage ratio. Outstanding advances under the term loans bore interest at (i) the base rate plus 0.15% to 0.95% or (ii) LIBOR plus 1.15% to 1.95%, depending on the maximum consolidated leverage ratio. Our unsecured credit facility matured on September 30, 2018.
In May 2015, CIM Commercial entered into an unsecured term loan facility with a bank syndicate pursuant to which CIM Commercial could borrow up to a maximum of $385,000,000. Outstanding advances under the term loan facility bore interest at (i) the base rate plus 0.60% to 1.25% or (ii) LIBOR plus 1.60% to 2.25%, depending on the maximum consolidated leverage ratio, which interest rate was effectively converted to a fixed rate of 3.16% through interest rate swaps. The term loan facility had a maturity date in May 2022. On November 2, 2015, $385,000,000 was drawn under the term loan facility. Proceeds from the term loan facility were used to repay balances outstanding under our unsecured credit facility. During the year ended December 31, 2017, we repaid $215,000,000 of outstanding borrowings on our unsecured term loan facility. In connection with such paydowns, we wrote off deferred loan costs of $1,988,000 and related accumulated amortization of $705,000, a proportionate amount to the borrowings being repaid, which was recorded as loss on early extinguishment of debt for the year ended December 31, 2017. On October 30, 2018, we repaid and terminated the $170,000,000 of outstanding borrowings on our unsecured term loan facility using proceeds from our new revolving credit facility (as described below). In connection with such paydown and termination, we wrote off the remaining deferred loan costs of $1,872,000 and related accumulated amortization of $1,064,000, which was recorded as loss on early extinguishment of debt for the year ended December 31, 2018.
In June 2016, we entered into six mortgage loan agreements with an aggregate principal amount of $392,000,000. A portion of the net proceeds from the loans was used to repay outstanding balances under our unsecured credit facility and the remaining portion was used to repurchase shares of our Common Stock in a private repurchase in September 2016. On September 21, 2017, in connection with the sale of an office property in Los Angeles, California, one mortgage loan with an outstanding principal balance of $21,700,000, collateralized by such property, was assumed by the buyer, and we recognized a loss on early extinguishment of debt of $367,000 for the year ended December 31, 2017, which represents the write-off of deferred loan costs of $259,000 and related accumulated amortization of $32,000, and transaction costs of $140,000. On March 1, 2019, additional mortgage loans, with an aggregate outstanding principal balance of $205,500,000 at such time, were legally defeased in connection with the sale of the related properties. The cash outlay required for this defeasance in the net amount of $224,086,000 was based on the purchase price of U.S. government securities that will generate sufficient cash flow to fund continued interest payments on the loans from the effective date of this defeasance through the date on which we could repay the loans at par. As a result of this defeasance, we recognized a loss on early extinguishment of debt of $19,290,000 for the year ended December 31, 2019, which represents the sum of the difference between the purchase price of U.S. government securities of $224,086,000 and the aggregate outstanding principal balance of the mortgage loans of $205,500,000, the write-off of
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deferred loan costs of $637,000 and related accumulated amortization of $170,000, and transaction costs of $237,000. On March 14, 2019, in connection with the sale of an office property in San Francisco, California, one mortgage loan with an outstanding principal balance of $28,200,000 at such time was assumed by the buyer. As a result of this assumption, we recognized a loss on early extinguishment of debt of $178,000 for the year ended December 31, 2019, which represents the write-off 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 for the year ended December 31, 2019, which represents the sum of the difference between the purchase price of U.S. government securities of $44,108,000 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.
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 $38,200,000 of unguaranteed SBA 7(a) loan-backed notes. The securitization uses a trust formed for the benefit of the note holders (the "Trust") which is considered a variable interest entity ("VIE"). Applying the consolidation requirements for VIEs under the accounting rules in Accounting Standards Codification ("ASC") Topic 810, Consolidation, 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. The SBA 7(a) loan-backed notes are collateralized solely by the right to receive payments and other recoveries attributable to the unguaranteed portions of certain of our SBA 7(a) loans receivable. 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%. We reflect the SBA 7(a) loans receivable as assets on our consolidated balance sheets and the SBA 7(a) loan-backed notes as debt on our consolidated balance sheets. The restricted cash on our consolidated balance sheets as of December 31, 2019 and 2018 included $3,306,000 and $3,174,000, respectively, of funds related to our SBA 7(a) loan-backed notes.
In October 2018, CIM Commercial entered into a revolving credit facility with a bank syndicate pursuant to which CIM Commercial can borrow up to a maximum of $250,000,000, subject to a borrowing base calculation. The revolving credit facility is secured by deeds of trust on certain properties. Outstanding advances under the revolving credit facility bear interest at (i) the base rate plus 0.55% or (ii) LIBOR plus 1.55%. At December 31, 2019, the variable interest rate was 3.29%. The interest rate on the first $120,000,000 of one-month LIBOR indexed variable rate borrowings on our revolving credit facility was effectively converted to a fixed rate of 3.11% through interest rate swaps until such swaps were terminated on March 11, 2019. The 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 revolving credit facility matures in October 2022 and provides for one one-year extension option under certain conditions. On October 30, 2018, we borrowed $170,000,000 on this facility to repay outstanding borrowings on our unsecured term loan facility. On December 28, 2018, we repaid $40,000,000 of outstanding borrowings on our revolving credit facility and we terminated one interest rate swap with a notional value of $50,000,000. On February 28, 2019 and March 11, 2019, we repaid $10,000,000 and $120,000,000, respectively, of outstanding borrowings on our revolving credit facility using cash on hand and net proceeds from the Asset Sale, and, in connection with the March 11, 2019 repayment, we terminated our two remaining interest rate swaps, which had an aggregate notional value of $120,000,000. At March 12, 2020, December 31, 2019 and December 31, 2018, $159,500,000, $153,000,000 and $130,000,000, respectively, was outstanding under the revolving credit facility, and approximately $67,400,000, $73,900,000 and $91,000,000, respectively, was available for future borrowings. The revolving credit facility is not subject to any financial covenants, but is subject to a borrowing base calculation that determines the amount we can borrow.
On March 28, 2017, in connection with the sale of an office property in San Francisco, California, we paid off a mortgage with an outstanding balance of $25,331,000 using proceeds from the sale. As a result, we recognized a loss on early extinguishment of debt of $1,534,000 for the year ended December 31, 2017, which represents a prepayment penalty of $1,508,000 and the write-off of deferred loan costs of $165,000 and related accumulated amortization of $139,000.
On May 30, 2017, in connection with the sale of two multifamily properties, both located in Dallas, Texas, we paid off two mortgages with an aggregate outstanding principal balance of $15,448,000 using proceeds from the sales. As a result, we recognized a loss on early extinguishment of debt of $2,014,000 for the year ended December 31, 2017, which represents prepayment penalties of $1,901,000 and the write-off of deferred loan costs of $298,000 and related accumulated amortization of $185,000.
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On June 23, 2017, in connection with the sale of a multifamily property in Dallas, Texas, we paid off a mortgage with an outstanding principal balance of $23,333,000 using proceeds from the sale. As a result, we recognized a loss on early extinguishment of debt of $2,925,000 for the year ended December 31, 2017, which represents a prepayment penalty of $2,812,000 and the write-off of deferred loan costs of $304,000 and related accumulated amortization of $191,000.
On December 15, 2017, in connection with the sale of a multifamily property in Houston, Texas, a mortgage with an outstanding principal balance of $28,560,000, collateralized by such property, was assumed by the buyer. As a result, we recognized a loss on early extinguishment of debt of $92,000 for the year ended December 31, 2017, which represents the write-off of deferred loan costs of $264,000 and related accumulated amortization of $172,000.
On March 1, 2019, in connection with the sale of an office property in Washington, D.C., we prepaid the related mortgage loan with an outstanding principal balance of $46,000,000 at such time, using proceeds from the sale. As a result, we recognized a loss on early extinguishment of debt of $5,603,000 for the year ended December 31, 2019, which represents a prepayment penalty of $5,325,000 and the write-off of deferred loan costs of $537,000 and related accumulated amortization of $259,000.
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. 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 share at an annual rate of 5.5% of the Series A Preferred Stock Stated Value (i.e., the equivalent of $0.34375 per share per quarter). 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 is at 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 of such Series A Preferred Warrants. 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, 2019, we had issued 4,484,376 Series A Preferred Units and received net proceeds of $102,565,000 after commissions, fees and allocated costs. As of December 31, 2019, there were 4,468,315 shares of Series A Preferred Stock and 4,484,376 Series A Preferred Warrants to purchase 1,164,432 shares of Common Stock outstanding. As of December 31, 2019, 16,061 shares of Series A Preferred Stock had been redeemed. In December 2019, we received a request to redeem 800 shares of Series A Preferred Stock, which were redeemed in January 2020. As of December 31, 2019, such shares are included in accounts payable and accrued expenses on our consolidated balance sheet.
On November 21, 2017, we issued 8,080,740 shares of Series L Preferred Stock and received net proceeds of $207,845,000 after commissions, fees, allocated costs, and a discount. Each share of Series L Preferred Stock has a Series L Preferred Stock Stated Value of $28.37 per share, subject to adjustment. Holders of 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 of Series L Preferred Stock at an annual rate of 5.5% of the Series L Preferred Stock Stated Value (i.e., the equivalent of $1.56035 per share per year), with the first distribution paid in January 2019. 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 1.0% per year, up to a maximum rate of 8.5% 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 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 Directors announced an Initial Dividend on shares of our Common Stock for fiscal year 2020 in the aggregate amount of $4,380,644.70.
On October 22, 2019, the Company commenced the Tender Offer for the purchase of up to 2,693,580 shares of Series L Preferred Stock, 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. 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 unpaid dividends on the Series L Preferred Stock as of November 20, 2019), as converted to and paid in ILS. The total cost to repurchase the tendered shares, including professional fees to complete the Tender Offer of $462,000 but excluding the dividends accrued in respect of such shares, was $75,155,000, which was primarily funded from borrowings under the revolving credit facility. We recognized $5,873,000 of redeemable preferred stock redemptions in our consolidated statement of operations for the year ended December 31, 2019 in connection with the Tender Offer. 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.
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Since February 2020, we have been conducting a continuous public offering of up to approximately $785,000,000 of our Series A Preferred Stock and Series D Preferred Stock. Since such time, our Series A Preferred Stock is no longer being issued as a unit with an accompanying Series A Preferred Warrant. Holders of Series A Preferred Stock and Series D 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 5.5% of the Series A Preferred Stock Stated Value (i.e., the equivalent of $0.34375 per share per quarter) and 5.65% of the Series D Preferred Stock Stated Value (i.e., the equivalent of $0.35313 per share per quarter), respectively.
On March 16, 2020, the Company established an “at the market” (“ATM”) program through which it may, from time to time in its discretion, offer and sell shares of Common Stock having an aggregate offering price of up to $25,000,000 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. The Company intends 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 16, 2020, no sales of Common Stock have been made under the ATM program.
We currently have substantial borrowing capacity, and may finance our future activities through one or more of the following methods: (i) offerings of shares of Common Stock, preferred stock, senior unsecured securities, and or other equity and debt securities; (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.
Our long-term liquidity needs will consist primarily of funds necessary for acquisitions of assets, development or repositioning of properties (including, without limitation, (i) development of an existing surface parking lot at 3601 S Congress Avenue into approximately 42,000 square feet of additional office space, which development is expected to cost approximately $15,300,000, of which costs of $5,671,000 had been incurred as of December 31, 2019, (ii) a repositioning of an existing office building at 4750 Wilshire Boulevard into vibrant, collaborative office space, which repositioning is expected to cost approximately $14,500,000, of which costs of $1,258,000 had been incurred as of December 31, 2019, and (iii) renovations of the guest rooms, food and beverage amenities, public areas, meeting rooms and other amenities at the Sheraton Grand Hotel in Sacramento, California, which renovations are expected to cost approximately $26,300,000, of which costs of $2,423,000 had been incurred as of December 31, 2019), 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 methods described in the immediately preceding paragraph. 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 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.
Cash Flow Analysis
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
Our cash and cash equivalents and restricted cash, inclusive of cash and restricted cash included in assets held for sale, net, totaled $35,947,000 and $77,926,000 at December 31, 2019 and 2018, respectively. 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 recoveries from our tenants, and loan related activity. Our cash flows from operating activities are also impacted by fluctuations in operating expenses and other general and administrative costs. Net cash provided by operating activities totaled $40,985,000 for the year ended December 31, 2019 compared to $61,456,000 for the year ended December 31, 2018. The decrease was primarily due to a $16,405,000 decrease in net income adjusted for the gain on sale of real estate, depreciation and amortization expense, impairment of real estate, and loss on early extinguishment of debt, a decrease of $14,109,000 in proceeds from the sale of guaranteed loans, a decrease of $13,842,000 resulting from a higher level of working capital used compared to the prior period, and a decrease of $2,085,000 in principal collected on loans subject to secured borrowings, partially offset by a decrease of $25,961,000 in loans funded.
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Our cash flows from investing activities are primarily related to property acquisitions and sales, 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.
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 was $1,000,157,000 compared to $6,535,000 in the corresponding period in 2018. We had net debt payments inclusive of secured borrowings and SBA 7(a) loan-backed notes of the lending business, of $38,100,000 for the year ended December 31, 2019, compared with net debt payments of $11,157,000 for the year ended December 31, 2018. Additionally, for the year ended December 31, 2019, we had an outflow of $268,194,000 for investments in marketable securities in connection with the legal defeasance of certain mortgage loans and an outflow of $5,660,000 for prepayment penalties and other payments related to the early extinguishment of debt in connection with the Asset Sale. The source of funds used to pay dividends of $648,591,000 for the year ended December 31, 2019, which includes an annual dividend on the Series L Preferred Stock of $14,045,000 paid in January 2019, was cash provided by operating activities and cash on hand at the beginning of the period, as well as proceeds from the Asset Sale, while the source of funds used to pay dividends of $25,643,000 for the year ended December 31, 2018 was cash provided by operating activities. During the year ended December 31, 2019, we had an outflow of $75,155,000 for the repurchase of Series L Preferred Stock. Proceeds from the issuance of our Series A Preferred Units were $37,582,000 during the year ended December 31, 2019 compared to $36,057,000 in the corresponding period in 2018, while cash used for the payment of deferred stock offering costs totaled $1,320,000 for the year ended December 31, 2019, compared to $1,136,000 in the corresponding period in 2018. Cash used for payment of deferred loan costs totaled $34,000 during the year ended December 31, 2019, compared to $4,234,000 in the corresponding period in 2018, which primarily related to our revolving credit facility we entered into in October 2018 and the issuance of unguaranteed SBA 7(a) loan-backed notes in May 2018.
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Our cash and cash equivalents and restricted cash, inclusive of cash and restricted cash included in assets held for sale, net, totaled $77,926,000 and $154,739,000 at December 31, 2018 and 2017, respectively. 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 recoveries from our tenants, and loan related activity. Our cash flows from operating activities are also impacted by fluctuations in operating expenses and other general and administrative costs. Net cash provided by operating activities totaled $61,456,000 for the year ended December 31, 2018 compared to net cash used in operating activities of $2,724,000 for the year ended December 31, 2017. The increase was primarily due to an increase of $54,175,000 resulting from a lower level of working capital used compared to the prior period, primarily due to a prior period $20,000,000 deposit for the office property acquired in January 2018, an increase of $8,936,000 in net income adjusted for the gain on sale of real estate, depreciation and amortization expense, impairment of real estate, loss on early extinguishment of debt, and the transfer of the right to collect supplemental real estate tax reimbursements at an office property in San Francisco, California that we sold in March 2017, an increase of $2,830,000 in proceeds from the sale of guaranteed loans, and a $1,582,000 decrease in loans funded, partially offset by a $976,000 decrease in principal collected on loans subject to secured borrowings.
Our cash flows from investing activities are primarily related to property acquisitions and sales, expenditures for development or repositioning of properties, capital expenditures and cash flows associated with loans originated at our lending segment. Net cash used in investing activities for the year ended December 31, 2018 was $131,734,000 compared to net cash provided by investing activities of $969,865,000 in the corresponding period in 2017. The decrease was primarily due to $1,018,476,000 in cash generated from the sale of real estate during the year ended December 31, 2017, and an increase in the acquisition of real estate cash outflow of $92,417,000, partially offset by a decrease of $9,046,000 in additions to investments in real estate.
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, 2018 was $6,535,000 compared to $989,011,000 in the corresponding period in 2017. The increase in cash flows from financing activities was primarily due to $886,010,000 used during the year ended December 31, 2017 to repurchase our Common Stock and net debt payments, inclusive of secured borrowings and SBA 7(a) loan-backed notes of the lending business, of $11,157,000 for 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
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borrowings on our unsecured term loan facility in August and November 2017, and the prepayment of mortgages with an aggregate outstanding principal balance of $64,112,000 in the corresponding period in 2017 in connection with the sale of real estate. Additionally, for the year ended December 31, 2017, we had an outflow of $6,361,000 for prepayment penalties and other payments related to early extinguishment of debt. Proceeds from the issuance of Series L Preferred Stock and Series A Preferred Units were $0 and $36,057,000, respectively, for the year ended December 31, 2018 compared to $210,377,000 and $28,197,000, respectively, in the corresponding period in 2017, while cash used for the payment of deferred stock offering costs totaled $1,136,000 for the year ended December 31, 2018, compared to $3,832,000 in the corresponding period in 2017. The source of funds used to pay dividends of $25,643,000 for the year ended December 31, 2018 was cash provided by operating activities, while the source of funds used to pay dividends of $43,449,000 in the corresponding period in 2017 was cash on hand at the beginning of the period of $144,449,000. Cash used for the payment of deferred loan costs totaled $4,234,000 for the year ended December 31, 2018, which primarily related to the revolving credit facility we entered into in October 2018 and the issuance of unguaranteed SBA 7(a) loan-backed notes in May 2018, compared to $304,000 for the year ended December 31, 2017.
Summarized Contractual Obligations, Commitments and Contingencies
The following summarizes our contractual obligations at December 31, 2019:
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 | |||||||||
(1) | Represents the junior subordinated notes, SBA 7(a) loan-backed notes, and revolving credit facility. |
(2) | Principal payments on SBA 7(a) loan-backed notes, which are included in Other, and secured borrowings are generally dependent upon cash flows received from the underlying loans. Our estimate of their repayment is based on scheduled payments on the underlying loans. Our estimate will differ from actual amounts to the extent we experience prepayments and or loan liquidations or charge-offs. No payment is due unless payments are received from the borrowers on the underlying loans. |
(3) | Excludes premiums and discounts. For the mortgage payable and junior subordinated notes, the interest expense is calculated based on the effective interest rate on the related debt. For our revolving credit facility, we use the balance outstanding and the applicable rates in effect at December 31, 2019 to calculate the unused commitment fees. For our secured borrowings related to our government guaranteed loans, we use the variable rate in effect at December 31, 2019. |
Off Balance Sheet Arrangements
At December 31, 2019, we did not have any off-balance sheet arrangements.
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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, among others, affect 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.
Valuation of Investments in Real Estate
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. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which 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.
The Company's process for evaluating real estate impairment involves the comparison of the fair value of each asset group or property to its carrying value. The Company estimates fair value primarily using the income approach. The income approach is based on the present value of the estimated future cash flows attributable to the respective property. This requires management to make significant assumptions related to certain inputs, including the market discount rates and terminal capitalization rates. The valuation of investments in real estate was determined to be a critical accounting policy. The evaluation of market discount rates and terminal capitalization rates requires a subjective evaluation based on the specific property and market and the related comparison to comparable sales data and published sources of these assumptions. Changes in the assumptions could have a significant impact on either the fair value, the amount of impairment charge, if any, or both.
Allowance for Loan Loss Reserves
As described in Notes 2 and 5 to the consolidated financial statements included in this Annual Report on Form 10-K, the Company has loans receivable of $67,532,000 and loan loss reserves of $598,000 as of December 31, 2019. On a quarterly basis, and more frequently if indicators exist, we evaluate the collectability of our loans receivable. Our 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' business models and future operations in accordance with ASC 450-20, Contingencies-Loss Contingencies, and ASC 310-10, Receivables. For the years ended December 31, 2019, 2018 and 2017, we recorded $66,000, $147,000 and $97,000 of impairment on our loans receivable, respectively. There were no material loans receivable subject to credit risk which were considered to be impaired at December 31, 2019 or 2018. We also establish 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. In addition to the reserves established on loans not considered impaired that have been evaluated under a specific evaluation, we establish 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.
The evaluation of the collectability of our loans receivable is highly subjective and is based in part on factors that could differ materially from actual results in future periods. If these factors change, we may recognize an impairment loss, which could be material.
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FINRA Estimated Per Share Value
We have prepared an estimate of the per share value of our Series A Preferred Stock as of December 31, 2019 in order to assist broker-dealers that are participating in our public offering of Series A 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, 2019 (the "Calculated Assets and 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, by (ii) the number of shares of Series A 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 expressly provide that the amount that a holder of Series A Preferred Stock would be entitled to receive upon the redemption of the Series A Preferred Stock or the liquidation of the Company would be equal to the Series A Preferred Stock Stated Value, plus 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 be entitled to receive an amount greater than the Maximum Value upon the redemption of such shares or the liquidation of the Company. Accordingly, although the estimated value of the Series A Preferred Stock, calculated based on the Calculated Assets and Liabilities as described above, exceeded the Maximum Value, the Company determined that the estimated value of the Series A Preferred Stock, as of December 31, 2019, was equal to $25.00 per share, plus accrued and unpaid dividends.
Dividends
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 share of Series A Preferred Stock at an annual rate of 5.5% of the Series A Preferred Stock Stated Value (i.e., the equivalent of $0.34375 per share per quarter). Dividends on each share of Series A Preferred Stock begin accruing on, and are cumulative from, the date of issuance.
We expect to pay dividends on the Series A Preferred Stock in arrears on a monthly basis in accordance with the foregoing provisions, 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 payment of dividends on the Series A Preferred Stock will be determined by our Board of Directors, in its sole discretion, and may vary from time to time.
Cash dividends on our Series A Preferred Stock paid in respect of the years ended December 31, 2019 and 2018 consist of the following:
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 | ||||
On January 28, 2020, we declared a quarterly cash dividend of $0.34375 per share of our Series A Preferred Stock, or portion thereof for issuances during the period from January 1, 2020 to March 31, 2020. As a result, $0.114583 per share was paid on February 18, 2020 to holders of record of Series A Preferred Stock at the close of business on February 5, 2020, $0.114583 per share will be paid on March 16, 2020 to holders of record of Series A Preferred Stock at the close of
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business on March 5, 2020, and $0.114583 per share will be paid on April 15, 2020 to holders of record of Series A Preferred Stock at the close of business on April 5, 2020.
Further, on March 2, 2020, we declared a quarterly cash dividend of $0.34375 per share of our Series A Preferred Stock, or portion thereof for issuances during the period from April 1, 2020 to June 30, 2020. As a result, $0.114583 per share will be paid on May 15, 2020 to holders of record of Series A Preferred Stock at the close of business on May 5, 2020, $0.114583 per share will be paid on June 15, 2020 to holders of record of Series A Preferred Stock at the close of business on June 5, 2020, and $0.114583 per share will be paid on July 15, 2020 to holders of record of Series A Preferred Stock at the close of business on July 5, 2020.
Holders of Series D 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 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 D Preferred Stock begin accruing on, and are cumulative from, the date of issuance.
We expect to pay the Series D Dividend in arrears on a monthly basis in accordance with the foregoing provisions, 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 the Series D Dividend will be determined by our Board of Directors, in its sole discretion, and may vary from time to time.
As of March 12, 2020, there were 5,600 shares of Series D Preferred Stock outstanding. On March 2, 2020, we declared a quarterly cash dividend of $0.235417 per share of our Series D Preferred Stock, or portion thereof for issuances during the period from February 1, 2020 to March 31, 2020, and declared a quarterly cash dividend of $0.353125 per share of our Series D Preferred Stock, or portion thereof for issuances during the period from April 1, 2020 to June 30, 2020. The quarterly dividend per share is lower in the first quarter as it covers a two-month period, whereas the second quarter covers a three-month period because the first issuance of the Series D Preferred Stock occurred in February 2020. These dividends will be payable as follows: $0.117708 per share to be paid on March 16, 2020 to holders of record of Series D Preferred Stock at the close of business on March 5, 2020, $0.117708 per share to be paid on April 15, 2020 to holders of record of Series D Preferred Stock at the close of business on April 5, 2020, $0.117708 per share to be paid on May 15, 2020 to holders of record of Series D Preferred Stock at the close of business on May 5, 2020, $0.117708 per share to be paid on June 15, 2020 to holders of record of Series D Preferred Stock at the close of business on June 5, 2020, and $0.117708 per share to be paid on July 15, 2020 to holders of record of Series D Preferred Stock at the close of business on July 5, 2020.
Holders of 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 of Series L Preferred Stock at an annual rate of 5.5% of 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.
We expect to pay dividends on the Series L Preferred Stock in arrears on an annual basis in accordance with the foregoing provisions, 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. 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 1.0% per year, up to a maximum rate of 8.5% 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 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 Directors announced an Initial Dividend on shares of our Common Stock for fiscal year 2020 in the aggregate amount of $4,380,644.70.
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Cash dividends on our Series L Preferred Stock paid in respect of the years ended December 31, 2019 and 2018 consist of the following:
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) | |||
(1) | Excludes $3,744,000, which represents a prorated cash dividend from January 1, 2019 to November 20, 2019 related to the 2,693,580 shares of Series L Preferred Stock that were repurchased in connection with the Series L Preferred Stock Tender Offer on November 20, 2019. |
(2) | Includes $1,436,000, which represents a prorated cash dividend from November 20, 2017 to December 31, 2017. For the year ended December 31, 2017, the accumulated dividends of $1,436,000 are included in the numerator for purposes of calculating basic and diluted net income (loss) attributable to common stockholders per share. |
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.
Cash dividends per share of Common Stock paid in respect of the years ended December 31, 2019 and 2018 consist of the following:
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 | ||||
(1) | Amounts have been adjusted to give retroactive effect to the Reverse Stock Split. |
On March 2, 2020, we declared a cash dividend of $0.075 per share of our Common Stock, to be paid on March 25, 2020 to stockholders of record at the close of business on March 13, 2020.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The fair value of our mortgages payable is sensitive to fluctuations in interest rates. Discounted cash flow analysis is generally used to estimate the fair value of our mortgages payable, using a rate of 3.67% at December 31, 2019, 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 $386,923,000 as of December 31, 2019 and 2018, respectively, have fair values of $99,764,000 and $377,364,000, respectively.
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
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floating rate debt or the fair values of our fixed rate debt. At December 31, 2019 and 2018 (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), $97,100,000 (or 31.2%) and $416,300,000 (or 66.8%) of our debt, respectively, was fixed rate mortgage loans, and $214,504,000 (or 68.8%) and $206,604,000 (or 33.2%), respectively, was floating rate borrowings. Based on the level of floating rate debt outstanding at December 31, 2019 and 2018, and before the impact of the interest rate swaps, as applicable, a 12.5 basis point change in LIBOR would result in an annual impact to our earnings of approximately $268,000 and $258,000, 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.
In order to manage financing costs and interest rate exposure related to our one-month LIBOR indexed variable rate borrowings, on August 13, 2015, we entered into ten interest rate swap agreements with multiple counterparties totaling $385,000,000 of notional value. These swap agreements became effective on November 2, 2015. These interest rate swaps effectively converted the interest rate on our one-month LIBOR indexed variable rate interest payments into a fixed weighted average rate of 1.563% plus the credit spread, which was 1.55% at December 31, 2018, or an all-in rate of 3.11%. During the year ended December 31, 2017, we repaid $215,000,000 of outstanding one-month LIBOR indexed variable rate borrowings and we terminated seven interest rate swaps with an aggregate notional value of $215,000,000, for which we received termination payments, net of fees, of $973,000. On December 28, 2018, we repaid $40,000,000 of outstanding one-month LIBOR indexed variable rate borrowings and we terminated one interest rate swap with a notional value of $50,000,000, for which we received a termination payment, net of fees, of $684,000. On March 11, 2019, we repaid $120,000,000 of outstanding one-month LIBOR indexed variable rate borrowings and we terminated our two remaining interest rate swaps with an aggregate notional value of $120,000,000, for which we received aggregate termination payments, net of fees, of $1,302,000. For a description of our derivative contracts, see Note 12 to our consolidated financial statements in Item 15 of this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is incorporated herein by reference to the Financial Statements and 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, 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) 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's rules and forms and include controls and procedures designed to ensure the information required to be disclosed by the Company in such reports is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
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's assessment with the Audit Committee of the Board of Directors.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
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Treadway Commission in Internal Control—Integrated Framework (2013). Based on their assessment, management determined that as of December 31, 2019, the Company's internal control over financial reporting was effective based on those criteria.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2019 has been audited by BDO USA, 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
Shareholders and Board of Directors
CIM Commercial Trust Corporation
Dallas, TX
Opinion on Internal Control over Financial Reporting
We have audited CIM Commercial Trust Corporation and its subsidiaries’ (the “Company’s”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets 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, 2020 expressed an unqualified opinion thereon.
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. 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 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 included 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, LLP
Los Angeles, CA
March 16, 2020
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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, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item regarding the Company’s 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 2020 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 2020 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 2020 Annual Meeting of Stockholders. Such information is incorporated herein by reference. Information relating to securities authorized for issuance under the Company’s 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 2020 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 2020 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
97
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) | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
*4.1 | ||
4.2 | ||
4.3 | ||
98
4.4 | ||
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 | ||
99
10.14 | ||
10.15 | ||
*10.16 | ||
*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.
100
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.
CIM Commercial Trust Corporation | |||
Dated: | March 16, 2020 | By: | /s/ DAVID THOMPSON |
David Thompson | |||
Chief Executive Officer | |||
Dated: | March 16, 2020 | 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, 2020 | ||
David Thompson | Officer) | |||
/s/ Nathan D. DeBacker | Chief Financial Officer (Principal Financial | March 16, 2020 | ||
Nathan D. DeBacker | Officer and Principal Accounting Officer) | |||
/s/ Douglas Bech | Director | March 16, 2020 | ||
Douglas Bech | ||||
/s/ Robert Cresci | Director | March 16, 2020 | ||
Robert Cresci | ||||
/s/ Kelly Eppich | Director | March 16, 2020 | ||
Kelly Eppich | ||||
/s/ Frank Golay | Director | March 16, 2020 | ||
Frank Golay | ||||
/s/ Shaul Kuba | Director | March 16, 2020 | ||
Shaul Kuba | ||||
/s/ Richard Ressler | Director | March 16, 2020 | ||
Richard Ressler | ||||
/s/ Avraham Shemesh | Director | March 16, 2020 | ||
Avraham Shemesh | ||||
101
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Financial Statements | Page Number | |
F-1
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
CIM Commercial Trust Corporation
Dallas, TX
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CIM Commercial Trust Corporation (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 (collectively referred to as the “consolidated financial statements”). In 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.
We also have 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2014.
Los Angeles, CA
March 16, 2020
F-2
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
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 | |||
(1) | All share and per share amounts have been adjusted to give retroactive effect to the one-for-three reverse stock split of our common stock effected on September 3, 2019. |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
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 | ||||||||
(1) | All share and per share amounts have been adjusted to give retroactive effect to the one-for-three reverse stock split of our common stock effected on September 3, 2019. |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
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
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Equity
(In thousands, except share and per share amounts)
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 | ||||||||||||||||||||
(1) | All share and per share amounts have been adjusted to give retroactive effect to the one-for-three reverse stock split of our common stock effected on September 3, 2019. |
(Continued)
F-6
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Equity (Continued)
(In thousands, except share and per share amounts)
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 | ||||||||||||||||||||
(1) | All share and per share amounts have been adjusted to give retroactive effect to the one-for-three reverse stock split of our common stock effected on September 3, 2019. |
(Continued)
F-7
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Equity (Continued)
(In thousands, except share and per share amounts)
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 | ||||||||||||||||||||
(1) | All share and per share amounts have been adjusted to give retroactive effect to the one-for-three reverse stock split of our common stock effected on September 3, 2019. |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
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)
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
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 | $ | — | $ | — | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-9
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017
1. ORGANIZATION AND OPERATIONS
CIM Commercial Trust Corporation ("CIM Commercial" or the "Company"), a Maryland corporation and real estate investment trust ("REIT"), together with its wholly-owned subsidiaries ("we," "us" or "our") primarily acquires, owns, and operates Class A and creative office assets in vibrant and improving metropolitan communities throughout the United States (including improving and developing such assets). These communities are located in areas that include traditional downtown areas and suburban main streets, which have high barriers to entry, high population density, positive population trends and a propensity for growth. We were originally organized in 1993 as PMC Commercial Trust ("PMC Commercial"), a Texas real estate investment trust.
On July 8, 2013, PMC Commercial entered into a merger agreement with CIM Urban REIT, LLC ("CIM REIT"), an affiliate of CIM Group, L.P. ("CIM Group" or "CIM"), and subsidiaries of the respective parties. CIM REIT was a private commercial REIT and was the owner of CIM Urban Partners, L.P. ("CIM Urban"). The merger was completed on March 11, 2014 (the "Acquisition Date").
Our common stock, $0.001 par value per share ("Common Stock"), is currently traded on the Nasdaq Global Market ("Nasdaq") under the ticker symbol "CMCT", and on the Tel Aviv Stock Exchange (the "TASE") under the ticker symbol "CMCT-L." Our Series L preferred stock, $0.001 par value per share ("Series L Preferred Stock"), is currently traded on Nasdaq and on the TASE, in each case under the ticker symbol "CMCTP." We have authorized for issuance 900,000,000 shares of common stock and 100,000,000 shares of preferred stock ("Preferred Stock").
We filed Articles of Amendment (the "Reverse Stock Split Amendment") to effectuate a one-for-three reverse stock split of our Common Stock, effective on September 3, 2019 (the "Reverse Stock Split"). Pursuant to the Reverse Stock Split Amendment, every three shares of Common Stock issued and outstanding immediately prior to the effective time of the Reverse Stock Split were converted into one share of Common Stock, par value $0.003 per share. In connection with the Reverse Split Amendment, the Company filed Articles of Amendment to revert the par value of the Common Stock issued and outstanding from $0.003 per share to $0.001 per share, effective as of September 3, 2019, following the effective time of the Reverse Split Amendment. All Common Stock and per share of Common Stock amounts set forth in this Annual Report on Form 10-K have been adjusted to give retroactive effect to the Reverse Stock Split, unless otherwise stated.
CIM Commercial has qualified and intends to continue to qualify as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the "Code").
On March 16, 2020, the Company established an “at the market” (“ATM”) program through which it may, from time to time in its discretion, offer and sell shares of Common Stock having an aggregate offering price of up to $25,000,000 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. The Company intends 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 16, 2020, no sales of Common Stock have been made under the ATM program.
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").
Principles of Consolidation—The consolidated financial statements include the accounts of CIM Commercial and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
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
F-10
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
will be capitalized. Investments in real estate are stated at depreciated cost. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:
Buildings and improvements | 15 - 40 years |
Furniture, fixtures, and equipment | 3 - 5 years |
Tenant improvements | Shorter of the useful lives or the terms of the related leases |
We capitalize 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.
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. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. The estimated fair value of the asset group identified for step two of the impairment testing under GAAP is based on either the income approach with market discount rate, terminal capitalization rate and rental rate assumptions being most critical to such analysis, or on the sales comparison approach to similar properties. Assets held for sale are reported at the lower of the asset's carrying amount or fair value, less costs to sell. We 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 (Note 3).
Cash and Cash Equivalents—Cash and cash equivalents include short-term liquid investments with initial maturities of three months or less.
Restricted Cash—Our 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 our loans receivable.
Loans Receivable—Our loans receivable are carried at their unamortized principal balance less unamortized acquisition discounts and premiums, retained loan discounts and loan loss reserves. For loans originated under the Small Business Administration's ("SBA") 7(a) Guaranteed Loan Program ("SBA 7(a) Program"), we sell 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 us is valued on a 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 and $7,234,000 as of December 31, 2019 and 2018, respectively
At the Acquisition Date, the carrying value of our loans was adjusted to estimated fair market value and acquisition discounts of $33,907,000 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 and $884,000 remained as of December 31, 2019 and 2018, respectively.
A loan receivable is generally classified as non-accrual (a "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 we 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.
F-11
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
On a quarterly basis, and more frequently if indicators exist, we evaluate the collectability of our loans receivable. Our 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' business models and future operations in accordance with Accounting Standards Codification ("ASC") 450-20, Contingencies—Loss Contingencies, and ASC 310-10, Receivables. For the years ended December 31, 2019, 2018 and 2017, we recorded $66,000, $147,000 and $97,000 of impairment on our loans receivable, respectively. There were no material loans receivable subject to credit risk which were considered to be impaired at December 31, 2019 or 2018. We also establish 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. In addition to the reserves established on loans not considered impaired that have been evaluated under a specific evaluation, we establish 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.
Accounts Receivable—Accounts receivable are carried net of the allowances for uncollectible amounts. Management's determination of the adequacy of these allowances is based primarily upon evaluation of historical loss experience, individual receivables, current economic conditions, and other relevant factors. The allowances are increased or decreased through the provision for bad debts. The allowance for uncollectible accounts receivable was $45,000 and $160,000 as of December 31, 2019 and 2018, respectively.
Deferred Rent Receivable and Charges—Deferred rent receivable and charges consist of deferred rent, deferred leasing costs, deferred offering costs (Note 10) 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 our 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 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 are 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 of $5,275,000 and $4,213,000 related to our offering of Series A Preferred Units are included in 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.
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), the holder of such shares has the right to require the Company to redeem such shares at a redemption price of 100% of the Series A Preferred Stock Stated Value (as defined in Note 10) or 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 A Preferred Stock Stated Value or Series D Preferred Stock Stated Value, as applicable, plus accrued and unpaid dividends, without a redemption fee, and 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
F-12
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
applicable, plus accrued and unpaid dividends. The applicable redemption price payable upon redemption of any Series A Preferred Stock is payable in cash or, on or after the first anniversary of the issuance of such shares of Series A Preferred Stock to be redeemed, in the Company's sole discretion, in cash 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 applicable redemption price payable upon redemption of any Series D Preferred Stock is payable in cash or, in the Company's sole discretion, 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. Since a holder of Series A Preferred Stock has the right to request redemption of such shares and redemptions prior to the first anniversary are to be paid in cash, we have recorded the activity related to our Series A Preferred Stock in temporary equity. We recorded the activity related to our Series A Preferred Warrants (Note 10) in permanent equity. We will record the activity related to our Series D Preferred Stock (Note 10) in permanent equity. On the first anniversary of the date of original issuance of a particular share of Series A Preferred Stock, we reclassify 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 date.
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 (as defined in Note 10), plus, provided certain conditions are met, all accrued and unpaid distributions. Notwithstanding the foregoing, a holder of shares of our Series L Preferred Stock may require us 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 do not declare and pay in full the distributions on the Series L Preferred Stock for any annual period prior to such fifth anniversary or (2) we do 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's sole discretion, in the form of (A) cash in Israeli New Shekels ("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) our net asset value ("NAV") per share of our Common Stock as most recently published by the Company as of the effective date of redemption and (ii) the volume-weighted average price of our 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 our Common Stock, based on the conversion mechanisms set forth in (A) and (B), respectively. We recorded the activity related to our Series L Preferred Stock in permanent equity.
Purchase Accounting for Acquisition of Investments in Real Estate—We apply 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 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.
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" 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'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 to the in-place leases and (ii) management's estimate of fair market lease rates for the corresponding in-place leases measured
F-13
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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.
A tax abatement intangible asset was recorded for a property acquired in 2011 and sold in 2017, based on an approval for a property tax abatement, due to the location of the property. The tax abatement intangible asset was amortized over eight years and was written off in connection with the disposition.
Revenue Recognition—We use a five-step model to recognize revenue for contracts with customers. The five-step model requires that we (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy the performance obligation.
Revenue from leasing activities
We operate as a lessor of real estate assets, primarily in Class A and creative office assets. In determining whether our contracts with our tenants constitute leases, we determined that our contracts explicitly identify the premises and that any substitution rights to relocate the tenant to other premises within the same building stated in the contract are not substantive. Additionally, so long as payments are made timely under these contracts, our tenants 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 premises are used to conduct their operations. Therefore, our contracts with our 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 assured 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 determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are 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 and $12,958,000 are presented net of accumulated amortization of $2,029,000 and $6,188,000 at December 31, 2019 and 2018, 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 in the period the expenses are incurred. Tenant reimbursements are recognized and presented on a gross basis when we are 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 have 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 our leases.
In addition to minimum rents, certain leases provide for additional rents based upon varying percentages of tenants' sales in excess of annual minimums. Percentage rent is recognized once 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.
We derive parking revenues from leases with third-party operators. Our parking leases provide for additional rents based upon varying percentages of tenants' sales in excess of annual minimums. Parking percentage rent is recognized once lessees' specific sales targets have been met. Included in rental and other property income for the years ended December 31,
F-14
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
2019, 2018 and 2017, is $160,000, $1,509,000 and $1,881,000, respectively, of parking percentage rent. Included in hotel income for the years ended December 31, 2019, 2018 and 2017, is $0, $0, and $733,000, respectively, of parking percentage rent.
For the years ended December 31, 2019, 2018 and 2017, we 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 | ||||||
(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 our operating leases. |
Revenue from lending activities
Interest income included in interest and other income is comprised of interest earned on loans and our 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.
Revenue from hotel activities
Hotel revenue is recognized upon establishment of a contract with a customer. At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, the Company considers all of the goods or services promised in the contract regardless of whether they are explicitly stated or implied by customary business practices. Various performance obligations of hotel revenues can be categorized as follows:
• 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.
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 as the good or service is delivered to the customer.
At inception of these contracts with customers for hotel revenues, the contractual price is equivalent to the transaction price as there are no elements of variable consideration to estimate.
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
We recognized hotel income of $35,633,000, $35,672,000 and $35,576,000 for the years ended December 31, 2019, 2018 and 2017, respectively. Below is a reconciliation of the hotel revenue from contracts with customers to the total hotel segment revenue disclosed in Note 19:
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(in thousands) | ||||||||||||
Hotel properties | ||||||||||||
Hotel income | $ | 35,633 | $ | 35,672 | $ | 35,576 | ||||||
Rental and other property income | 2,947 | 2,922 | 2,877 | |||||||||
Interest and other income | 168 | 195 | 132 | |||||||||
Hotel revenues | $ | 38,748 | $ | 38,789 | $ | 38,585 | ||||||
Tenant recoveries outside of the lease agreements
Tenant recoveries outside of the lease agreements are related to construction projects in which our tenants have agreed to fully reimburse us 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. Amounts 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, 2018 and 2017, respectively, which are included in interest and other income on the consolidated statements of operations. As of December 31, 2019, 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, which approximates the effective interest method.
Stock-Based Compensation Plans—We have issued and continue to issue restricted shares under stock-based compensation plans described more fully in Note 8. We use fair value recognition provisions to account for all awards granted, modified or settled.
Earnings per Share ("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.
Distributions—Distributions on our 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 our Board of Directors and declared by the Company.
Assets Held for Sale and Discontinued Operations—In the ordinary course of business, we may periodically enter into agreements to dispose of our assets. Some of these agreements are non-binding because either they do not obligate either
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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 do not classify assets that are subject to such non-binding agreements as held for sale.
We classify assets as held for sale, if material, when they meet the necessary criteria, which include: a) management commits to and actively embarks upon a plan to sell the assets, b) the assets to be sold are available for immediate sale in their present condition, c) the sale is expected to be completed within one year under terms usual and customary for such sales and d) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. We generally believe that we meet these criteria when the plan for sale has been approved by our management, having the authority to approve the sale, there are no known significant contingencies related to the sale and management believes it is probable that the sale will be completed within one year.
Assets held for sale are recorded at the lower of cost or estimated fair value less cost to sell. In addition, if we 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.
We sold all of our multifamily properties during the year ended December 31, 2017. We assessed the sale of these properties (Note 3) in accordance with ASC 205-20, Discontinued Operations. In our assessment, we considered, among other factors, the materiality of the revenue, net operating income, and total assets of our multifamily segment. Based on our qualitative and quantitative assessment, we concluded the disposals did not represent a strategic shift that would have a major effect on our operations and financial results and therefore should not be classified as discontinued operations on our consolidated financial statements.
Derivative Financial Instruments—As part of risk management and operational strategies, from time to time, we 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.
Changes in the estimated fair value of a derivative (effective and ineffective components) that is highly effective and that is designated and qualifies as a cash flow hedge are initially recorded in other comprehensive income ("OCI"), and are subsequently reclassified into earnings as a component of interest expense when the variability of cash flows of the hedged transaction affects earnings (e.g., when periodic settlements of a variable-rate asset or liability are recorded in earnings). When an interest rate swap designated as a cash flow hedge no longer qualifies for hedge accounting, we recognize changes in the estimated fair value of the hedge previously deferred to accumulated other comprehensive income ("AOCI"), along with any changes in estimated fair value occurring thereafter, through earnings. We classify cash flows from interest rate swap agreements as net cash provided by operating activities on the consolidated statements of cash flows as our accounting policy is to present the cash flows from the hedging instruments in the same category in the consolidated statements of cash flows as the category for the cash flows from the hedged items. See Note 12 for disclosures about our derivative financial instruments and hedging activities.
Income Taxes—We have elected to be taxed as a REIT under the provisions of the Code. To the extent we qualify for taxation as a REIT, we generally will not be subject to a federal corporate income tax on our taxable income that is distributed to our stockholders. We may, however, be subject to certain federal excise taxes and state and local taxes on our income and property. If we fail to qualify as a REIT in any taxable year, we 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, we 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 our taxable income within the specified time in accordance with the Code.
We have wholly-owned taxable REIT subsidiaries ("TRS's") which are subject to federal income taxes. The income generated from the taxable REIT subsidiaries is taxed at normal corporate rates. Deferred tax assets and liabilities are
F-17
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases.
We have established a policy on classification of penalties and interest related to audits of our federal and state income tax returns. If incurred, our policy for recording interest and penalties associated with audits will be to record such items as a component of general and administrative expense. Penalties, if incurred, will be recorded in general and administrative expense and interest paid or received will be recorded in interest expense or interest income, respectively, in our consolidated statements of operations.
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 our tax returns to determine whether the tax positions are "more likely than 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 have reviewed all open tax years and concluded that the application of ASC 740 resulted in no material effect to our consolidated financial position or results of operations.
Consolidation Considerations 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, 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.
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. Actual results could differ from those estimates.
Reclassifications—Certain prior period amounts have been reclassified to conform with the current period presentation. With the adoption of Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) and the election of the lessor practical expedient not to separate lease and non-lease components, $9,039,000 and $9,264,000 of expense reimbursements were reclassified as rental and other property income on the consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively, and $984,000 and $7,382,000 of non-lease component expense reimbursements recognized under the revenue recognition guidance were reclassified as interest and other income on the consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively. Under the new leasing guidance, bad debt expense associated with changes in the collectability assessment for operating leases shall be recorded as adjustments to rental and other property income rather than rental and other property operating expenses. The impact of this reclassification resulted in a $254,000 and $317,000 reclassification from rental and other property expenses to rental and other property income on the consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively. Additionally, to conform with the current period presentation, we reclassified $808,000 and $1,854,000 from interest expense to loss on early extinguishment of debt on the consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively, and $6,361,000 from gain on sale of real estate to loss on early extinguishment of debt on the consolidated statement of operations for the year ended December 31, 2017. In accordance with ASU 2016-15, we changed previously reported amounts within the accompanying consolidated statement of cash flows for the year ended December 31, 2017 to reclassify $6,361,000 of prepayment penalties and other payments for early extinguishment of debt from net cash provided by investing activities to net cash used in financing activities. To comply with the current year presentation, we reclassified $272,000, related to certain funds at our hotel property, from cash to other assets on the balance sheet as December 31, 2018. Such reclassification, as well as reclassification of $1,579,000 of funds at our hotel property from cash to other assets as of December 31, 2017, resulted in a $1,307,000 and $1,579,000 increase in cash provided by (used in) operating activities for the years ended December 31, 2018 and 2017, respectively.
F-18
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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 our cash and cash equivalents on deposit with what we believe 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 our revenues are earned from properties located in California. We are 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, 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.
Fair Value Measurements—The fair value of our financial assets and liabilities are disclosed in Note 13.
We determine the estimated fair value of financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. The hierarchy for inputs used in measuring fair value is as follows:
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 hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
We disclose the fair value of our debt. We determine the fair value of mortgage notes payable and junior subordinated notes by performing discounted cash flow analyses using an appropriate market discount rate. We calculate the market discount rate for our mortgage notes payable by obtaining period-end treasury or swap rates, as applicable, for maturities that correspond to the maturities of our debt and then adding an appropriate credit spread. These credit spreads take into account factors such as our credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.
We disclose the fair value of our loans receivable. We determine the fair value of loans receivable by performing a present value analysis for the anticipated future cash flows using an appropriate market discount rate taking into consideration the credit risk and using an anticipated prepayment rate.
We estimated the fair value of our interest rate swaps by calculating the credit-adjusted present value of the expected future cash flows of each swap. The calculation incorporated the contractual terms of the derivatives, observable market interest rates, and credit risk adjustments, if any, to reflect the counterparty's as well as our own nonperformance risk.
The carrying amounts of our 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, 2019 and 2018. The carrying amounts of our secured borrowings—government guaranteed loans, SBA 7(a) loan-backed notes and revolving credit facility approximate their fair values, as the interest rates on these securities are variable and approximate current market interest rates.
Segment Information—Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes. Our reportable segments for the years ended December 31, 2019 and 2018 consist of two 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 our lending business. The products for our 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 our hotel segment include revenues generated from the operations of hotel properties and rental income generated from a garage located directly
F-19
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
across the street from one of the hotels. The income from our lending segment includes income from the yield and other related fee income earned on our loans receivable.
Recently Issued Accounting Pronouncements—In February 2016, the Financial Accounting Standards Board ("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.
The guidance provided a package of transition practical expedients, which must be elected as a package and applied consistently by an entity to all of its leases (including those for which the entity is a lessee or a lessor) when applying this guidance to leases that commenced before the effective date of January 1, 2019: (1) An entity need not reassess whether any expired or existing contracts are or contain leases; (2) an entity need not reassess the lease classification for any expired or existing leases (that is, all leases that were classified as operating leases prior to January 1, 2019 remain classified as operating leases); and (3) an entity need not reassess initial direct costs for any existing leases. The Company elected all the aforementioned transition practical expedients, including the expedients provided under ASU 2018-11.
From a lessee's perspective, the Company determined that there is one office lease for our lending segment that is material to the consolidated balance sheet. Based on our assessment, the lease had been classified as an operating lease and the Company recorded approximately $362,000 as a right-of-use asset and lease liability on the consolidated balance sheet on the effective date of January 1, 2019. As of December 31, 2019, the right-of-use asset and lease liability balance were each approximately $106,000.
From a lessor's perspective, the Company did not record a cumulative effect adjustment on January 1, 2019 as the aforementioned package of practical expedients allowed us to continue accounting for our then-existing or expired leases under the previous accounting guidance, and we applied the new lease accounting guidance to leases that commenced or are modified after the effective date of January 1, 2019. Leases commenced or modified after the effective date have been, and we expect future commencements and modifications of leases in the future will continue to be, classified as operating leases and that we will qualify for the lessor practical expedient provided under ASU 2018-11 to not separate lease and non-lease components. Additionally, if following the effective date, our tenants have made or make payments for taxes or insurance directly to a third-party on behalf of the Company as the lessor, we have excluded and will exclude these amounts from the measurement of the contract consideration and consider these lessee costs. Otherwise, any recoveries of these costs are and will be recognized as lease revenue on a gross basis in our consolidated income statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity. The amendments in the ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In November 2018, the FASB issued ASU No. 2018-19, Financial Instruments-
F-20
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
Credit Losses (Topic 326): Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarified that receivables arising from operating leases are not within the scope of the credit losses standards. In April 2019, the FASB issued ASU 2019-04, Financial Instruments-Credit Losses (Topic 326): Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarified the following: (i) an entity’s estimate of expected credit losses should include expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (ii) an entity should consider contractual extension or renewal options that it cannot unconditionally cancel when determining the contractual term over which expected credit losses are measured. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, which allows entities to irrevocably elect the fair value option for existing financial assets on an instrument-by-instrument basis upon adoption of ASU 2016-13. Except for existing held-to-maturity debt securities, the alternative is available for all instruments in the scope of ASC 326-20 that are eligible for the fair value option in ASC 825-10. If an entity elects the fair value option, it will recognize a cumulative-effect adjustment for the difference between the fair value of the instrument and its carrying value. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), which deferred the effective date of Topic 326 for certain entities, including smaller reporting companies, public entities that are not SEC filers, and entities that are not public business entities. For public entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2019. For smaller reporting companies, public entities that are not SEC filers, and entities that are not public business entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2022. Early adoption is permitted for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2018. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which made narrow-scope improvements to the credit losses standard, including, but not limited to, adjustments for transition relief for troubled debt restructurings and disclosures related to accrued interest receivables. We are currently in the process of evaluating the impact of adoption of this new accounting guidance on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which simplified and expanded the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplified the application of Topic 815, Derivatives and Hedging, through targeted improvements in key practice areas. In addition, the ASU prescribed how hedging results should be presented and required incremental disclosures. Further, the ASU provided partial relief on the timing of certain aspects of hedge documentation and eliminated the requirement to recognize hedge ineffectiveness separately in earnings in the current period. For public entities, the ASU was effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018. The Company has evaluated the guidance and determined that the effects of ASU 2017-12 did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public entities will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. For public entities, the ASU is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2019. Early adoption is permitted in any interim period after issuance of the ASU. The Company has evaluated the guidance and determined that the effects of ASU 2018-13 is not expected to have a material impact on our consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (the “SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The guidance permits the use of the OIS rate based on the SOFR as a U.S. benchmark rate for purposes of applying hedge accounting. The SOFR is a volume-weighted median interest rate that is calculated daily based on overnight transactions from the prior day’s activity in specified segments of the U.S. Treasury repo market. It has been selected as the preferred replacement for the U.S. dollar London Interbank Offered Rate ("LIBOR"), which will be phased out by the end of 2021. For public entities, the ASU is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2019. Early adoption is permitted in any interim period after issuance of the ASU. The Company has evaluated the guidance and determined that the effects of ASU 2018-16 is not expected to have a material impact on our consolidated financial statements.
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. For public entities, the ASU is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2020. Early adoption is permitted in any interim period after the issuance of the ASU. The Company has evaluated the guidance and determined the effects of ASU 2019-12 is not expected to have a material impact on our consolidated financial statements.
3. ACQUISITIONS AND DISPOSITIONS
The fair value of real estate acquired is recorded 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 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.
2019 Transactions—There were no acquisitions during the year ended December 31, 2019.
We sold 100% fee-simple interests in the following properties to unrelated third-parties during the year ended December 31, 2019. Transaction costs related to these sales were expensed as incurred.
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 | ||||||||||||||
(1) | The "March Oakland Properties" consist of 1901 Harrison Street, 2100 Franklin Street, 2101 Webster Street, and 2353 Webster Street Parking Garage. |
(2) | The "Union Square Properties" consist of 899 North Capitol Street, 901 North Capitol Street and 999 North Capitol Street. Prior to the sale, we determined that the book values of such properties exceeded their estimated fair values and recognized an impairment charge of $69,000,000 for the year ended December 31, 2019 (Note 2). Our determination of the fair values of these properties was based on negotiations with the third-party buyer and the contract sales price. The gain on sale includes $113,000 of extinguishment of noncontrolling interests as a result of the sale. |
F-22
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
2018 Transactions—On January 18, 2018, we acquired a 100% fee-simple interest in an office property known as 9460 Wilshire Boulevard from an unrelated third-party. The property has approximately 68,866 square feet of office space and 22,884 square feet of retail space and is located in Beverly Hills, California. The acquisition was funded with proceeds from our Series L Preferred Stock offering, and the acquired property is reported as part of the office segment (Note 19). We performed an analysis and, based on our analysis, we determined this acquisition was an asset purchase and not a business combination. As such, transaction costs were capitalized as incurred in connection with 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 | |||||
(1) | In December 2017, at the time we entered into the purchase and sale agreement, we made a $20,000,000 non-refundable deposit to an escrow account that was included in other assets on our consolidated balance sheet at December 31, 2017. Transaction costs that were capitalized in connection with the acquisition of this property totaled $48,000, which are not included in the purchase price above. |
There were no dispositions during the year ended December 31, 2018.
2017 Transactions—On December 29, 2017, we acquired a 100% fee-simple interest in an office property known as 1130 Howard Street from an unrelated third-party. The office property has approximately 21,194 square feet and is located in San Francisco, California. The acquisition was funded with proceeds from our Series L Preferred Stock offering, and the acquired property is reported as part of the office segment (Note 19). We performed an analysis and, based on our analysis, we determined this acquisition was an asset purchase and not a business combination. As such, transaction costs were capitalized as incurred in connection with this acquisition.
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 | |||||
(1) | Transaction costs that were capitalized and assumption of liabilities totaled $1,915,000, which are excluded from the purchase price above. |
F-23
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
We sold 100% fee-simple interests in the following properties, other than 800 N Capitol, in which we sold a 100% leasehold interest, to unrelated third-parties 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 | |||||||||||||
(1) | Reflects the square footage of office properties and number of units of multifamily properties. |
(2) | A mortgage collateralized by this property was prepaid in connection with our sale of the property (Note 7). |
(3) | A mortgage collateralized by this property was assumed by the buyer in connection with our sale of the property (Note 7). |
(4) | In August 2017, we negotiated an agreement with an unrelated third-party for the sale of this property. We determined that the book value of this property exceeded its estimated fair value less costs to sell, and recognized an impairment charge of $13,100,000 for the year ended December 31, 2017 (Note 2). Our determination of fair value was based on the sales price negotiated with the third-party buyer. |
F-24
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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 | |||||
(1) | Debt, net for the year ended December 31, 2019 is presented net of deferred loan costs of $1,704,000 and accumulated amortization of $576,000. Additionally, a mortgage loan with an outstanding principal balance of $28,200,000 was assumed by the buyer in connection with the sale of our property in San Francisco, California. A mortgage loan with an outstanding principal balance of $46,000,000 was prepaid in connection with the sale in March 2019 of our property in Washington, D.C. that was collateral for the loan. Mortgage loans with an aggregate outstanding principal balance of $205,500,000 were legally defeased in connection with the sale of the March Oakland Properties that were collateral for the loans. A mortgage loan with an outstanding principal balance of $39,500,000 was legally defeased in connection with the sale in May 2019 of our property in Oakland, California that was collateral for the loan. |
(2) | Debt, net for the year ended December 31, 2017 is presented net of $665,000 of premium on assumed mortgage. Additionally, debt of $50,260,000 was assumed by certain buyers in connection with sales of certain properties. |
F-25
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
The results of operations of the properties we acquired have been included in the consolidated statements of operations from the date of acquisition. The purchase price of the acquisitions completed during the years ended December 31, 2018 and 2017 were less than 10% of our total assets as of the respective most recent annual consolidated financial statements filed at or prior to the date of acquisition. The fair value of the net assets acquired for the aforementioned acquisitions during the years ended December 31, 2019, 2018 and 2017 are as follows:
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 | |||||
(1) | Acquired in-place leases have a weighted average amortization period of 3 years and 5 years, respectively, for the 2018 and 2017 acquisitions. |
(2) | Acquired above-market leases have a weighted average amortization period of 2 years and 7 years, respectively, for the 2018 and 2017 acquisitions. |
(3) | Acquired below-market leases have a weighted average amortization period of 3 years and 2 years, respectively, for the 2018 and 2017 acquisitions. |
F-26
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
Assets Held for Sale
As noted above, in March 2019, we sold a 100% fee-simple interest in an office property located at 260 Townsend Street in San Francisco, California to an unrelated third-party. The office property had been classified as held for sale as of December 31, 2018, as the purchase and sale agreement was entered into and became subject to a non-refundable deposit prior to December 31, 2018.
The following is the detail of the carrying amounts of assets and liabilities for the office properties that are classified as held for sale on our consolidated balance sheet as of December 31, 2018:
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 | ||
(1) | Investments in real estate of $24,832,000 are presented net of accumulated depreciation of $7,709,000. |
(2) | Deferred rent receivable and charges consist of deferred rent receivable of $2,909,000 and deferred leasing costs of $1,669,000 net of accumulated amortization of $569,000. |
(3) | Other intangible assets, net, represent acquired in-place leases of $1,778,000, which are presented net of accumulated amortization of $1,558,000. |
(4) | Debt, net, includes the outstanding principal balance of 260 Townsend Street of $28,200,000, net of deferred loan costs of $243,000 and accumulated amortization of $61,000. |
F-27
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
4. INVESTMENTS IN REAL ESTATE
Investments in real estate consist of the following:
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 | |||
For the years ended December 31, 2019, 2018, and 2017, we recorded depreciation expense of $22,209,000, $43,499,000, and $49,427,000, respectively.
5. LOANS RECEIVABLE
Loans receivable consist of the following:
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).
SBA 7(a) Loans Receivable, Subject to Credit Risk—Represents the unguaranteed portions of loans originated under the SBA 7(a) Program which were retained by the Company and the government guaranteed portions of such loans that have not yet been fully funded or sold.
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.
At December 31, 2019 and 2018, 99.6% and 99.7%, respectively, of our loans subject to credit risk were current. We classify loans with negative characteristics in substandard categories ranging from special mention to doubtful. At December 31, 2019 and 2018, $1,362,000 and $235,000, respectively, of loans subject to credit risk were classified in substandard categories.
F-28
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
At December 31, 2019 and 2018, our loans subject to credit risk were 98.7% and 98.3%, respectively, concentrated in the hospitality industry.
6. OTHER INTANGIBLE ASSETS
A schedule of our intangible assets and liabilities and related accumulated amortization and accretion as of December 31, 2019 and 2018, is as follows:
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 | ||||||||||||
The amortization of the acquired above-market leases, which decreased rental and other property income, was $63,000, $51,000 and $3,000 for the years ended December 31, 2019, 2018 and 2017, respectively. The amortization of the acquired in-place leases included in depreciation and amortization expense was $2,112,000, $3,691,000 and $808,000 for the years ended December 31, 2019, 2018 and 2017, respectively. Tax abatement amortization included in rental 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.
F-29
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
A schedule of future amortization and accretion of acquisition related intangible assets and liabilities as of December 31, 2019, is as follows:
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 | ) | ||||||
F-30
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
7. DEBT
Information on our debt is as follows:
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 mortgages payable are secured by deeds of trust on certain of the properties and assignments of rents. The junior subordinated notes may be redeemed at par at our option.
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.
SBA 7(a) loan-backed notes are secured by deeds of trust or mortgages.
F-31
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
Deferred loan costs, which represent legal and third-party fees incurred in connection with our borrowing activities, are capitalized and amortized to interest expense on a straight-line basis over the life of the related loan, approximating the effective interest method. Deferred loan costs of $4,535,000 and $5,994,000 are presented net of accumulated amortization of $1,494,000 and $876,000 at December 31, 2019 and 2018, respectively, and are a reduction to total debt.
In September 2014, CIM Commercial entered into an $850,000,000 unsecured credit facility with a bank syndicate which consisted of a $450,000,000 revolver, a $325,000,000 term loan and a $75,000,000 delayed-draw term loan. Outstanding advances under the revolver bore interest at (i) the base rate plus 0.20% to 1.00% or (ii) LIBOR plus 1.20% to 2.00%, depending on the maximum consolidated leverage ratio. Outstanding advances under the term loans bore interest at (i) the base rate plus 0.15% to 0.95% or (ii) LIBOR plus 1.15% to 1.95%, depending on the maximum consolidated leverage ratio. Our unsecured credit facility matured on September 30, 2018.
In May 2015, CIM Commercial entered into an unsecured term loan facility with a bank syndicate pursuant to which CIM Commercial could borrow up to a maximum of $385,000,000. Outstanding advances under the term loan facility bore interest at (i) the base rate plus 0.60% to 1.25% or (ii) LIBOR plus 1.60% to 2.25%, depending on the maximum consolidated leverage ratio, which interest rate was effectively converted to a fixed rate of 3.16% through interest rate swaps. The term loan facility had a maturity date in May 2022. On November 2, 2015, $385,000,000 was drawn under the term loan facility. Proceeds from the term loan facility were used to repay balances outstanding under our unsecured credit facility. During the year ended December 31, 2017, we repaid $215,000,000 of outstanding borrowings on our unsecured term loan facility. In connection with such paydowns, we wrote off deferred loan costs of $1,988,000 and related accumulated amortization of $705,000, a proportionate amount to the borrowings being repaid, which was recorded as loss on early extinguishment of debt for the year ended December 31, 2017. On October 30, 2018, we repaid and terminated the $170,000,000 of outstanding borrowings on our unsecured term loan facility using proceeds from our new revolving credit facility (as described below). In connection with such paydown and termination, we wrote off the remaining deferred loan costs of $1,872,000 and related accumulated amortization of $1,064,000, which was recorded as loss on early extinguishment of debt for the year ended December 31, 2018.
In June 2016, we entered into six mortgage loan agreements with an aggregate principal amount of $392,000,000. A portion of the net proceeds from the loans was used to repay outstanding balances under our unsecured credit facility and the remaining portion was used to repurchase shares of our Common Stock in a private repurchase in September 2016. On September 21, 2017, in connection with the sale of an office property in Los Angeles, California, one mortgage loan with an outstanding principal balance of $21,700,000, collateralized by such property, was assumed by the buyer, and we recognized a loss on early extinguishment of debt of $367,000 for the year ended December 31, 2017, which represents the write-off of deferred loan costs of $259,000 and related accumulated amortization of $32,000, and transaction costs of $140,000. On March 1, 2019, additional mortgage loans, with an aggregate outstanding principal balance of $205,500,000 at such time, were legally defeased in connection with the sale of the related properties. The cash outlay required for this defeasance in the net amount of $224,086,000 was based on the purchase price of U.S. government securities that will generate sufficient cash flow to fund continued interest payments on the loans from the effective date of this defeasance through the date on which we could repay the loans at par. As a result of this defeasance, we recognized a loss on early extinguishment of debt of $19,290,000 for the year ended December 31, 2019, which represents the sum of the difference between the purchase price of U.S. government securities of $224,086,000 and the aggregate outstanding principal balance of the mortgage loans of $205,500,000, the write-off of deferred loan costs of $637,000 and related accumulated amortization of $170,000, and transaction costs of $237,000. On March 14, 2019, in connection with the sale of an office property in San Francisco, California, one mortgage loan with an outstanding principal balance of $28,200,000 at such time was assumed by the buyer. As a result of this assumption, we recognized a loss on early extinguishment of debt of $178,000 for the year ended December 31, 2019, which represents the write-off 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 for the year ended December 31, 2019, which represents the sum of the difference between the purchase price of U.S. government securities of $44,108,000 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.
F-32
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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 $38,200,000 of unguaranteed SBA 7(a) loan-backed notes. The securitization uses a trust formed for the benefit of the note holders (the "Trust") which is considered a variable interest entity ("VIE"). Applying the consolidation requirements for VIEs under the accounting rules in ASC Topic 810, Consolidation, 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. The SBA 7(a) loan-backed notes are collateralized solely by the right to receive payments and other recoveries attributable to the unguaranteed portions of certain of our SBA 7(a) loans receivable. 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%. We reflect the SBA 7(a) loans receivable as assets on our consolidated balance sheets and the SBA 7(a) loan-backed notes as debt on our consolidated balance sheets. The restricted cash on our consolidated balance sheets as of December 31, 2019 and 2018 included $3,306,000 and $3,174,000, respectively, of funds related to our SBA 7(a) loan-backed notes.
In October 2018, CIM Commercial entered into a revolving credit facility with a bank syndicate pursuant to which CIM Commercial can borrow up to a maximum of $250,000,000, subject to a borrowing base calculation. The revolving credit facility is secured by deeds of trust on certain properties. Outstanding advances under the revolving credit facility bear interest at (i) the base rate plus 0.55% or (ii) LIBOR plus 1.55%. At December 31, 2019, the variable interest rate was 3.29%. The interest rate on the first $120,000,000 of one-month LIBOR indexed variable rate borrowings on our revolving credit facility was effectively converted to a fixed rate of 3.11% through interest rate swaps until such swaps were terminated on March 11, 2019. The 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 revolving credit facility matures in October 2022 and provides for one one-year extension option under certain conditions. On October 30, 2018, we borrowed $170,000,000 on this facility to repay outstanding borrowings on our unsecured term loan facility. On December 28, 2018, we repaid $40,000,000 of outstanding borrowings on our revolving credit facility and we terminated one interest rate swap with a notional value of $50,000,000 (Note 12). On February 28, 2019 and March 11, 2019, we repaid $10,000,000 and $120,000,000, respectively, of outstanding borrowings on our revolving credit facility using cash on hand and net proceeds from the 2019 asset sales (Note 3), and, in connection with the March 11, 2019 repayment, we terminated our two remaining interest rate swaps, which had an aggregate notional value of $120,000,000 (Note 12). At December 31, 2019 and 2018, $153,000,000 and $130,000,000, respectively, was outstanding under the revolving credit facility, and approximately $73,900,000 and $91,000,000, respectively, was available for future borrowings. The revolving credit facility is not subject to any financial covenants, but is subject to a borrowing base calculation that determines the amount we can borrow.
On March 28, 2017, in connection with the sale of an office property in San Francisco, California, we paid off a mortgage with an outstanding balance of $25,331,000 using proceeds from the sale. As a result, we recognized a loss on early extinguishment of debt of $1,534,000 for the year ended December 31, 2017, which represents a prepayment penalty of $1,508,000 and the write-off of deferred loan costs of $165,000 and related accumulated amortization of $139,000.
On May 30, 2017, in connection with the sale of two multifamily properties, both located in Dallas, Texas, we paid off two mortgages with an aggregate outstanding principal balance of $15,448,000 using proceeds from the sales. As a result, we recognized a loss on early extinguishment of debt of $2,014,000 for the year ended December 31, 2017, which represents prepayment penalties of $1,901,000 and the write-off of deferred loan costs of $298,000 and related accumulated amortization of $185,000.
On June 23, 2017, in connection with the sale of a multifamily property in Dallas, Texas, we paid off a mortgage with an outstanding principal balance of $23,333,000 using proceeds from the sale. As a result, we recognized a loss on early extinguishment of debt of $2,925,000 for the year ended December 31, 2017, which represents a prepayment penalty of $2,812,000 and the write-off of deferred loan costs of $304,000 and related accumulated amortization of $191,000.
On December 15, 2017, in connection with the sale of a multifamily property in Houston, Texas, a mortgage with an outstanding principal balance of $28,560,000, collateralized by such property, was assumed by the buyer. As a result, we recognized a loss on early extinguishment of debt of $92,000 for the year ended December 31, 2017, which represents the write-off of deferred loan costs of $264,000 and related accumulated amortization of $172,000.
F-33
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
On March 1, 2019, in connection with the sale of an office property in Washington, D.C., we prepaid the related mortgage loan with an outstanding principal balance of $46,000,000 at such time, using proceeds from the sale. As a result, we recognized a loss on early extinguishment of debt of $5,603,000 for the year ended December 31, 2019, which represents a prepayment penalty of $5,325,000 and the write-off of deferred loan costs of $537,000 and related accumulated amortization of $259,000.
At December 31, 2019 and 2018, accrued interest and unused commitment fees payable of $650,000 and $1,574,000, respectively, are included in accounts payable and accrued expenses.
Future principal payments on our 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 | |||||||||
(1) | Principal payments on secured borrowings and SBA 7(a) loan-backed notes, which are included in Other, are generally dependent upon cash flows received from the underlying loans. Our estimate of their repayment is based on scheduled payments on the underlying loans. Our estimate will differ from actual amounts to the extent we experience prepayments and or loan liquidations or charge-offs. No payment is due unless payments are received from the borrowers on the underlying loans. |
(2) | Represents the junior subordinated notes, SBA 7(a) loan-backed notes, and revolving credit facility. |
8. STOCK-BASED COMPENSATION PLANS
Restricted Shares—A summary of our restricted shares as of December 31, 2019, 2018 and 2017 and the changes during the years ended is as follows:
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 | |||
F-34
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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 | |||
In May 2016, we granted awards of 1,131 restricted shares of Common Stock to each of the independent members of the Board of Directors (3,393 in aggregate) under the 2015 Equity Incentive Plan, which fully vested in May 2017 based on one year of continuous service. In June 2017, we granted awards of 1,065 restricted shares of Common 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. Compensation expense related to these restricted shares of Common Stock is recognized over the vesting period. We recorded compensation expense of $194,000, $162,000 and $153,000 for the years ended December 31, 2019, 2018 and 2017, respectively, related to these restricted shares of Common Stock.
We issued to two of our executive officers an aggregate of 666 shares of Common Stock on March 6, 2015, which fully vested in March 2017. The restricted shares of Common Stock vested based on two years of continuous service with one-third of the shares of Common Stock vesting immediately upon issuance and one-third vesting at the end of each of the next two years from the date of issuance. Compensation expense related to these restricted shares of Common Stock was recognized over the vesting period. We recognized compensation expense of $0, $0 and $1,000 for the years ended December 31, 2019, 2018 and 2017, respectively, related to these restricted shares of Common Stock.
As of December 31, 2019, there was $75,000 of total unrecognized compensation expense related to shares of Common Stock which will be recognized over the next year. The estimated fair value of restricted shares vested during 2019, 2018 and 2017 was $150,000, $150,000 and $203,000, respectively.
F-35
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
9. EARNINGS PER SHARE ("EPS")
The computations of basic EPS are based on our 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, 2018 and 2017 because their impact was either anti-dilutive or such warrants were not exercisable during such periods (Note 11). Outstanding shares of Series L Preferred Stock were not included in the computation of diluted EPS for the years ended December 31, 2019, 2018 and 2017 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 our basic and diluted per-share amounts for net income (loss) attributable to common stockholders for the years ended December 31, 2019, 2018 and 2017:
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 | ||||
F-36
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
10. REDEEMABLE PREFERRED STOCK
Series A Preferred Stock—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, 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 one 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). 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 have been conducting a continuous public offering with respect to shares of our Series A Preferred Stock, which, since such time, is no longer being issued as a unit with an accompanying Series A Preferred Warrant.
With respect to the payment of dividends, each of the Series A Preferred Stock 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.
Our Series A Preferred Stock is redeemable at the option of the holder (the "Series A Preferred Stock Holder") or CIM Commercial. The redemption schedule of the Series A Preferred Stock allows redemptions at the option of the Series A Preferred Stock Holder from the date of original issuance of any given shares of Series A Preferred Stock at the Series A Preferred Stock Stated Value, less a redemption fee applicable prior to the fifth anniversary of the issuance of such shares, plus accrued and unpaid dividends. CIM Commercial has the right to redeem the Series A Preferred Stock after the fifth anniversary of the issuance of such shares at the Series A Preferred Stock Stated Value, plus accrued and unpaid dividends. At the Company's discretion, redemptions will be paid in cash or, on or after the first anniversary of the issuance of such shares of Series A Preferred Stock, an equal value of Common Stock based on the volume weighted average price of our Common Stock for the 20 trading days prior to the redemption.
As of December 31, 2019, we had issued 4,484,376 Series A Preferred Units and received gross proceeds of $112,106,000 ($111,377,000 of which were allocated to the Series A Preferred Stock and the remaining $729,000 were allocated to the Series A Preferred Warrants). In connection with such issuance, costs specifically identifiable to the offering of Series A Preferred Units, such as commissions, dealer manager fees and other offering fees and expenses, totaled $8,836,000 ($8,697,000 of which were allocated to the Series A Preferred Stock and the remaining $139,000 were allocated to the Series A Preferred Warrants). In addition, as of December 31, 2019, non-issuance-specific costs related to this offering totaled $5,980,000. As of December 31, 2019, we have reclassified and allocated $701,000 and $4,000 from deferred rent receivable and charges to Series A Preferred Stock and Series A Preferred Warrants, respectively, as a reduction to the gross proceeds received. Such reclassification was based on the cumulative number of Series A Preferred Units issued relative to the maximum number of Series A Preferred Units expected to be issued under the offering. As of December 31, 2019, there were 4,468,315 shares of Series A Preferred Stock and 4,484,376 Series A Preferred Warrants to purchase 1,164,432 shares of Common Stock outstanding. As of December 31, 2019, 16,061 shares of Series A Preferred Stock had been redeemed. In December 2019, we received a request to redeem 800 shares of Series A Preferred Stock, which were redeemed in January 2020. As of December 31, 2019, such shares are included in accounts payable and accrued expenses on our consolidated balance sheet.
On the first anniversary of the issuance of a particular share of Series A Preferred Stock, we reclassify 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. As of December 31, 2019, we have reclassified an aggregate of $64,953,000 in net proceeds from temporary equity to permanent equity.
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 share of Series A Preferred Stock at an annual rate of 5.5% of the Series A Preferred Stock Stated Value (i.e., the equivalent of $0.34375 per share per quarter) (the "Series A Dividend"). Dividends on each share of Series A Preferred Stock begin accruing on, and are cumulative from, the date of issuance.
F-37
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
We expect to pay the Series A Dividend in arrears on a monthly basis in accordance with the foregoing provisions, 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 the Series A Dividend will be determined by our Board of Directors, in its sole discretion, and may vary from time to time.
Cash dividends on our Series A Preferred Stock paid in respect of the years ended December 31, 2019 and 2018 consist of the following:
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 | ||||
On January 28, 2020, we declared a quarterly cash dividend of $0.34375 per share of our Series A Preferred Stock, or portion thereof for issuances during the period from January 1, 2020 to March 31, 2020. As a result, $0.114583 per share was paid on February 18, 2020 to holders of record of Series A Preferred Stock at the close of business on February 5, 2020, $0.114583 per share will be paid on March 16, 2020 to holders of record of Series A Preferred Stock at the close of business on March 5, 2020, and $0.114583 per share will be paid on April 15, 2020 to holders of record of Series A Preferred Stock at the close of business on April 5, 2020.
Further, on March 2, 2020, we declared a quarterly cash dividend of $0.34375 per share of our Series A Preferred Stock, or portion thereof for issuances during the period from April 1, 2020 to June 30, 2020. As a result, $0.114583 per share will be paid on May 15, 2020 to holders of record of Series A Preferred Stock at the close of business on May 5, 2020, $0.114583 per share will be paid on June 15, 2020 to holders of record of Series A Preferred Stock at the close of business on June 5, 2020, and $0.114583 per share will be paid on July 15, 2020 to holders of record of Series A Preferred Stock at the close of business on July 5, 2020.
Series D Preferred Stock—Since February 2020, we have been conducting a continuous public offering with respect to shares of our series D preferred stock (the "Series D Preferred Stock"), par value $25.00 per share (the "Series D Preferred Stock Stated Value"), subject to adjustment.
With respect to the payment of dividends, each of the Series D Preferred Stock and Series A Preferred Stock 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 D Preferred Stock and Series A 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.
Our Series D Preferred Stock is redeemable at the option of the holder (the "Series D Preferred Stock Holder") or CIM Commercial. The redemption schedule of the Series D Preferred Stock allows redemptions at the option of the Series D Preferred Stock Holder from the date of original issuance of any given shares of Series D Preferred Stock at the Series D Preferred Stock Stated Value, less a redemption fee applicable prior to the fifth anniversary of the issuance of such shares, plus accrued and unpaid dividends. CIM Commercial has the right to redeem the Series D Preferred Stock after the fifth anniversary of the issuance of such shares at the Series D Preferred Stock Stated Value, plus accrued and unpaid dividends. At the Company's discretion, redemptions will be paid in cash or an equal value of Common Stock based on the volume weighted average price of our Common Stock for the 20 trading days prior to the redemption.
F-38
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
As of December 31, 2019, we had not issued any shares of Series D Preferred Stock as the offering of Series D Preferred Stock began in February 2020. Shares of Series D Preferred Stock will be recorded in permanent equity at the time of their issuance.
Holders of Series D 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 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 D Preferred Stock begin accruing on, and are cumulative from, the date of issuance.
We expect to pay the Series D Dividend in arrears on a monthly basis in accordance with the foregoing provisions, 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 the Series D Dividend will be determined by our Board of Directors, in its sole discretion, and may vary from time to time.
As of March 12, 2020, there were 5,600 shares of Series D Preferred Stock outstanding. On March 2, 2020, we declared a quarterly cash dividend of $0.235417 per share of our Series D Preferred Stock, or portion thereof for issuances during the period from February 1, 2020 to March 31, 2020, and declared a quarterly cash dividend of $0.353125 per share of our Series D Preferred Stock, or portion thereof for issuances during the period from April 1, 2020 to June 30, 2020. The quarterly dividend per share is lower in the first quarter as it covers a two-month period, whereas the second quarter covers a three-month period because the first issuance of the Series D Preferred Stock occurred in February 2020. These dividends will be payable as follows: $0.117708 per share to be paid on March 16, 2020 to holders of record of Series D Preferred Stock at the close of business on March 5, 2020, $0.117708 per share to be paid on April 15, 2020 to holders of record of Series D Preferred Stock at the close of business on April 5, 2020, $0.117708 per share to be paid on May 15, 2020 to holders of record of Series D Preferred Stock at the close of business on May 5, 2020, $0.117708 per share to be paid on June 15, 2020 to holders of record of Series D Preferred Stock at the close of business on June 5, 2020, and $0.117708 per share to be paid on July 15, 2020 to holders of record of Series D Preferred Stock at the close of business on July 5, 2020.
Series L Preferred Stock—On November 21, 2017, we 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. We received gross proceeds of $229,251,000 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 $15,928,000, a discount of $2,946,000, and non-issuance-specific costs of $2,532,000. 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. 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 unpaid dividends on the Series L Preferred Stock as of November 20, 2019), as converted to and paid in ILS. The total cost to repurchase the tendered shares, including professional fees to complete the Tender Offer of $462,000 but excluding the dividends accrued in respect of such shares, was $75,155,000, which was primarily funded from borrowings under the revolving credit facility (Note 7). We recognized $5,873,000 of redeemable preferred stock redemptions in our consolidated statement of operations for the year ended December 31, 2019 in connection with the Tender Offer. 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.
With respect to the payment of dividends, the Series L Preferred Stock ranks senior to our Common Stock (except with respect to and only to the extent of the Initial Dividend) and junior to our 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 L Preferred Stock ranks senior to our Common Stock, both (i) to the extent of the Series L Preferred Stock Stated Value and (ii) following payment to holders of our Common Stock of an 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 our Series A Preferred Stock and Series D Preferred Stock, to the extent of the Series L Preferred Stock Stated Value
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
and junior to our 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.
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 shares of our Series L Preferred Stock may require us 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 do 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 do 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'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 our Common Stock as most recently published by the Company as of the effective date of redemption and (ii) the volume-weighted average price of our 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 our Common Stock, based on the conversion mechanisms set forth in (A) and (B), respectively.
Holders of 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 of Series L Preferred Stock at an annual rate of 5.5% of 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.
We expect to pay dividends on the Series L Preferred Stock in arrears on an annual basis in accordance with the foregoing provisions, 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. 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 1.0% per year, up to a maximum rate of 8.5% 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 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 Directors announced an Initial Dividend on shares of our Common Stock for fiscal year 2020 in the aggregate amount of $4,380,644.70.
Cash dividends on our Series L Preferred Stock paid in respect of the year ended December 31, 2019 and 2018 consist of the following:
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) | |||
(1) | Excludes $3,744,000, which represents a prorated cash dividend from January 1, 2019 to November 20, 2019 related to the 2,693,580 shares of Series L Preferred Stock that were repurchased in connection with the Series L Preferred Stock Tender Offer on November 20, 2019. |
(2) | Includes $1,436,000, which represents a prorated cash dividend from November 20, 2017 to December 31, 2017. For the year ended December 31, 2017, the accumulated dividends of $1,436,000 are included in the numerator for purposes of calculating basic and diluted net income (loss) attributable to common stockholders per share (Note 9). |
Until the fifth anniversary of the date of original issuance of our Series L Preferred Stock, 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 Minimum
F-40
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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. At December 31, 2019 and 2018, 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 during the year ending December 31, 2020, for the first and second quarters of 2020, we will, subject to applicable laws and regulations under Nasdaq and the TASE and the agreement of the Operator and or the Administrator, seek to pay some or all of the asset management fees, the Base Service Fee and or reimbursements under the Master Services Agreement in respect of such quarter in shares of Common Stock. The Company may seek to do so for the third 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).
11. STOCKHOLDERS' EQUITY
Dividends
Cash dividends per share of Common Stock paid in respect of the years ended December 31, 2019 and 2018 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 | ||||
(1) | Amounts have been adjusted to give retroactive effect to the Reverse Stock Split. |
On March 2, 2020, we declared a cash dividend of $0.075 per share of our Common Stock, to be paid on March 25, 2020 to stockholders of record at the close of business on March 13, 2020.
We declared the special cash dividends detailed below to allow the common stockholders that did not participate in the share repurchases as described below to receive the economic benefit of such repurchases. Urban Partners II, LLC ("Urban II"), a fund managed by an affiliate of CIM Group, the Administrator and the Operator of CIM Commercial (each as defined in Note 14), and an affiliate of CIM REIT and CIM Urban, waived its right to receive the April 5, 2017, June 12, 2017, and December 18, 2017 special cash dividends.
On April 5, 2017, we declared a special cash dividend of $0.84 per share of Common Stock ($0.28 per share prior to the Reverse Stock Split), or $601,000 in the aggregate, that was paid on April 24, 2017 to stockholders of record on April 17, 2017.
On June 12, 2017, we declared a special cash dividend of $5.94 per share of Common Stock ($1.98 per share prior to the Reverse Stock Split), or $4,271,000 in the aggregate, that was paid on June 27, 2017 to stockholders of record on June 20, 2017.
On December 18, 2017, we declared a special cash dividend of $2.19 per share of Common Stock ($0.73 per share prior to the Reverse Stock Split), or $1,575,000 in the aggregate, which was paid on January 11, 2018 to stockholders of record on December 29, 2017.
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
On August 30, 2019, in connection with the Program to Unlock Embedded Value in Our Portfolio and Improve Trading Liquidity of Our Common Stock, as defined in "Item 1—Business" of this Annual Report on Form 10-K, we paid a special cash dividend of $42.00 per share of Common Stock ($14.00 per share of Common Stock prior to the Reverse Stock Split) (the “Special Dividend”), or $613,294,000 in the aggregate, to stockholders of record at the close of business on August 19, 2019. The Special Dividend was funded primarily by the net proceeds (after the repayment of debt) received from the sale of ten properties during 2019 (Note 3) and borrowings on our revolving credit facility.
Share Repurchases
On June 12, 2017, we repurchased, in a privately negotiated transaction, canceled and retired 8,727,272 shares of Common Stock from Urban II (26,181,818 shares of Common Stock prior to the Reverse Stock Split). The aggregate purchase price was $576,000,000, or $66.00 per share of Common Stock ($22.00 per share of Common Stock prior to the Reverse Stock Split). We funded the repurchase using available cash from asset sales and short-term borrowings on our unsecured credit facility. As a result of the repurchase, our stockholders' equity was reduced by the amount we paid for the repurchased shares and the related expenses. The Company paid a special cash dividend, as described above, on June 27, 2017 that allowed stockholders that did not participate in the June 12, 2017 private repurchase to receive the economic benefit of such repurchase.
On December 18, 2017, we repurchased, in a privately negotiated transaction, canceled and retired 4,696,969 shares of Common Stock from Urban II (14,090,909 shares of Common Stock prior to the Reverse Stock Split). The aggregate purchase price was $310,000,000, or $66.00 per share of Common Stock ($22.00 per share of Common Stock prior to the Reverse Stock Split). We funded the repurchase using available cash from asset sales. As a result of the repurchase, our stockholders' equity was reduced by the amount we paid for the repurchased shares and the related expenses. The Company paid a special cash dividend, as described above, on January 11, 2018 that allowed stockholders that did not participate in the December 18, 2017 private repurchase to receive the economic benefit of such repurchase.
Series A Preferred Warrants
Prior to February 2020, the Series A Preferred Stock was sold as a unit that included one share of Series A Preferred Stock (Note 10) and one Series A Preferred Warrant (Note 10) which allowed holders of Series A Preferred Warrants to purchase 0.25 of a share of Common Stock depending on when such warrants were issued. 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 is at 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 of such Series A Preferred Warrants. 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.
Proceeds and expenses from the sale of the Series A Preferred Units are 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 4,484,376 Series A Preferred Warrants in connection with our offering of Series A Preferred Units and allocated net proceeds of $586,000, after specifically identifiable offering costs and allocated general offering costs, to the Series A Preferred Warrants in permanent equity.
12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Hedges of Interest Rate Risk
In order to manage financing costs and interest rate exposure related to the one-month LIBOR indexed variable rate borrowings, on August 13, 2015, we entered into ten interest rate swap agreements with multiple counterparties totaling $385,000,000 of notional value. These swap agreements became effective on November 2, 2015. During the year ended December 31, 2017, we repaid $215,000,000 of outstanding one-month LIBOR indexed variable rate borrowings and we terminated seven interest rate swaps with an aggregate notional value of $215,000,000, for which we received termination payments, net of fees, of $973,000. On December 28, 2018, we repaid $40,000,000 of outstanding one-month LIBOR indexed variable rate borrowings and we terminated one interest rate swap with a notional value of $50,000,000, for which we received
F-42
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
a termination payment, net of fees, of $684,000. On March 11, 2019, we repaid $120,000,000 of outstanding one-month LIBOR indexed variable rate borrowings (Note 7) and we terminated our two remaining interest rate swaps with an aggregate notional value of $120,000,000, for which we received aggregate termination payments, net of fees, of $1,302,000. The fair value of our two remaining swaps at the time of termination was $1,421,000 resulting in a net loss of $119,000, which was recorded as a net increase to interest expense on our consolidated statement of operations for the year ended December 31, 2019.
Each of our interest rate swap agreements initially met the criteria for cash flow hedge accounting treatment and we had designated the interest rate swap agreements as cash flow hedges of the risk of variability attributable to changes in the one-month LIBOR. Accordingly, the interest rate swaps were recorded on our consolidated balance sheets at fair value, and prior to August 1, 2018, the changes in the fair value of the swaps were recorded in OCI and reclassified to earnings as an adjustment to interest expense as interest became receivable or payable (Note 2). On July 31, 2018, we determined the hedged forecasted transaction was no longer probable of occurring so all subsequent changes in the fair value of our interest rate swaps were included in interest expense on our consolidated statements of operations. The balance in AOCI as of July 31, 2018 was reclassified to earnings as an adjustment to interest expense on our consolidated statements of operations as the originally designated forecasted transaction affected earnings. For the years ended December 31, 2019 and 2018, $1,806,000 and $1,552,000, respectively, was reclassified from AOCI and decreased interest expense on our consolidated statements of operations, which, during the year ended December 31, 2019, included a write off of $1,580,000 at the time our two remaining interest rate swaps were terminated. Beginning on August 1, 2018, changes in the fair value of the swaps were recorded in interest expense on our consolidated statements of operations. For the years ended December 31, 2019 and 2018, $209,000 and $1,728,000, respectively, was included as an increase in interest expense on our consolidated statements of operations related to the change in the fair value of our interest rate swaps.
Credit-Risk-Related Contingent Features
Each of our interest rate swap agreements contained a provision under which we could also be declared in default under such agreements if we defaulted on the revolving credit facility or if we defaulted on the term loan facility. As of March 11, 2019, the date of termination of such swaps, and December 31, 2018, there have been no events of default under our interest rate swap agreements.
Impact of Hedges on AOCI and Consolidated Statements of Operations
The changes in the balance of each component of AOCI related to our interest rate swaps designated as cash flow hedges are as follows:
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 | ||||||
(1) | The amounts from AOCI were reclassified as a (decrease) increase to interest expense in our consolidated statements of operations. |
Reclassifications from AOCI
As of July 31, 2018, the hedged forecasted transaction was no longer probable of occurring so the interest rate swaps were no longer eligible for hedge accounting and all future changes in fair value of the interest rate swaps were recorded in interest expense on our consolidated statements of operations and no further amounts were deferred into AOCI. The balance in AOCI as of July 31, 2018 was reclassified to earnings as an adjustment to interest expense on our consolidated statements of operations as the originally designated forecasted transaction affected earnings. On March 11, 2019, the remaining balance in
F-43
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
AOCI was reclassified to earnings as a decrease to interest expense on our consolidated statements of operations in connection with the termination of our two remaining interest rate swaps.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Our derivative financial instruments (Note 12) were measured at fair value on a recurring basis and were presented on our consolidated balance sheets at fair value, on a gross basis, excluding accrued interest. The table below presents 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 | ||||||
Interest Rate Swaps—We estimated the fair value of our interest rate swaps by calculating the credit-adjusted present value of the expected future cash flows of each swap. The calculation incorporated the contractual terms of the derivatives, observable market interest rates which we considered to be Level 2 inputs, and credit risk adjustments, if any, to reflect the counterparty's as well as our own nonperformance risk.
The estimated fair values of those financial instruments which are not recorded at fair value on a recurring basis on our consolidated balance sheets are as follows:
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 | |||||||||||||
(1) | The December 31, 2018 carrying amount and estimated fair value of mortgages payable exclude one mortgage loan with a carrying value of $28,018,000 that had been classified as liabilities associated with assets held for sale, net, on our consolidated balance sheet at December 31, 2018 (Notes 3 and 7). |
Management's estimation of the fair value of our financial instruments other than our interest rate swaps is based on a Level 3 valuation in the fair value hierarchy established for disclosure of how a company values its financial instruments. In general, quoted market prices from active markets for the identical financial instrument (Level 1 inputs), if available, should be used to value a financial instrument. If quoted prices are not available for the identical financial instrument, then a determination should be made if Level 2 inputs are available. Level 2 inputs include quoted prices for similar financial instruments in active markets for identical or similar financial instruments in markets that are not active (i.e., markets in which there are few transactions for the financial instruments, the prices are not current, price quotations vary substantially, or in which little information is released publicly). There is limited reliable market information for our financial instruments and we utilize other methodologies based on unobservable inputs for valuation purposes since there are no Level 1 or Level 2 inputs available. Accordingly, Level 3 inputs are used to measure fair value.
F-44
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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 we could realize in a current market exchange.
The carrying amounts of our secured borrowings—government guaranteed loans, SBA 7(a) loan-backed notes and revolving credit facility approximate their fair values, as the interest rates on these securities are variable and approximate current market interest rates.
SBA 7(a) Loans Receivable, Subject to Loan-Backed Notes—These loans receivable represent 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 from the transfer have been recorded as SBA 7(a) loan-backed notes payable. In order to determine the estimated fair value of these loans receivable, we use a present value technique for the anticipated future cash flows using certain assumptions. At December 31, 2019, our assumptions included 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%.
SBA 7(a) Loans Receivable, Subject to Credit Risk—Loans receivable were initially recorded at estimated fair value at the Acquisition Date. Loans receivable originated subsequent to the Acquisition Date are recorded at cost upon origination and adjusted by net loan origination fees and discounts. In order to determine the estimated fair value of our loans receivable, we use a present value technique for the anticipated future cash flows using certain assumptions. At December 31, 2019, our assumptions included discount rates ranging from 5.25% to 7.75% and prepayment rates ranging from 9.85% to 17.50%. At December 31, 2018, our assumptions included discount rates ranging from 6.75% to 9.75% and prepayment rates ranging from 4.91% to 17.50%.
SBA 7(a) Loans Receivable, Subject to Secured Borrowings—These loans receivable represent the government guaranteed portion of loans 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. In order to determine the estimated fair value of these loans receivable, we use a present value technique for the anticipated future cash flows taking into consideration the lack of credit risk. At December 31, 2019, our assumptions included discount rates ranging from 6.75% to 7.50% and prepayment rates ranging from 11.77% to 16.80%. At December 31, 2018, our assumptions included discount rates ranging from 8.75% to 9.50% and prepayment rates ranging from and 10.29% to 17.50%.
Mortgages Payable—The fair values of mortgages payable 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 used to estimate the fair value of our mortgages payable, using a rate of 3.67% at December 31, 2019, and rates ranging from 4.62% to 4.64% at December 31, 2018.
Junior Subordinated Notes—The fair value of the junior subordinated notes is estimated based on current interest rates available for 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% and 7.05% at December 31, 2019 and 2018, respectively.
14. RELATED PARTY TRANSACTIONS
Asset Management and Other Fees to Related Parties
In December 2015, CIM Urban and CIM Capital, LLC (formerly CIM Investment Advisors, LLC), an affiliate of CIM REIT and CIM Group ("CIM Capital"), entered into an investment management agreement, pursuant to which CIM Urban engaged CIM Capital to provide certain services to CIM Urban (the “Investment Management Agreement”). On January 1, 2019, CIM Capital assigned its duties under the Investment Management Agreement to its four wholly-owned subsidiaries: CIM Capital Securities Management, LLC, a securities manager, CIM Capital RE Debt Management, LLC, a debt manager, CIM Capital Controlled Company Management, LLC, a controlled company manager, and CIM Capital Real Property Management, LLC, a real property manager. The "Operator" refers to CIM Investment Advisors, LLC from December 10, 2015 to December 31, 2018 and to CIM Capital and its four wholly-owned subsidiaries on and after January 1, 2019.
F-45
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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'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% | ||||||
The Operator earned asset management fees of $12,019,000, $17,880,000 and $22,229,000 for the years ended December 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.
For the first and second quarters of 2020, the Company will, subject to applicable laws and regulations under Nasdaq and the TASE and the agreement of the Operator and or the Administrator, seek to pay some or all of the asset management fees, the Base Service Fee and or reimbursements under the Master Services Agreement in respect of such quarter in shares of Common Stock. The Company may seek to do so for the third 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).
CIM Management, Inc. and certain of its affiliates (collectively, the "CIM Management Entities"), all affiliates of CIM REIT and CIM Group, provide property management, leasing, and development services to CIM Urban. The 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 for the years ended December 31, 2019, 2018 and 2017, respectively, for onsite management costs incurred on behalf of CIM Urban, which 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, the CIM Management Entities earned construction management fees of $525,000, $580,000 and $1,654,000 for the years ended December 31, 2019, 2018 and 2017, respectively, which were capitalized to investments in real estate.
At December 31, 2019 and 2018, fees payable and expense reimbursements due to the CIM Management Entities of $4,107,000 and $3,202,000, respectively, are included in due to related parties. Also included in due to related parties as of December 31, 2019 and 2018, were $97,000 and $315,000, respectively, due to the CIM Management Entities and certain of its affiliates.
On March 11, 2014, CIM Commercial and its subsidiaries entered into a master services agreement (the "Master Services Agreement") with CIM Service Provider, LLC (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 CIM Commercial and its subsidiaries. Pursuant to the Master Services Agreement, we appointed an affiliate of CIM Group as the administrator of Urban Partners GP, LLC. Under the Master Services Agreement, CIM Commercial pays a base service fee (the "Base Service Fee") to the Administrator initially set at $1,000,000 per year (subject to an annual escalation by a specified inflation factor beginning on January 1, 2015), payable quarterly in arrears. For the years ended December 31, 2019, 2018 and 2017, the Administrator earned a Base Service Fee of $1,102,000, $1,079,000 and $1,060,000, respectively. 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 the Base Service Fee. During the years ended December 31, 2019, 2018 and 2017, 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 public offering of Series A Preferred Units, where each Series A Preferred Unit consisted of one share of Series A Preferred Stock and one Series
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
A Preferred Warrant. The Administrator's compensation is based on the salaries and benefits of the employees of the Administrator and or its affiliates who performed these services (allocated based on the percentage of time spent on the affairs of CIM Commercial 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, for such services which are included in asset management and other fees to related parties. At December 31, 2019 and 2018, $1,673,000 and $1,490,000 was due to the Administrator, respectively, for such services.
On January 1, 2015, we entered into a Staffing and Reimbursement Agreement with CIM SBA Staffing, LLC ("CIM SBA"), an affiliate of CIM Group, and our subsidiary, PMC Commercial Lending, LLC. The agreement provides that CIM SBA will provide personnel and resources to us and that we will reimburse CIM SBA for the costs and expenses of providing such personnel and resources. For the years ended December 31, 2019, 2018 and 2017, we incurred expenses related to services subject to reimbursement by us under this agreement of $2,382,000, $2,445,000 and $3,464,000, respectively, which are included in asset management and other fees to related parties for lending segment costs, and $223,000, $264,000 and $433,000, respectively, for corporate services, which are included in asset management and other fees to related parties. In addition, for the years ended December 31, 2019, 2018 and 2017, we deferred personnel costs of $112,000, $330,000 and $429,000, respectively, associated with services provided for originating loans. At December 31, 2019 and 2018, $1,029,000 and $1,347,000, respectively, was due to CIM SBA for costs and expenses of providing such personnel and resources.
On May 10, 2018, the Company executed a wholesaling agreement (the "Wholesaling Agreement") with International Assets Advisors, LLC ("IAA") and CCO Capital, LLC ("CCO Capital"). CCO Capital is a registered broker dealer and is under common control with the Operator and the Administrator. IAA was the exclusive dealer manager for the Company’s public offering of Series A Preferred Units until May 31, 2019. Under the Wholesaling Agreement, among other things, CCO Capital, in its capacity as the wholesaler for the offering, assisted IAA with the sale of Series A Preferred Units. In exchange for such services, IAA paid CCO Capital a fee equal to 2.75% of the selling price of each Series A Preferred Unit for which a sale was completed, reduced by any applicable fee reallowances payable to soliciting dealers pursuant to separate soliciting dealer agreements between IAA and soliciting dealers. The foregoing fee was reduced, and could have been exceeded, by a fixed monthly payment by CCO Capital to IAA for IAA’s services in connection with periodic closings and settlements for the offering.
On May 31, 2019, the Company, IAA and CCO Capital entered into an Amendment, Assignment and Assumption Agreement (the “Assignment Agreement”), pursuant to which CCO Capital assumed all of the rights and obligations of IAA under the dealer manager agreement, dated as of June 28, 2016, as amended, by and between the Company and IAA. As a result of the Assignment Agreement, CCO Capital became the exclusive dealer manager for the Company’s public offering of the Series A Preferred Units effective as of May 31, 2019. In connection with the execution of the Assignment Agreement, the Company terminated the Wholesaling Agreement effective as of May 31, 2019. At December 31, 2019 and 2018, $621,000 and $200,000, respectively, was included in deferred costs for CCO Capital fees, of which $169,000 and $138,000, respectively, was included in due to related parties. CCO Capital incurred issuance-specific costs of $700,000, which were allocated to the Series A Preferred Stock for the year ended December 31, 2019. The Company’s offering of the Series A Preferred Units ended at the end of January 2020. On January 28, 2020, the Company entered into the Second Amended and Restated Dealer Manager Agreement, pursuant to which CCO Capital acts as the exclusive dealer manager for the Company’s public offering of Series A Preferred Stock and Series D Preferred Stock. In connection with such agreement, the Wholesaling Agreement and the Assignment Agreement were terminated.
Equity Transactions
On June 12, 2017, we repurchased, in a privately negotiated transaction, canceled and retired 8,727,272 shares of Common Stock from Urban II. The aggregate purchase price was $576,000,000, or $66.00 per share (Note 11).
On December 18, 2017, we repurchased, in a privately negotiated transaction, canceled and retired 4,696,969 shares of Common Stock from Urban II. The aggregate purchase price was $310,000,000, or $66.00 per share (Note 11).
Other
On October 1, 2015, an affiliate of CIM Group entered into a 5-year lease renewal with respect to a property owned by the Company, which lease was amended to a month-to-month term in February 2019. For the years ended December 31, 2019,
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
2018 and 2017, we recorded rental and other property income related to this tenant of $112,000, $108,000 and $108,000, respectively.
On May 15, 2019, CIM Group entered into an approximately eleven-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, 2018 and 2017, we recorded rental and other property income related to this tenant of $932,000, $0 and $0, respectively.
In October 2019, our Administrator acquired 2,468,390 shares of our Common Stock, representing approximately 16.9% of the outstanding shares of our Common Stock at such time, for $19.1685 per share from an affiliate of CIM Group in a private transaction. As of March 12, 2020, CIM Group, its affiliates, and our officers and directors have an aggregate economic interest in approximately 19.6% of the outstanding shares of our Common Stock.
15. COMMITMENTS AND CONTINGENCIES
Loan Commitments—Commitments to extend credit are agreements to lend to a customer provided the terms established in the contract are met. Our outstanding loan commitments to fund loans were $9,696,000 at December 31, 2019 and are for prime-based loans to be originated by our subsidiary engaged in SBA 7(a) 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 have certain obligations for the payment of tenant improvement allowances and lease commissions in connection with new leases and renewals. CIM Commercial had a total of $7,747,000 in future obligations under leases to fund tenant improvements and other future construction obligations at December 31, 2019. At December 31, 2019, $2,814,000 was funded to reserve accounts included in restricted cash on our consolidated balance sheet for these tenant improvement obligations in connection with the mortgage loan agreement entered into in June 2016.
Employment Agreements—We have employment agreements with two of our officers. Under certain circumstances, each of these employment agreements provides for (1) severance payment equal to the annual base salary paid to the officer and (2) death and disability payments in an amount equal to two times and one time, respectively, the annual base salary paid to the officers.
Litigation—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'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.
In September 2018, we filed a lawsuit against the City and County of San Francisco seeking a refund of the $11,845,000 in penalties, interest and legal fees paid by us for real property transfer tax allegedly due for a transaction in a prior year. We disputed that such penalties, interest and legal fees were payable but, in order to contest the asserted tax obligations, we had to pay such amounts to the City and County of San Francisco in August 2017. We have been vigorously pursuing this litigation and intend 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 are unable to estimate a range of potential losses due to the complexity and current status of the lawsuit. However, we maintain 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 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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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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 SBA 7(a) Program, the SBA may seek recovery of the principal loss related to the deficiency from us. 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 us in the event that a loss is deemed to be attributable to technical deficiencies. Based on historical experience, we do not expect that this contingency is probable to be asserted. However, if asserted, 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.
Environmental Matters—In connection with the ownership and operation of real estate properties, we may be potentially liable for costs and damages related to environmental matters, including asbestos-containing materials. We have not been notified by any governmental authority of any noncompliance, liability, or other claim in connection with any of the properties, and we are not aware of any other environmental condition with respect to any of the properties that management believes will 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.
Rent Expense—Rent expense under a ground lease for a property that was sold in August 2017, which includes straight-line rent and amortization of acquired below-market ground lease, was $0, $0 and $1,168,000 the years ended December 31, 2019, 2018 and 2017, respectively.
We lease office space in Dallas, Texas under a lease which, 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.
As of December 31, 2019, the right-of-use asset and lease liability balance was approximately $106,000. The right-of-use asset is included within other assets 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 ended December 31, 2019, 2018 and 2017, respectively, in general and administrative expenses on our consolidated statements of operations.
At December 31, 2019, our scheduled future noncancelable minimum lease payments was $106,000 for the year ending December 31, 2020.
16. FUTURE MINIMUM LEASE RENTALS
Future minimum rental revenue under long-term operating leases at December 31, 2019, excluding tenant reimbursements of certain costs, are as follows:
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 | |||
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
17. CONCENTRATIONS
Tenant Revenue Concentrations—Rental and other property income from Kaiser Foundation Health Plan, Incorporated ("Kaiser"), which occupied space in two of our Oakland, California properties, accounted for approximately 17.3%, 12.9% and 10.8% of our office segment revenues for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019 and 2018, $23,000 and $331,000, respectively, was due from Kaiser.
Rental and other property income from the U.S. General Services Administration and other government agencies (collectively, "Governmental Tenants"), which primarily occupied space in our properties located in Washington, D.C., accounted for approximately 17.1%, 24.6% and 29.4% of our office segment revenues for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019 and 2018, $282,000 and $2,899,000, respectively, was due from Governmental Tenants.
Geographical Concentrations of Investments in Real Estate—As of December 31, 2019, 2018 and 2017, we owned 8, 16 and 15 office properties, respectively; one hotel property; one, two and two parking garages, respectively; and one, two, and two development sites, respectively, one of which is being used as a parking lot. As of December 31, 2019, 2018 and 2017, these properties were located in two states, and in Washington, D.C. as of December 31, 2018 and 2017.
Our revenue concentrations from properties are as follows:
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 | % | |||
Our real estate investments concentrations from properties are as follows:
December 31, | |||||
2019 | 2018 | ||||
California (1) | 94.4 | % | 70.6 | % | |
Texas | 5.6 | 2.2 | |||
Washington, D.C. | — | 27.2 | |||
100.0 | % | 100.0 | % | ||
(1) | The December 31, 2018 percentage for California includes the assets of 260 Townsend Street, which was classified as held for sale on our consolidated balance sheet at December 31, 2018 and sold in March 2019 (Note 3). |
18. INCOME TAXES
We have elected to be taxed as a REIT under the Code. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our taxable income to our stockholders. As a REIT, we generally will not be subject to corporate level federal income tax on net income that is currently distributed to stockholders.
We have wholly-owned TRS's which are subject to federal and state income taxes. The income generated from the TRS's is taxed at normal corporate rates.
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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' 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, | |||||||||||
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 | |||||
The components of our net deferred tax asset, which are included in other assets, are as follows:
December 31, | |||||||
2019 | 2018 | ||||||
(in thousands) | |||||||
Deferred tax assets: | |||||||
Net operating losses | $ | 39 | $ | 37 | |||
Secured borrowings—government guaranteed loans | 132 | 198 | |||||
Other | 166 | 185 | |||||
Total gross deferred tax assets | 337 | 420 | |||||
Valuation allowance | (38 | ) | (38 | ) | |||
299 | 382 | ||||||
Deferred tax liabilities: | |||||||
Loans receivable | (210 | ) | (255 | ) | |||
(210 | ) | (255 | ) | ||||
Deferred tax asset, net | $ | 89 | $ | 127 | |||
The net operating loss carryforwards at December 31, 2019 and 2018 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.
The periods subject to examination for our federal and state income tax returns are 2016 through 2019. As of December 31, 2019 and 2018, no reserves for uncertain tax positions have been established and we do 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. Management has reviewed these statutory changes and determined that the impact to our consolidated financial statements is not material.
19. SEGMENT DISCLOSURE
In accordance with ASC Topic 280, Segment Reporting, our reportable segments during the years ended December 31, 2019 and 2018 consist of two types of commercial real estate properties, namely, office and hotel, as well as a segment for our lending business. Our reportable segments during 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 our lending business. Management internally evaluates the operating performance and financial results of the segments based on net operating income. We also have certain
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
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 our real estate segments, we define net operating income 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 for income taxes. For our lending segment, we define net operating income as interest income net of interest expense and general overhead expenses.
The net operating income of our segments for the years ended December 31, 2019, 2018 and 2017 is as follows:
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 | |||||
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
A reconciliation of our segment net operating income to net income attributable to the Company for the years ended December 31, 2019, 2018 and 2017 is as follows:
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Total segment net operating income | $ | 67,251 | $ | 109,457 | $ | 128,452 | |||||
Interest and other income | 3,329 | — | — | ||||||||
Asset management and other fees to related parties | (15,921 | ) | (22,006 | ) | (26,787 | ) | |||||
Interest expense | (10,361 | ) | (25,482 | ) | (34,070 | ) | |||||
General and administrative | (4,069 | ) | (4,928 | ) | (3,018 | ) | |||||
Transaction costs | (574 | ) | (938 | ) | (11,862 | ) | |||||
Depreciation and amortization | (27,374 | ) | (53,228 | ) | (58,364 | ) | |||||
Loss on early extinguishment of debt | (29,982 | ) | (808 | ) | (8,215 | ) | |||||
Impairment of real estate | (69,000 | ) | — | (13,100 | ) | ||||||
Gain on sale of real estate | 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 | |||||
The condensed assets for each of the segments as of December 31, 2019 and 2018, along with capital expenditures and loan originations for the years ended December 31, 2019, 2018, and 2017 are as follows:
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 | |||
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CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (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 | |||||
(1) | The December 31, 2018 balances include the assets of 260 Townsend Street, which was classified as held for sale on our consolidated balance sheet at December 31, 2018 and sold in March 2019 (Note 3). |
(2) | Represents additions and improvements to real estate investments, excluding acquisitions. Includes the activity for dispositions through their respective disposition dates. |
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial information for the year ended December 31, 2019:
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 | |||||||||||
(1) | 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. |
(2) | Amounts have been adjusted to give retroactive effect to the Reverse Stock Split. |
F-54
CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements as of December 31, 2019 and 2018
and for the Years Ended December 31, 2019, 2018 and 2017 (Continued)
The following is a summary of quarterly financial information for the year ended December 31, 2018:
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 | |||||||||||
(1) | Represents revenues for the three months ended March 31, June 30, September 30, and December 31, 2018, as previously reported in the Annual Report on Form 10-K for the year ended December 31, 2018. Under the new leasing guidance, bad debt expense associated with changes in the collectability assessment for operating leases shall be recorded as adjustments to rental and other property income rather than other property operating expense (Note 2). |
(2) | 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. |
(3) | Amounts have been adjusted to give retroactive effect to the Reverse Stock Split. |
F-55
Schedule III—Real Estate and Accumulated Depreciation
December 31, 2019
(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 | |||||||||||||||||||||
(1) | These properties collateralize the revolving credit facility, which had a $153,000,000 outstanding balance as of December 31, 2019. |
(2) | The aggregate gross cost of property included above for federal income tax purposes approximates $661,503,000 (unaudited) as of December 31, 2019. |
F-56
The following table reconciles our investments in real estate from January 1, 2017 to December 31, 2019:
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Investments in Real Estate | |||||||||||
Balance, beginning of period | $ | 1,344,636 | $ | 1,228,780 | $ | 2,021,494 | |||||
Additions: | |||||||||||
Improvements | 18,388 | 14,906 | 26,078 | ||||||||
Property acquisitions | — | 128,928 | 18,770 | ||||||||
Deductions: | |||||||||||
Assets held for sale | — | (24,832 | ) | — | |||||||
Asset sales | (659,849 | ) | — | (815,357 | ) | ||||||
Impairment | (69,000 | ) | — | (13,100 | ) | ||||||
Retirements | (4,913 | ) | (3,146 | ) | (9,105 | ) | |||||
Balance, end of period | $ | 629,262 | $ | 1,344,636 | $ | 1,228,780 | |||||
The following table reconciles the accumulated depreciation from January 1, 2017 to December 31, 2019:
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 | ) | ||
F-57
Schedule IV—Mortgage Loans on Real Estate
December 31, 2019
(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 | |||||||||||||||||||||||||||||
(1) | Excludes general reserves of $450,000. |
(2) | Includes $242,000 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 $284,000, a valuation reserve of $116,000 and a fixed interest rate of 7.75%. |
(5) | Includes a loan with a retained face value of $80,000, a valuation reserve of $32,000 and a fixed interest rate of 8.25%. |
(6) | Represents the government guaranteed portions of our 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. |
(7) | 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. |
(8) | For Federal income tax purposes, the aggregate cost basis of our loans was approximately $54,925,000 (unaudited). |
F-58
Schedule IV—Mortgage Loans on Real Estate (Continued)
December 31, 2019
(in thousands)
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 | ||||||
F-59
Exhibit 4.1
Description of Securities
The following is a summary description of certain important terms of our securities. The description of our securities is not complete and is qualified in its entirety by reference to the provisions of our charter, bylaws and, with respect to our Series A Warrants (as defined in “Series A Warrants” below), the terms of the agreement governing such warrants and the global warrant certificate and the applicable provisions of the Maryland General Corporation Law (the “MGCL”). Our charter, bylaws and agreements governing the terms of our securities are filed with, or are incorporated by reference into, our Annual Report on Form 10-K.
Unless the context otherwise requires, references to “the Company” “us,” “we” and “our” are solely to CIM Commercial Trust Corporation and not to any of its subsidiaries or affiliates.
General
Our charter provides that we may issue up to 900,000,000 shares of our common stock, par value $0.001 per share (our “Common Stock”), and up to 100,000,000 shares of our preferred stock, par value $0.001 per share, of which 36,000,000 shares are classified as our Series A Preferred Stock (our “Series A Preferred Stock”), 32,000,000 shares are classified as our Series D Preferred Stock (our “Series D Preferred Stock”), and 9,000,000 shares are classified as our Series L Preferred Stock (our “Series L Preferred Stock”). Our charter authorizes our board of directors (our “Board of Directors”), with the approval of a majority of our entire Board of Directors and without stockholder approval, 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 we are authorized to issue.
As of March 12, 2020, there were 14,602,149 shares of Common Stock, 4,788,993 shares of Series A Preferred Stock, 5,600 shares of Series D Preferred Stock, 5,387,160 shares of Series L Preferred Stock and 4,603,287 Series A Warrants (as defined in “Series A Warrants” below) issued and outstanding.
Under applicable Maryland law, our stockholders are not generally liable for our debts or obligations solely as a result of their status as stockholders.
For a description of relevant provisions of our charter and bylaws that may have an effect of delaying, deferring or preventing a change in control of the Company, please see “Certain Provisions of the MGCL and Our Charter and Bylaws” below.
Common Stock
Ranking. Except with respect to the Series L Preferred Stock to the extent of the Initial Dividend (as defined in “Series L Preferred Stock” below), holders of shares of our Common Stock have no preference, conversion, exchange, sinking fund or redemption rights and have no preemptive rights to subscribe for any securities of our Company. Our charter provides that our common stockholders generally have no appraisal rights unless our Board of Directors determines prospectively that appraisal rights will apply to one or more transactions in which holders of our Common Stock would otherwise be entitled to exercise appraisal rights. Subject to the provisions of our charter regarding the restrictions on ownership and transfer of our stock (see “Certain Provisions of the MGCL and Our Charter and Bylaws-Restrictions on Ownership and Transfer” below), holders of our Common Stock will have equal dividend, liquidation and other rights.
Dividends. Subject to the preferential rights of our preferred stock and any other class or series of our capital stock and to the provisions of our charter regarding the restrictions on ownership and transfer of our capital stock (see “Certain Provisions of the MGCL and Our Charter and Bylaws-Restrictions on Ownership and Transfer” below), holders of shares of our Common Stock are entitled to receive dividends and other distributions on such shares if, as and when authorized by our Board of Directors out of funds legally available therefor and declared by us and to share ratably in the assets of our Company legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up after payment or establishment of reserves for all known debts and liabilities of our Company.
Voting Rights. Subject to the provisions of our charter regarding the restrictions on ownership and transfer of our capital stock (see “Certain Provisions of the MGCL and Our Charter and Bylaws-Restrictions on Ownership and Transfer” below) and except as may otherwise be specified in the terms of any class or series of our capital stock, each outstanding share of our Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors, and, except as provided with respect to any other class or series of stock, the holders of shares of Common Stock
will possess the exclusive voting power. There is no cumulative voting in the election of our directors. A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share of Common Stock entitles the holder thereof to vote for as many individuals as there are directors to be elected and for whose election the holder is entitled to vote. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by the MGCL or by our charter.
Listing. Our Common Stock is traded on the Nasdaq Global Market (“Nasdaq”), under the ticker symbol “CMCT,” and on the Tel Aviv Stock Exchange (the “TASE”), under the ticker symbol “CMCT-L.”
Transfer Agent and Registrar. The transfer agent and registrar for the Common Stock is American Stock Transfer and Trust Company.
Series A Preferred Stock
Ranking. The Series A Preferred Stock ranks, with respect to dividend rights:
• | senior to the Series L Preferred Stock, Common Stock and any other class or series of our capital stock, the terms of which expressly provide that our Series A Preferred Stock ranks senior to such class or series as to dividend rights; |
• | on parity with the Series D Preferred Stock and each other class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks on parity with the Series A Preferred Stock as to dividend rights; |
• | junior to each class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks senior to the Series A Preferred Stock as to dividend rights; and |
• | junior to all our existing and future debt obligations. |
The Series A Preferred Stock ranks, with respect to rights upon our liquidation, winding-up or dissolution:
• | senior to the Series L Preferred Stock (except as described below), Common Stock and any other class or series of our capital stock, the terms of which expressly provide that the Series A Preferred Stock ranks senior to such class or series as to rights upon our liquidation, winding-up or dissolution; |
• | on parity with the Series D Preferred Stock, Series L Preferred Stock (to the extent of the Series L Stated Value (as defined in “Series L Preferred Stock” below)) and with each class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks on parity with the Series A Preferred Stock as to rights upon our liquidation, winding-up or dissolution; |
• | junior to each class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks senior to the Series A Preferred Stock as to rights upon our liquidation, winding-up or dissolution; and |
• | junior to all our existing and future debt obligations. |
Stated Value. Each share of Series A Preferred Stock has a stated value of $25.00, subject to appropriate adjustment in limited circumstances described in “-Adjustment of the Series A Stated Value in Connection with a Redemption” below (the “Series A Stated Value”).
Dividends. Subject to the preferential rights of the holders of any class or series of our capital stock ranking senior to the Series A Preferred Stock, if any such class or series of stock is authorized in the future, the 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 share of Series A Preferred Stock at an annual rate of five and fifty hundredths of a percent (5.50%) of the Series A Stated Value (the “Series A Dividend”).
The Series A Dividend accrues and is cumulative from the end of the most recent period for which the Series A Dividend has been paid, or if no Series A Dividend has been paid, from the date of issuance of a given share of Series A Preferred Stock. The Series A Dividend accrues and is paid on the basis of a 360-day year consisting of twelve 30-day months.
The Series A Dividend accrues whether or not (i) we have earnings, (ii) there are funds legally available for the payment of such dividends and (iii) such dividends are authorized by our Board of Directors or declared by us. Accrued Series A Dividends do not bear interest.
The Series A Dividend is expected to be authorized and declared on a quarterly basis, payable monthly on the 15th day of the month or, if such date is not a business day, on the first business day thereafter, to holders of record on the 5th day of such month. We expect to authorize, declare and pay the Series A Dividend on a timely basis in accordance with the foregoing unless our results of operations or general financing conditions, general economic conditions, applicable provisions of Maryland law or other factors make it imprudent to do so. Subject to the foregoing power that may be delegated to an authorized officer of the Company, the timing and amount of the Series A Dividend will be determined by our Board of Directors, in its sole discretion, and may vary from time to time.
Holders of our shares of Series A Preferred Stock are not entitled to any dividend in excess of full cumulative Series A Dividends on such shares. Unless full cumulative Series A Dividends for all past dividend periods have been or are contemporaneously declared and paid or declared and a sum sufficient for the payment thereof is set apart for payment, we will not:
• | declare and pay or declare and set apart for payment dividends and we will not declare and make any other distribution of cash or other property (other than dividends or other distributions paid in shares of stock ranking junior to the Series A Preferred Stock as to the dividend rights or rights upon our liquidation, winding-up or dissolution, and options, warrants or rights to purchase such shares), directly or indirectly, on or with respect to any shares of Common Stock, Series D Preferred Stock, Series L Preferred Stock or any other class or series of our stock ranking junior to or on parity with the Series A Preferred Stock as to dividend rights or rights upon our liquidation, winding-up or dissolution for any period; or |
• | except by conversion into or exchange for shares of stock ranking junior to the Series A Preferred Stock as to dividend rights or rights upon our liquidation, winding-up or dissolution, or options, warrants or rights to purchase such shares, redeem, purchase or otherwise acquire (other than a redemption, purchase or other acquisition of Common Stock made for purposes of an employee incentive or benefit plan) for any consideration, or pay or make available any monies for a sinking fund for the redemption of, any Common Stock, Series D Preferred Stock, Series L Preferred Stock or any class or any other class or series of our stock ranking junior to or on parity with the Series A Preferred Stock as to dividend rights or rights upon our liquidation, winding-up or dissolution. |
To the extent necessary to preserve our status as a REIT, the foregoing sentence, however, will not prohibit declaring or paying or setting apart for payment any dividend or other distribution on the Common Stock or the redemption of our capital stock pursuant to the restrictions on ownership and transfer contained in our charter (see “Certain Provisions of the MGCL and Our Charter and Bylaws-Restrictions on Ownership and Transfer” below).
Redemption at the Option of a Holder. Beginning on the date of original issuance of any given shares of Series A Preferred Stock, the holder has the right to require the Company to redeem such shares at a redemption price equal to a percentage of the Series A Stated Value set forth below plus any accrued and unpaid Series A Dividends:
• | 90%, for all such redemptions effective prior to the second anniversary of the date of original issuance of such shares; provided, however, that the Board of Directors (or an authorized officer of the Company, if one is delegated such power by the Board of Directors), from time to time in its discretion, may authorize a reduction of such percentage to 87%; |
• | 92%, for all such redemptions effective on or after the second anniversary, but prior to the third anniversary, of the date of original issuance of such shares; |
• | 95%, for all such redemptions effective on or after the third anniversary, but prior to the fourth anniversary, of the date of original issuance of such shares; |
• | 97%, for all such redemptions effective on or after the fourth anniversary, but prior to the fifth anniversary, of the date of original issuance of such shares; and |
• | 100%, for all such redemptions effective on or after the fifth anniversary of the date of original issuance of such shares. |
Notwithstanding the foregoing, with respect to any redemptions effective on or after the second anniversary but prior to the fifth anniversary of the date of original issuance, the Board of Directors (or an authorized officer of the Company, if one is delegated such power by the Board of Directors), from time to time in its discretion, may authorize the Company to increase the redemption price from its existing level to an amount between 90 and 100% (inclusive) of the Series A Stated Value, plus any accrued and unpaid Series A Dividends through and including the date fixed for such redemption.
Each holder of Series A Preferred Stock may exercise such redemption right by delivering a written notice thereof to the Company and the redemption price will be paid by the Company on a date selected by the Company that is no later than 45 days after such notice is received by the Company.
Optional Redemption Following Death of a Holder. Beginning on the date of original issuance and ending on but not including the second anniversary of the date of original issuance of any shares of Series A Preferred Stock, we will redeem such shares held by a natural person upon his or her death at the written request of the holder’s estate at a redemption price equal to 100% of the Series A Stated Value, plus any accrued and unpaid Series A Dividends through and including the date fixed for such redemption.
Optional Redemption by the Company. We have the right to redeem any or all shares of our Series A Preferred Stock from and after the fifth anniversary of the date of original issuance of such shares at a redemption price equal to 100% of the Series A Stated Value, plus any accrued and unpaid Series A Dividends. If fewer than all the outstanding shares of Series A Preferred Stock are to be redeemed, the Company will select those shares to be redeemed pro rata or in such manner as our Board of Directors may determine.
We may exercise our redemption right by delivering a written notice thereof to the holders of shares of Series A Preferred Stock to be redeemed. Each such notice will state the date on which the redemption by us shall occur, which date will be no fewer than 10 nor more than 20 days following the notice date.
If full cumulative Series A Dividends on all outstanding shares of Series A Preferred Stock have not been declared and paid or declared and set apart for payment for all past dividend periods, no shares of the Series A Preferred Stock may be redeemed at the option of the Company, unless all outstanding shares of the Series A Preferred Stock are simultaneously redeemed, and, except as provided by the restrictions on ownership and transfer set forth in our charter (see “Certain Provisions of the MGCL and Our Charter and Bylaws-Restrictions on Ownership and Transfer” below), neither the Company nor any of its affiliates may purchase or otherwise acquire shares of Series A Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of shares of Series A Preferred Stock.
Payment of the Redemption Price. Upon any redemption of Series A Preferred Stock by a holder or the Company, or upon the death of a holder, we will pay the redemption price in cash or, on or after the first anniversary of the issuance of shares of Series A Preferred Stock to be redeemed, at our option and in our sole discretion, 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 as described in the articles supplementary to our charter defining the terms of the Series A Preferred Stock.
If the Company elects to pay the redemption price in Common Stock, the Company will cause the transfer agent to, as soon as practicable, but not later than three business days after the effective date of such redemption, register the number of shares of Common Stock such holder is entitled to receive as a result of such redemption. The person or persons entitled to receive the shares of Common Stock issuable upon such redemption will be treated for all purposes as the record holder or holders of such shares of Common Stock as of the effective date of such redemption.
Our obligation to redeem any shares of our Series A Preferred Stock is limited to the extent that (i) we do not have sufficient funds available to fund any such redemption, in which case we will be required to redeem with shares of Common Stock, or (ii) we are restricted by applicable law, our charter or contractual obligations from making such redemption.
Adjustment of the Series A Stated Value in Connection with a Redemption. If certain events affecting the Common Stock, such as recapitalizations, stock dividends, stock splits, stock combinations, reclassifications, mergers or similar events, occur during the 20 trading days prior to a redemption of Series A Preferred Stock, we will adjust the Series A Stated Value so that such redemption shall entitle the holder to receive the aggregate number of shares of Common Stock or cash which, if the redemption had occurred immediately prior to such event, such holder would have owned upon such redemption and been entitled to received pursuant to the event affecting our Common Stock.
Fractional Shares. No fractional shares of Common Stock will be issued upon redemption of any shares of Series A Preferred Stock. Rather, any fractional number of shares of Common Stock to be issued upon any redemption of the Series A Preferred Stock will be rounded down to the nearest whole number of shares of Common Stock.
Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, before any distribution or payment shall be made to holders of Common Stock or any other class or series of capital stock ranking junior to shares of Series A Preferred Stock, the holders of shares of Series A Preferred Stock will be entitled to be paid out of our assets legally available for distribution to our stockholders, after payment or provision for our debts and other liabilities, a liquidation preference equal to the Series A Stated Value per share, plus an amount equal to any accrued and unpaid Series A Dividends (whether or not declared) to and including the date of payment.
If upon the voluntary or involuntary liquidation, dissolution or winding-up of the Company, the available assets of the Company, or proceeds thereof, distributable among the holders of the Series A Preferred Stock are insufficient to pay in full the above described liquidation preference and the liquidating payments on any shares of any class or series of stock ranking on parity to the Series A Preferred Stock with respect to liquidation, dissolution or winding-up (“Series A Parity Stock”), then such assets, or the proceeds thereof, will be distributed among the holders of the Series A Preferred Stock and any such Series A Parity Stock ratably in the same proportion as the respective amounts that would be payable on such Series A Preferred Stock and any such Series A Parity Stock if all amounts payable thereon were paid in full.
After payment of the full amount of the liquidating distributions to which they are entitled, the holders of shares of Series A Preferred Stock will have no right or claim to any of our remaining assets. Our consolidation, merger or conversion with or into any other corporation, trust or other entity, the consolidation or merger of any other corporation, trust or entity with or into us, the sale or transfer of any or all our assets or business, or a statutory share exchange will not be deemed to constitute a liquidation, dissolution or winding-up of the Company.
In determining whether a distribution (other than upon voluntary or involuntary liquidation), by dividend, redemption or other acquisition of shares of our stock or otherwise, is permitted under the MGCL, amounts that would be needed, if we were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of holders of the Series A Preferred Stock will not be added to our total liabilities.
Voting Rights. The Series A Preferred Stock has no voting rights, and thus has no rights to vote on any dissolution, charter amendment, merger, sale of all or substantially all of our assets, share exchange or conversion, or any amendment to the terms of the Series A Preferred Stock.
Exchange Listing. We have not made, and do not plan on making, an application to list shares of Series A Preferred Stock on Nasdaq, any other national securities exchange or nationally recognized trading system or the TASE.
Transfer Agent and Registrar. The transfer agent and registrar for the Series A Preferred Stock is American Stock Transfer and Trust Company.
Series D Preferred Stock
Ranking. The Series D Preferred Stock ranks, with respect to dividend rights:
• | senior to the Series L Preferred Stock, Common Stock and any other class or series of our capital stock, the terms of which expressly provide that our Series D Preferred Stock ranks senior to such class or series as to dividend rights; |
• | on parity with the Series A Preferred Stock and each other class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks on parity with the Series D Preferred Stock as to dividend rights; |
• | junior to each class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks senior to the Series D Preferred Stock as to dividend rights; and |
• | junior to all our existing and future debt obligations. |
The Series D Preferred Stock ranks, with respect to rights upon our liquidation, winding-up or dissolution:
• | senior to the Series L Preferred Stock (except as described below), Common Stock and any other class or series of our capital stock, the terms of which expressly provide that the Series D Preferred Stock ranks senior to such class or series as to rights upon our liquidation, winding-up or dissolution; |
• | on parity with the Series A Preferred Stock, Series L Preferred Stock (to the extent of the Series L Stated Value (as defined in “Series L Preferred Stock” below)) and with each class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks on parity with the Series D Preferred Stock as to rights upon our liquidation, winding-up or dissolution; |
• | junior to each class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks senior to the Series D Preferred Stock as to rights upon our liquidation, winding-up or dissolution; and |
• | junior to all our existing and future debt obligations. |
Stated Value. Each share of Series D Preferred Stock has a stated value of $25.00, subject to appropriate adjustment in limited circumstances described in “-Adjustment of the Series D Stated Value in Connection with a Redemption” below (the “Series D Stated Value”).
Dividends. Subject to the preferential rights of the holders of any class or series of our capital stock ranking senior to the Series D Preferred Stock, if any such class or series of stock is authorized in the future, the holders of Series D 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 Series D Preferred Stock at an annual rate of five and sixty-five hundredths of a percent (5.65%) of the Series D Stated Value (the “Series D Dividend”).
The Series D Dividend accrues and is cumulative from the end of the most recent period for which the Series D Dividend has been paid, or if no Series D Dividend has been paid, from the date of issuance of a given share of Series D Preferred Stock. The Series D Dividend accrues and is paid on the basis of a 360-day year consisting of twelve 30-day months. The Series D Dividend accrues whether or not (i) we have earnings, (ii) there are funds legally available for the payment of such dividends and (iii) such dividends are authorized by our Board of Directors or declared by us. Accrued Series D Dividends do not bear interest.
The Series D Dividend is expected to be authorized and declared on a quarterly basis, payable monthly on the 15th day of the month or, if such date is not a business day, on the first business day thereafter, to holders of record on the 5th day of such month. We expect to authorize, declare and pay the Series D Dividend on a timely basis in accordance with the foregoing unless our results of operations or general financing conditions, general economic conditions, applicable provisions of Maryland law or other factors make it imprudent to do so. Subject to the foregoing power that may be delegated to an authorized officer of the Company, the timing and amount of the Series D Dividend will be determined by our Board of Directors, in its sole discretion, and may vary from time to time.
Holders of our shares of Series D Preferred Stock are not entitled to any dividend in excess of full cumulative Series D Dividends on such shares. Unless full cumulative Series D Dividends for all past dividend periods have been or are contemporaneously declared and paid or declared and a sum sufficient for the payment thereof is set apart for payment, we will not:
• | declare and pay or declare and set apart for payment dividends and we will not declare and make any other distribution of cash or other property (other than dividends or other distributions paid in shares of stock ranking junior to the Series D Preferred Stock as to the dividend rights or rights upon our liquidation, winding-up or dissolution, and options, warrants or rights to purchase such shares), directly or indirectly, on or with respect to any shares of Common Stock, Series A Preferred Stock, Series L Preferred Stock or any other class or series of our stock ranking junior to or on parity with the Series D Preferred Stock as to dividend rights or rights upon our liquidation, winding-up or dissolution for any period; or |
• | except by conversion into or exchange for shares of stock ranking junior to the Series D Preferred Stock as to dividend rights or rights upon our liquidation, winding-up or dissolution, or options, warrants or rights to purchase such shares, redeem, purchase or otherwise acquire (other than a redemption, purchase or other acquisition of Common Stock made for purposes of an employee incentive or benefit plan) for any consideration, or pay or make available any monies for a sinking fund for the redemption of, any Common Stock, Series A Preferred Stock, Series L Preferred Stock or any |
class or any other class or series of our stock ranking junior to or on parity with the Series D Preferred Stock as to dividend rights or rights upon our liquidation, winding-up or dissolution.
To the extent necessary to preserve our status as a REIT, the foregoing sentence, however, will not prohibit declaring or paying or setting apart for payment any dividend or other distribution on the Common Stock or the redemption of our capital stock pursuant to the restrictions on ownership and transfer contained in our charter (see “Certain Provisions of the MGCL and Our Charter and Bylaws-Restrictions on Ownership and Transfer” below).
Redemption at the Option of a Holder. Beginning on the date of original issuance of any given shares of Series D Preferred Stock, the holder has the right to require the Company to redeem such shares at a redemption price equal to a percentage of the Series D Stated Value set forth below plus any accrued and unpaid Series D Dividends:
• | 90%, for all such redemptions effective prior to the second anniversary of the date of original issuance of such shares; provided, however, that the Board of Directors (or an authorized officer of the Company, if one is delegated such power by the Board of Directors), from time to time in its discretion, may authorize a reduction of such percentage to 87%; |
• | 92%, for all such redemptions effective on or after the second anniversary, but prior to the third anniversary, of the date of original issuance of such shares; |
• | 95%, for all such redemptions effective on or after the third anniversary, but prior to the fourth anniversary, of the date of original issuance of such shares; |
• | 97%, for all such redemptions effective on or after the fourth anniversary, but prior to the fifth anniversary, of the date of original issuance of such shares; and |
• | 100%, for all such redemptions effective on or after the fifth anniversary of the date of original issuance of such shares. |
Notwithstanding the foregoing, with respect to any redemptions effective on or after the second anniversary but prior to the fifth anniversary of the date of original issuance, the Board of Directors (or an authorized officer of the Company, if one is delegated such power by the Board of Directors), from time to time in its discretion, may authorize the Company to increase the redemption price from its existing level to an amount between 90 and 100% (inclusive) of the Series D Stated Value, plus any accrued and unpaid Series D Dividends through and including the date fixed for such redemption.
Each holder of Series D Preferred Stock may exercise such redemption right by delivering a written notice thereof to the Company and the redemption price will be paid by the Company on a date selected by the Company that is no later than 45 days after such notice is received by the Company.
Optional Redemption Following Death of a Holder. Beginning on the date of original issuance and ending on but not including the fifth anniversary of the date of original issuance of any shares of Series D Preferred Stock, we will redeem such shares held by a natural person upon his or her death at the written request of the holder’s estate at a redemption price equal to 100% of the Series D Stated Value, plus any accrued and unpaid Series D Dividends through and including the date fixed for such redemption.
Optional Redemption by the Company. We will have the right to redeem any or all shares of our Series D Preferred Stock from and after the fifth anniversary of the date of original issuance of such shares. We may redeem such shares at a redemption price equal to 100% of the Series D Stated Value, plus any accrued and unpaid Series D Dividends. If fewer than all the outstanding shares of Series D Preferred Stock are to be redeemed, the Company will select those shares to be redeemed pro rata or in such manner as the Board of Directors may determine.
We may exercise our redemption right by delivering a written notice thereof to the holders of shares of Series D Preferred Stock to be redeemed. Each such notice will state the date on which the redemption by us shall occur, which date will be no fewer than 10 nor more than 20 days following the notice date.
If full cumulative Series D Dividends on all outstanding shares of Series D Preferred Stock have not been declared and paid or declared and set apart for payment for all past dividend periods, no shares of the Series D Preferred Stock may be redeemed at the option of the Company, unless all outstanding shares of the Series D Preferred Stock are simultaneously
redeemed, and, except as provided by the restrictions on ownership and transfer set forth in our charter (see “Certain Provisions of the MGCL and Our Charter and Bylaws-Restrictions on Ownership and Transfer” below), neither the Company nor any of its affiliates may purchase or otherwise acquire shares of Series D Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of shares of Series D Preferred Stock.
Payment of the Redemption Price. Upon any redemption of Series D Preferred Stock by a holder or the Company, or upon the death of a holder, we will pay the redemption price, at our option and in our sole discretion, in cash 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 as described in the articles supplementary to our charter defining the terms of the Series D Preferred Stock.
If the Company elects to pay the redemption price in Common Stock, the Company will cause the transfer agent to, as soon as practicable, but not later than three business days after the effective date of such redemption, register the number of shares of Common Stock such holder is entitled to receive as a result of such redemption. The person or persons entitled to receive the shares of Common Stock issuable upon such redemption will be treated for all purposes as the record holder or holders of such shares of Common Stock as of the effective date of such redemption.
Our obligation to redeem any shares of our Series D Preferred Stock is limited to the extent that (i) we do not have sufficient funds available to fund any such redemption, in which case we will be required to redeem with shares of Common Stock, or (ii) we are restricted by applicable law, our charter or contractual obligations from making such redemption.
Adjustment of the Series D Stated Value in Connection with a Redemption. If certain events affecting the Common Stock, such as recapitalizations, stock dividends, stock splits, stock combinations, reclassifications, mergers or similar events, occur during the 20 trading days prior to a redemption of Series D Preferred Stock, we will adjust the Series D Stated Value so that such redemption shall entitle the holder to receive the aggregate number of shares of Common Stock or cash which, if the redemption had occurred immediately prior to such event, such holder would have owned upon such redemption and been entitled to received pursuant to the event affecting our Common Stock.
Fractional Shares. No fractional shares of Common Stock will be issued upon redemption of any shares of Series D Preferred Stock. Rather, any fractional number of shares of Common Stock to be issued upon any redemption of the Series D Preferred Stock will be rounded down to the nearest whole number of shares of Common Stock.
Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, before any distribution or payment shall be made to holders of Common Stock or any other class or series of capital stock ranking junior to shares of Series D Preferred Stock, the holders of shares of Series D Preferred Stock will be entitled to be paid out of our assets legally available for distribution to our stockholders, after payment or provision for our debts and other liabilities, a liquidation preference equal to 100% of the Series D Stated Value per share, plus an amount equal to any accrued and unpaid Series D Dividends (whether or not declared) to and including the date of payment.
If upon the voluntary or involuntary liquidation, dissolution or winding-up of the Company, the available assets of the Company, or proceeds thereof, distributable among the holders of the Series D Preferred Stock are insufficient to pay in full the above described liquidation preference and the liquidating payments on any shares of any class or series of stock ranking on parity to the Series D Preferred Stock with respect to liquidation, dissolution or winding-up (“Series D Parity Stock”), then such assets, or the proceeds thereof, will be distributed among the holders of the Series D Preferred Stock and any such Series D Parity Stock ratably in the same proportion as the respective amounts that would be payable on such Series D Preferred Stock and any such Series D Parity Stock if all amounts payable thereon were paid in full.
After payment of the full amount of the liquidating distributions to which they are entitled, the holders of shares of Series D Preferred Stock will have no right or claim to any of our remaining assets. Our consolidation, merger or conversion with or into any other corporation, trust or other entity, the consolidation or merger of any other corporation, trust or entity with or into us, the sale or transfer of any or all our assets or business, or a statutory share exchange will not be deemed to constitute a liquidation, dissolution or winding-up of the Company.
In determining whether a distribution (other than upon voluntary or involuntary liquidation), by dividend, redemption or other acquisition of shares of our stock or otherwise, is permitted under the MGCL, amounts that would be needed, if we were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of holders of the Series D Preferred Stock will not be added to our total liabilities.
Voting Rights. The Series D Preferred Stock has no voting rights, and thus has no rights to vote on any dissolution, charter amendment, merger, sale of all or substantially all of our assets, share exchange or conversion, or any amendment to the terms of the Series D Preferred Stock.
Exchange Listing. We have not made, and do not plan on making, an application to list shares of Series D Preferred Stock on Nasdaq, any other national securities exchange or nationally recognized trading system or the TASE.
Transfer Agent and Registrar. The transfer agent and registrar for the Series D Preferred Stock is American Stock Transfer and Trust Company.
Series L Preferred Stock
Ranking. The Series L Preferred Stock ranks, with respect to dividend rights:
• | senior to our Common Stock, except with respect to and only to the extent of the Initial Dividend (as defined in “-Dividends” below), and any other class or series of our capital stock, the terms of which expressly provide that our Series L Preferred Stock ranks senior to such class or series as to dividend rights; |
• | on parity with any class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks on parity with the Series L Preferred Stock as to dividend rights; |
• | junior to our Series A Preferred Stock, Series D Preferred Stock, Common Stock (with respect to and only to the extent of the Initial Dividend) and any other class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks senior to the Series L Preferred Stock as to dividend rights; and |
• | junior to all our existing and future debt obligations. |
The Series L Preferred Stock ranks, with respect to rights upon our liquidation, winding-up or dissolution:
• | senior to our Common Stock, both (i) to the extent of the Series L Stated Value (as defined in “-Stated Value” below) and (ii) following payment to holders of our Common Stock of an amount equal to any unpaid Initial Dividend, to the extent of any accrued and unpaid Series L Dividends (as defined in “-Dividends” below) and any other class or series of our capital stock, the terms of which expressly provide that the Series L Preferred Stock ranks senior to such class or series as to rights upon our liquidation, winding-up or dissolution; |
• | on parity with the Series A Preferred Stock and Series D Preferred Stock to the extent of the Series L Stated Value and with each class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks on parity with the Series L Preferred Stock as to rights upon our liquidation, winding-up or dissolution; |
• | junior to our Series A Preferred Stock, Series D Preferred Stock and Common Stock (with respect to and only to the extent of the Initial Dividend), in each case with respect to any accrued and unpaid Series L Dividends, and any class or series of our capital stock, including capital stock issued in the future, the terms of which expressly provide that such class or series ranks senior to the Series L Preferred Stock as to rights upon our liquidation, winding-up or dissolution; and |
• | junior to all our existing and future debt obligations. |
Stated Value. Each share of Series L Preferred Stock has a stated value of $28.37, subject to appropriate adjustment in limited circumstances described in “-Adjustment of the Series L Stated Value in Connection with a Redemption” below (the “Series L Stated Value”).
Dividends. Subject to the preferential rights of the holders of any class or series of our capital stock ranking senior to the Series L Preferred Stock (including the Series A Preferred Stock, Series D Preferred Stock and, to the extent of the Initial Dividend, our Common Stock), the holders of our 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 of Series L Preferred Stock at an annual rate of five and fifty hundredths of a percent (5.50%) of the Series L Stated Value, paid in New Israeli Shekels (“ILS”) as described below; provided however, if the Company fails to timely declare or fails to timely pay
dividends on our Series L Preferred Stock, the annual dividend rate of our Series L Preferred Stock will temporarily increase by 1.0% per year, up to a maximum rate of 8.5% of the Series L Stated Value, until the Company has paid all accrued distributions on our Series L Preferred Stock for any past dividend periods (the “Series L Dividend”).
Series L Dividends accrue and are cumulative from the end of the most recent period for which such dividends have been paid. For a Series L Dividend to be timely, we must declare the amount of dividends to be paid on Series L Preferred Stock in U.S. dollars during the fourth quarter of the calendar year and no later than December 15. The payment date for such annual dividend is, at the discretion of the Company, on or between December 1 of the year for which such dividend is declared and January 31 of the year following the year for which such dividend is declared. Series L Dividends are paid to holders in ILS at the weighted average of the U.S. dollar/ILS exchange rates of all transactions completed by the banks through which the Company converts the payment on the third trading day of the TASE preceding the payment date.
Prior to declaring or paying any Series L Dividend, we must first declare and pay the “Initial Dividend,” which for a given fiscal year is a minimum annual dividend on our Common Stock that is announced by us at the end of the prior fiscal year. The Initial Dividend will be $0 for any year in which (i) our Board of Directors does not authorize or we do not announce the Initial Dividend, (ii) any Series L Dividend is in arrears and such amount was not declared as of the last day of the preceding year or (iii) the debt of the Company dividend by the total assets of the Company, calculated as set forth in the articles supplementary to our charter defining the terms of the Series L Preferred Stock, exceeded 60% as of November 30 of the prior year. 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 reasonably available to us at the time of announcement, we believe will cause us to be unable to make a future dividend on our Series L Preferred Stock or on any other outstanding share of preferred stock.
Unless full cumulative dividends on the Series L Preferred Stock for all past annual periods have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof is set apart for payment, we will not:
• | declare and pay or declare and set apart for payment dividends and we will not declare and make any other distribution of cash or other property (other than dividends or other distributions paid in shares of stock ranking junior to our Series L Preferred Stock as to the distribution rights or rights upon our liquidation, winding-up or dissolution, and options, warrants or rights to purchase such shares), directly or indirectly, on or with respect to any shares of our Common Stock other than in amounts up to but not exceeding the Initial Dividend, if any, or any class or series of our stock ranking junior to or on parity with our Series L Preferred Stock as to distribution rights for any period; or |
• | except by conversion into or exchange for shares of stock ranking junior to our Series L Preferred Stock as to distribution rights or rights upon our liquidation, winding-up or dissolution, or options, warrants or rights to purchase such shares, redeem, purchase or otherwise acquire (other than a redemption, purchase or other acquisition of Common Stock made for purposes of an employee incentive or benefit plan) for any consideration, or pay or make available any monies for a sinking fund for the redemption of, any Common Stock or any class or series of our stock ranking junior to or on parity with our Series L Preferred Stock as to distribution rights. |
However, to the extent necessary to preserve our status as a REIT, the foregoing sentence will not prohibit declaring or paying or setting apart for payment any dividend or other distribution on our Common Stock or the redemption of our capital stock pursuant to the restrictions on ownership and transfer contained in our charter (see “Certain Provisions of the MGCL and Our Charter and Bylaws-Restrictions on Ownership and Transfer” below).
Minimum Fixed Charge Coverage Ratio. Prior to November 21, 2022, we are not permitted to issue any preferred stock ranking senior to or on parity with the Series L Preferred Stock with respect to the payment of dividends, other distributions, liquidation or our dissolution or winding up unless the Minimum Fixed Charge Coverage Ratio (as defined in our charter) is equal to or greater than 1.25:1.00 as of the last day of the trailing 12-month period ending on the last day of the quarter preceding the date of such issuance.
Redemption at the Option of a Holder. From and after November 21, 2022, each holder of shares of Series L Preferred Stock may require us to redeem such shares at a redemption price equal to 100% of the Series L Stated Value plus, provided the Series L Conditions (as defined in “-Payment of the Redemption Price” below) are met, all accrued and unpaid Series L Dividends. Notwithstanding the foregoing, a holder of shares of our Series L Preferred Stock may require us to redeem such shares at any time prior to November 21, 2022 if (i) we do not declare and pay in full the Series L Dividend for any annual period prior to such date and (ii) we do not declare and pay all accrued and unpaid Series L Dividends for all past dividend periods prior to the applicable holder redemption date.
Optional Redemption by the Company. From and after November 21, 2022, subject to certain conditions, we may redeem shares of Series L Preferred Stock at a redemption price equal to 100% of the Series L Stated Value, plus any accrued and unpaid Series L Dividends.
No shares of Series L Preferred Stock may be redeemed at the option of the Company if (i) full cumulative Series L Dividends on all outstanding shares of Series L Preferred Stock have not been declared and paid or declared and set apart for payment for all past dividend periods, (ii) the Company has not declared the entire Initial Dividend with respect to the Common Stock for such fiscal year, (iii) full cumulative Series A Dividends on all outstanding shares of Series A Preferred Stock have not been declared and paid or declared and set apart for payment for all past dividend periods or (iv) the Company has not paid in such fiscal year dividends on the Common Stock equal to the product of (A) the Initial Dividend multiplied by (B) a fraction, the numerator of which is the number of quarters that have passed since the beginning of the fiscal year (including the current quarter) and the denominator of which is four (the conditions in (ii), (iii) and (iv), collectively, the “Series L Conditions”).
If full cumulative Series L Dividends on all outstanding shares of Series L Preferred Stock have not been declared and paid or declared and set apart for payment for all past dividend periods, neither the Company nor any of its affiliates may purchase or otherwise acquire shares of Series L Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of shares of Series L Preferred Stock.
Payment of the Redemption Price. Upon any redemption of Series L Preferred Stock by a holder or the Company, or upon the death of a holder, we will pay the redemption price (i) in cash in ILS, (ii) in shares of our Common Stock based on the lower of (i) the net asset value of the Company per share of Common Stock as most recently published by the Company as of the redemption date and (ii) the volume-weighted average price of our Common Stock for the 20 trading days prior to the redemption as described in the articles supplementary to our charter defining the terms of the Series L Preferred Stock or (iii) in any combination of cash in ILS and Common Stock, based on the foregoing conversion mechanisms.
If the Company elects to pay all or a portion of the redemption price in Common Stock, the Company will cause the transfer agent to, as soon as practicable, register the number of shares of Common Stock such holder is entitled to receive as a result of such redemption. The person or persons entitled to receive the shares of Common Stock issuable upon such redemption will be treated for all purposes as the record holder or holders of such shares of Common Stock as of the effective date of such redemption.
Our obligation to redeem any shares of our Series L Preferred Stock is limited to the extent that (i) we do not have sufficient funds available to fund any such redemption, in which case we will be required to redeem with shares of Common Stock, or (ii) we are restricted by applicable law, our charter or contractual obligations from making such redemption.
Fractional Shares. No fractional shares of Common Stock will be issued upon redemption of any shares of Series L Preferred Stock. Rather, we will round down to the nearest whole number the aggregate number of shares of Common Stock to be issued to a particular holder upon redemption in a given quarter and will pay cash, in equal value in ILS as determined in accordance with the articles supplementary to our charter defining the terms of the Series L Preferred Stock, in lieu of the fractional shares.
Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding-up of our affairs, after payment or provision for our debts and other liabilities, our funds legally available for distribution to our stockholders will be distributed as follows:
• | first, pro rata to (i) holders of our Series L Preferred Stock, in an amount per share equal to the Series L Stated Value, (ii) holders of our Series A Preferred Stock, in an amount per share equal to the Series A Stated Value plus an amount equal to all accrued and unpaid Series A Dividends (whether or not declared), (iii) holders of our Series D Preferred Stock, in an amount per share equal to the Series D Stated Value plus an amount equal to all accrued and unpaid Series D Dividends (whether or not declared) and (iv) holders of any other class or series of capital stock ranking on parity with our Series L Preferred Stock, Series A Preferred Stock and Series D Preferred Stock with respect to rights upon our redemption, liquidation, winding-up or dissolution, to the extent provided by the terms of such class or series of capital stock; |
• | second, to holders of our Common Stock in an amount equal to the amount of any unpaid Initial Dividend; |
• | third, to holders of our Series L Preferred Stock in an amount equal to any accrued and unpaid Series L Dividend; and |
• | fourth, to holders of our Common Stock and any other class or series of capital stock ranking junior to our Series L Preferred Stock. |
Any liquidation preference on our Series L Preferred Stock will be paid by the Company in ILS based on the weighted average of the U.S. dollar/ILS exchange rates of all transactions completed by the banks through which the Company converts the payment from U.S. dollars on the trading day of the TASE preceding the payment date.
If upon the voluntary or involuntary liquidation, dissolution or winding-up of the Company, the available assets of the Company, or proceeds thereof, distributable among the holders of the Series L Preferred Stock are insufficient to pay in full the above described liquidation preference and the liquidating payments on any shares of any class or series of stock ranking on parity to the Series L Preferred Stock with respect to the liquidation, dissolution or winding-up of the Company (“Series L Parity Stock”), then such assets, or the proceeds thereof, will be distributed among the holders of the Series L Preferred Stock and any such Series L Parity Stock ratably in the same proportion as the respective amounts that would be payable on such Series L Preferred Stock and any such Series L Parity Stock if all amounts payable thereon were paid in full.
After payment of the full amount of the liquidating distributions to which they are entitled, the holders of shares of Series L Preferred Stock will have no right or claim to any of our remaining assets. Our consolidation, merger or conversion with or into any other corporation, trust or other entity, the consolidation or merger of any other corporation, trust or entity with or into us, the sale or transfer of any or all our assets or business, or a statutory share exchange will not be deemed to constitute a liquidation, dissolution or winding-up of the Company.
In determining whether a distribution (other than upon voluntary or involuntary liquidation), by dividend, redemption or other acquisition of shares of our stock or otherwise, is permitted under the MGCL, amounts that would be needed, if we were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of holders of the Series L Preferred Stock will not be added to our total liabilities.
Voting Rights. The Series L Preferred Stock has no voting rights, and thus has no rights to vote on any dissolution, charter amendment, merger, sale of all or substantially all of our assets, share exchange or conversion, or any amendment to the terms of the Series L Preferred Stock.
Exchange Listing. Our Series L Preferred Stock is listed on Nasdaq and on the TASE, in each case under the ticker symbol “CMCTP.”
Transfer Agent and Registrar. The transfer agent and registrar for the Series L Preferred Stock is Computershare Trust Company, N.A.
Series A Warrants
Warrant Agreement. In connection with the initial public offering of our Series A Preferred Stock, we issued warrants to purchase 0.25 shares of Common Stock each (the “Series A Warrants”). The Series A Warrants are governed by a warrant agreement, which may be amended from time to time in accordance with its terms (the “Warrant Agreement”). The Series A Warrants are either in certificated form or in “book-entry” form and, in each case, are evidenced by one or more global warrants. Those investors who own beneficial interests in a global warrant do so through participants in DTC’s system, and the rights of these indirect owners are governed solely by the Warrant Agreement and the applicable procedures and requirements of the DTC.
Exercisability. Holders of our Series A Warrants may exercise their Series A Warrants at any time beginning on the first anniversary of their date of issuance until 5:00 p.m., New York time, on the date that is the fifth anniversary of such date of issuance (the “Warrant Expiration Time”). Each Series A Warrant was originally exercisable for 0.25 shares of Common Stock, subject to adjustment as described in “-Adjustments to Exercisability” below. The Series A Warrants are exercisable at the option of each holder, in whole but not in part, for no less than an aggregate of 50 shares of Common Stock (it being understood that in the case of a “cashless exercise,” the number of shares of Common Stock to be received by a holder of a Series A Warrant will be reduced to pay for the exercise price as provided in the Warrant Agreement), unless such holder does not at the time of exercise own a sufficient number of Series A Warrants to meet such minimum amount. The Series A Warrants may be exercised by delivering to the warrant agent, prior to their applicable Warrant Expiration Time, a duly executed exercise notice accompanied by payment in full for the number of shares of our Common Stock purchased upon such exercise (except in the case of a cashless exercise in the circumstances discussed below).
A holder of Series A Warrants does not have the right to exercise any portion of a Series A Warrant to the extent that, after giving effect to the issuance of shares of our Common Stock upon such exercise, the holder (together with its affiliates and any other persons acting as a group together with such holder or any of its affiliates) would beneficially or constructively own shares of Common Stock (i) in excess of 6.25% in value or number of shares, whichever is more restrictive, of the shares of Common Stock outstanding or (ii) that would otherwise result in the violation of any of the restrictions on ownership transfer of our stock contained in our charter, in each case, immediately after giving effect to the issuance of shares of Common Stock upon exercise of the Series A Warrant, as discussed in “Certain Provisions of the MGCL and Our Charter and Bylaws-Restrictions on Ownership and Transfer” below.
Cashless Exercise. If, on the date of any exercise of any Series A Warrant, a registration statement covering the issuance of the shares of Common Stock issuable upon exercise of the Series A Warrant is not effective and an exemption from registration is not available for the resale of such shares issuable upon exercise of the Series A Warrant, the holder may only satisfy its obligation to pay the exercise price upon the exercise of its Series A Warrant on a cashless basis in accordance with the terms of the Warrant Agreement. When exercised on a cashless basis, a portion of the Series A Warrant is cancelled in payment of the purchase price payable in respect of the number of shares of our Common Stock purchasable upon such exercise. The shares of Common Stock cancelled in a cashless exercise will be valued at the closing price of the Common Stock on the trading day immediately preceding the date as of which such value is being determined.
Outstanding Warrants After Expiration. Any Series A Warrant that is outstanding after its applicable Warrant Expiration Time shall be automatically terminated.
Exercise Price. The exercise price of the Common Stock purchasable upon exercise of the Series A Warrants equals an amount equal to a 15% premium to the Applicable NAV, subject to adjustment as described in “-Adjustments to Exercisability” below. The “Applicable NAV” is the fair market net asset value per share of Common Stock, calculated in the sole discretion of the Company, as most recently published by the Company at the time of the issuance of the applicable Series A Warrant. The Company will determine the Applicable NAV on an annual basis or more frequently if, in the Company’s discretion, significant developments warrant.
Adjustments to Exercisability. The exercise price and the number of shares of Common Stock issuable upon exercise of the Series A Warrants are subject to appropriate adjustment from time to time in relation to the following events or actions in respect of the Company: (i) we declare a dividend or make a distribution on outstanding shares of Common Stock in shares of Common Stock; (ii) we subdivide or reclassify our outstanding shares of Common Stock into a greater number of shares of Common Stock; (iii) we combine or reclassify our outstanding shares of Common Stock into a smaller number of shares of Common Stock; or (iv) we enter into any transaction whereby the outstanding shares of Common Stock are at any time changed into or exchanged for a different number or kind of shares or other securities of the Company or of another entity through reorganization, merger, consolidation, liquidation or recapitalization. Additionally, the Company may, as it deems appropriate to account for the effect of the payment of a special cash dividend by the Company, adjust the exercise price of outstanding and unexpired Series A Warrants and/or adjust the number of shares of Common Stock for which Series A Warrants may be exercised. The decision of what constitutes a special cash dividend and whether to make any adjustment in connection therewith, the methodology used to make any adjustment and the extent of any adjustment will be determined by the Company in its sole discretion.
Transferability. Subject to applicable law, the Series A Warrants may be transferred at the option of the holder upon surrender of the Series A Warrants with the appropriate instruments of transfer.
Exchange Listing. The Series A Warrants are not listed on Nasdaq, any other national securities exchange or other nationally recognized trading system or the TASE.
Rights as Stockholder. Except by virtue of such holder’s ownership of shares of our Common Stock, the holders of the Series A Warrants will not have the rights or privileges of holders of our Common Stock, including any voting rights, until they exercise their Series A Warrants.
Fractional Shares. No fractional shares of Common Stock will be issued upon the exercise of the Series A Warrants. Rather, we shall, at our election, either pay a cash adjustment in respect of such fraction in an amount equal to such fraction multiplied by the exercise price or round down the number of shares of Common Stock to be issued to the nearest whole number.
Certain Provisions of the MGCL and Our Charter and Bylaws
Classification or Reclassification of Capital Stock
Our charter authorizes our Board of Directors to classify and reclassify any unissued shares of Common Stock, or preferred stock into other classes or series of stock, including one or more classes or series of stock that have priority with respect to voting rights, dividends or upon liquidation over our Common Stock, our Series A Preferred Stock, or our Series L Preferred Stock, and authorizes us to issue the newly-classified shares, subject to the limitations contained in the terms of our Series L Preferred Stock described above. Prior to the issuance of shares of each new class or series, our Board of Directors is required by Maryland law and by our charter to set, subject to the provisions of our charter regarding the restrictions on ownership and transfer of our stock and the express terms of any other class or series of our stock then outstanding, the preferences, conversion or other rights, voting powers, restrictions (including restrictions as to transferability), limitations as to dividends and other distributions, qualifications and terms and conditions of redemption for each class or series. Our Board of Directors may take these actions without stockholder approval unless stockholder approval is required by the rules of any stock exchange or automatic quotation system on which our securities may be listed or traded or the terms of any other class or series of our stock. Therefore, our Board of Directors could authorize the issuance of shares of Common Stock or preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a change in control or other transaction that might involve a premium price for shares of our Common Stock or otherwise be in the best interest of our stockholders.
Restrictions on Ownership and Transfer
Our charter, subject to certain exceptions, contains certain restrictions on the number of shares of our stock that a person may own. Our charter contains a stock ownership limit that prohibits any person, unless exempted by our Board of Directors, from acquiring or holding, directly or indirectly, applying attribution rules under the Code, shares of our capital stock in excess of 6.25% in number of shares or value, whichever is more restrictive, of the aggregate of the outstanding shares of our stock or 6.25% of the number of shares or value, whichever is more restrictive, of the outstanding shares of our Common Stock. Pursuant to our charter, our Board of Directors has the power to increase or decrease the percentage of stock that a person may beneficially or constructively own. However, any decreased stock ownership limit will not apply to any person whose percentage ownership of our stock is in excess of such decreased stock ownership limit until that person’s percentage ownership of our stock equals or falls below the decreased stock ownership limit. Until such a person’s percentage ownership of our stock falls below such decreased stock ownership limit, any further acquisition of stock will be in violation of the decreased stock ownership limit.
Our charter further prohibits (i) any person from beneficially or constructively owning our stock that (A) would result in us being “closely held” under Section 856(h) of the Code (without regard to whether the shares are owned during the last half of a taxable year), (B) would cause us to constructively own 10% or more of the ownership interests in a tenant of our real property within the meaning of Section 856(d)(2)(B) of the Code or (C) would otherwise cause us to fail to qualify as a REIT, or (ii) any person from transferring our stock if such transfer would result in our stock being beneficially owned by fewer than 100 persons. Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of our stock that will or may violate any of the foregoing restrictions on ownership and transfer, or who is the intended transferee of shares of our stock that are transferred to the trust (as described below), is required to give written notice immediately to us or, in the event of a proposed or attempted transfer, at least 15 days prior written notice to us and provide us with such other information as we may request in order to determine the effect of such transfer on our qualification as a REIT. The foregoing restrictions on transfer and ownership will not apply if our Board of Directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT or that compliance with such restrictions is no longer required in order for us to qualify as a REIT.
Our Board of Directors, in its sole discretion, may exempt, prospectively or retroactively, a person from each of the foregoing restrictions except those listed under (i)(A), (i)(C) and (ii) in the preceding paragraph. The person seeking an exemption must provide such representations, covenants and undertakings as our Board of Directors may deem appropriate to conclude that granting the exemption will not cause us to lose our qualification as a REIT. Our Board of Directors may also require a ruling from the Internal Revenue Service or an opinion of counsel in order to determine or ensure our qualification as a REIT in the context of granting such exemptions. Our Board of Directors has waived the 6.25% ownership limits and the restrictions listed under (i)(B) in the preceding paragraph for CIM Urban REIT, LLC, CIM Urban Partners GP, LLC, CIM Service Provider, LLC, the California Public Employees’ Retirement System and persons owning a direct or indirect interest in CIM Urban REIT, LLC, CIM Urban Partners GP, LLC, CIM Service Provider, LLC or the California Public Employees’ Retirement System, and created and excepted holder limit that allows the California Public Employees’ Retirement System to hold up to 23.756% of our outstanding Common Stock.
Any attempted transfer of shares of our stock which, if effective, would result in a violation of the foregoing restrictions will cause the number of shares of our stock causing the violation (rounded up to the nearest whole share) to be automatically transferred to a trust for the benefit of one or more charitable beneficiaries, and the proposed transferee will not acquire any rights in such stock. The automatic transfer will be deemed to be effective as of the close of business on the business day (as defined in our charter) prior to the date of the transfer. If, for any reason, the transfer to the trust does not occur or would not prevent a violation of the restrictions on ownership and transfer contained in our charter, our charter provides that the purported transfer will be treated as invalid from the outset. Shares of stock held in the trust will be issued and outstanding shares. The proposed transferee will not benefit economically from ownership of any stock held in the trust, will have no rights to dividends and no rights to vote or other rights attributable to the shares of stock held in the trust. The trustee of the trust will have all voting rights and rights to dividends or other distributions with respect to shares held in the trust. These rights will be exercised for the exclusive benefit of the charitable beneficiary. Any dividend or other distribution paid prior to our discovery that shares of our stock have been transferred to the trust will be paid by the recipient to the trustee upon demand. Any dividend or other distribution authorized but unpaid will be paid when due to the trustee. Any dividend or other distribution paid to the trustee will be held in trust for the charitable beneficiary. Subject to Maryland law, the trustee will have the authority to rescind as void any vote cast by the proposed transferee prior to our discovery that the shares have been transferred to the trust and to recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. However, if we have already taken irreversible corporate action, then the trustee will not have the authority to rescind and recast the vote.
Within 20 days of receiving notice from us that shares of our stock have been transferred to the trust, the trustee will sell the shares to a person designated by the trustee, whose ownership of the shares will not violate the above ownership limitations. Upon such sale, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee and to the charitable beneficiary as follows: the proposed transferee will receive the lesser of (i) the price paid by the proposed transferee for the shares, or, if the proposed transferee did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise or other similar transaction), the market price (as defined in our charter) of the shares on the day of the event causing the shares to be held in the trust and (ii) the price per share received by the trustee from the sale or other disposition of the shares. The trustee may reduce the amount payable to the proposed transferee by the amount of dividends and other distributions paid to the proposed transferee and owed by the proposed transferee to the trust.
Any net sale proceeds in excess of the amount payable to the proposed transferee will be paid immediately to the charitable beneficiary. If, prior to our discovery that our stock have been transferred to the trust, the shares are sold by the proposed transferee, then (i) the shares shall be deemed to have been sold on behalf of the trust and (ii) to the extent that the proposed transferee received an amount for the shares that exceeds the amount the proposed transferee was entitled to receive, the excess shall be paid to the trustee upon demand.
In addition, shares of our stock held in the trust will be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of the price per share in the transaction that resulted in the transfer to the trust (or, in the case of a devise or gift, the market price at the time of the devise or gift) and the market price on the date we, or our designee, accept the offer. We may reduce the amount payable to the proposed transferee by the amount of dividends and other distributions paid to the proposed transferee and owned by the proposed transferee to the trust. We will have the right to accept the offer until the trustee has sold the shares. Upon a sale to us, the interest of the charitable beneficiary in the shares sold will terminate, and the trustee will distribute the net proceeds of the sale to the proposed transferee and any dividends or other distributions held by the trustee shall be paid to the charitable beneficiary.
Every owner of more than 5% (or such lower percentage as required by the Code or the regulations promulgated thereunder) in number or in value of the outstanding shares of our stock, including our Common Stock, within 30 days after the end of each taxable year, will be required to give written notice to us stating the name and address of such owner, the number of shares of each class and series of shares of our stock that the owner beneficially owns and a description of the manner in which the shares are held. Each owner shall provide to us such additional information as we may request to determine the effect, if any, of the beneficial ownership on our qualification as a REIT and to ensure compliance with the ownership limitations. In addition, each beneficial or constructive owner and each person who is holding shares of our stock for such owner will, upon demand, be required to provide to us such information as we may request to determine our qualification as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance and to ensure compliance with the ownership limits.
These ownership limitations could delay, defer or prevent a transaction or a change in control that might involve a premium price for our Common Stock or might otherwise be in the best interests of our stockholders.
Our Board of Directors
Our charter and bylaws provide that the number of directors may be established, increased or decreased by a majority of our entire Board of Directors, but may not be fewer than the minimum number required by the MGCL (which currently is one) or, unless our bylaws are amended, more than 25. Any vacancy on our Board of Directors, whether resulting from an increase in the number of directors or otherwise, may only be filled by the affirmative vote of a majority of the remaining directors, even if such a majority constitutes less than a quorum. Except as may be provided with respect to any class or series of our stock, at each annual meeting of our stockholders, each of our directors will be elected by the holders of our Common Stock to serve until the next annual meeting of our stockholders and until his or her successor is duly elected and qualifies.
Removal of Directors
Our charter provides that, subject to the rights of holders of one or more classes or series of preferred stock, a director may be removed with or without cause and by the affirmative vote of at least two-thirds of the votes entitled to be cast by our stockholders generally in the election of our directors. This provision, when coupled with the exclusive power of our Board of Directors to fill vacant directorships, may preclude stockholders from removing incumbent directors except by a substantial affirmative vote and filling the vacancies created by such removal with their own nominees.
Limitation of Liability and Indemnification
Maryland law permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (i) actual receipt of an improper benefit or profit in money, property or services or (ii) active or deliberate dishonesty established in a judgment or other final adjudication to be material to the cause of action. Our charter contains a provision that eliminates the liability of our directors and officers to the maximum extent permitted by Maryland law.
Maryland law requires a Maryland corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. Maryland law permits a Maryland corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established that:
• | an act or omission of the director or officer was material to the matter giving rise to the proceeding and |
• | was committed in bad faith or |
• | was the result of active and deliberate dishonesty; |
• | the director or officer actually received an improper personal benefit in money, property or services; or |
• | in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, Maryland law permits a Maryland corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of:
• | a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and |
• | a written undertaking by the director or officer or on the director’s or officer’s behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the director or officer did not meet the standard of conduct. |
Our charter and bylaws obligate 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 present or former director or officer 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 of our Company and at our Company’s request, serves or has served another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, trustee, member, manager or partner 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. |
Our charter and bylaws also permit us, subject to approval from our Board of Directors, to indemnify and advance expenses to any person who served a predecessor of our Company in any of the capacities described above and to any employee or agent of our Company or a predecessor of our Company.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and named executive officers. Each indemnification agreement provides that we will indemnify and hold harmless each such director or named executive officer to the fullest extent permitted by law.
Business Combinations
Under the MGCL, certain “business combinations,” including a merger, consolidation, statutory share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities, between a Maryland corporation and an “interested stockholder” or an affiliate of such an interested stockholder, are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. An “interested stockholder” is, generally, any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting shares or an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding voting shares of the corporation.
After such five-year period, any such business combination must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding voting shares of the corporation and (ii) two-thirds of the votes entitled to be cast by holders of voting shares of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder, unless, among other conditions, the corporation’s common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares.
Under the MGCL, a person is not an “interested stockholder” if the board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. A corporation’s board of directors may provide that its approval is subject to compliance with any terms and conditions determined by it.
We have elected to opt out of these provisions of the MGCL by resolution of our Board of Directors. However, our Board of Directors may by resolution elect to repeal the foregoing opt-outs from the business combination provisions of the MGCL in the future.
Control Share Acquisitions
The MGCL provides that a holder of “control shares” of a Maryland corporation acquired in a “control share acquisition” has no voting rights with respect to such shares except to the extent approved by the affirmative vote of two-thirds of the votes entitled to be cast on the matter, excluding any of the following persons entitled to exercise or direct the exercise of the voting power of such shares in the election of directors: (i) a person who makes or proposes to make a control share acquisition, (ii) an officer of the corporation or (iii) an employee of the corporation who is also a director of the corporation. “Control shares” are voting shares of stock that, if aggregated with all other such shares previously acquired, directly or indirectly, by the acquirer, or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: (A) one-tenth or more but less than one-third, (B) one-third or more but less than a majority or (C) a majority or more of all voting power.
Control shares do not include shares that the acquiring person 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, directly or indirectly, of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses and making an acquiring person statement (as described in the MGCL)), may compel the board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the control shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders’ meeting.
If voting rights of control shares are not approved at the meeting or if the acquiring person does not deliver an “acquiring person statement” as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value 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 such shares are considered and not approved or, if no such meeting is held, as of the date of the last control share acquisition. If voting rights for control shares are approved at a stockholders’ meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply to (i) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (ii) acquisitions approved or exempted by the charter or bylaws of the corporation.
We have elected to opt out of these provisions of the MGCL pursuant to a provision in our bylaws. However, we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Subtitle 8
Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any or all of the following five provisions:
• | a classified board consisting of three classes; |
• | a two-thirds vote requirement for removing a director; |
• | a requirement that the number of directors be fixed only by vote of the directors; |
• | a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred; or |
• | a majority stockholder vote requirement for the calling of a stockholder-requested 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.
Dissolution, Amendment to the Charter and Other Extraordinary Actions
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or convert into another entity unless declared advisable by the board of directors
and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter provides for approval of any of these matters by the affirmative vote of stockholders entitled to cast a majority of the votes entitled to be cast on such matters, except that the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on such matter is required to amend the provisions of our charter relating to the removal of directors, the indemnification of our officers and directors, restrictions on ownership and transfer of our stock or the vote required to amend such provisions. Maryland law also permits a Maryland corporation to transfer all or substantially all of its assets without the approval of the stockholders of the corporation to an entity if all of the equity interests of the entity are owned, directly or indirectly, by the corporation. Because our operating assets may be held by our operating partnership or its subsidiaries, these subsidiaries may be able to merge or transfer all or substantially all of their assets without the approval of our stockholders.
Meetings of Stockholders
Under our bylaws, annual meetings of holders of our Common Stock must be held each year at a date, time and place determined by our Board of Directors. Special meetings of holders of our Common Stock may be called by the chairman of our Board of Directors, our chief executive officer, our president and our Board of Directors. Subject to the provisions of our bylaws, a special meeting of stockholders to act on any matter that may properly be considered at a meeting of stockholders must be called by our secretary upon the written request of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter at such meeting who have requested the special meeting in accordance with the procedures specified in our bylaws and provided the information and certifications required by our bylaws. Only matters set forth in the notice of a special meeting of stockholders may be considered and acted upon at such a meeting.
Advance Notice of Director Nominations and New Business
Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to our Board of Directors and the proposal of business to be considered by stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by or at the direction of our Board of Directors, or (iii) by a holder of our Common Stock who was a stockholder of record at the time of giving notice and at the time of our annual meeting, who is entitled to vote at the meeting and who has complied with the advance notice procedures set forth in our bylaws. Our bylaws provide that with respect to special meetings of our stockholders, only the business specified in our notice of meeting may be brought before the meeting, and nominations of persons for election to our Board of Directors may be made only (A) by or at the direction of our Board of Directors, or (B) provided that the special meeting has been called in accordance with our bylaws for the purpose of electing directors, by any holder of our Common Stock who was a stockholder of record at the time of giving notice and at the time of the special meeting, who is entitled to vote at the meeting and who has complied with the advance notice procedures set forth in our bylaws.
Exhibit 10.11
CIM COMMERCIAL TRUST CORPORATION
OFFERING OF A MAXIMUM OF
$784,983,825,
ON AN AGGREGATE BASIS, OF SERIES A PREFERRED STOCK
AND
SERIES D PREFERRED STOCK
SECOND AMENDED AND RESTATED
DEALER MANAGER AGREEMENT
This SECOND AMENDED AND RESTATED DEALER MANAGER AGREEMENT (this "Agreement") is entered into as of January 28, 2020, by and among CIM Commercial Trust Corporation, a Maryland corporation (the "Company"), CIM Service Provider, LLC, a Delaware limited liability company (the "Manager"), and CCO Capital, LLC, a Delaware limited liability company (the "Dealer Manager"), in connection with the public offering (the "Offering") by the Company of a maximum of $784,983,825, on an aggregate basis, of shares of Series A Preferred Stock, par value $0.001 per share, of the Company ("Series A Preferred Stock") and shares of Series D Preferred Stock, par value $0.001 per share, of the Company ("Series D Preferred Stock"). Shares of Series A Preferred Stock and Series D Preferred Stock are referred to as "Preferred Shares". Each of the Company, the Manager, and the Dealer Manager is from time to time referred to as a "Party" and, collectively, the "Parties".
WHEREAS, on July 1, 2016, the Company commenced an offering of up to 36,000,000 units of the Company (the "Units") at a purchase price of up to $25.00 per Unit (the "Prior Offering"), with each Unit consisting of (a) one share of Series A Preferred Stock and (b) one warrant to purchase 0.25 of a share of common stock, par value $0.001 per share, of the Company ("Common Stock");
WHEREAS, the Prior Offering was conducted pursuant to that certain registration statement on Form S-11 (Reg. No. 333-210880), as amended from time to time, and that certain replacement registration statement on Form S-11 (Reg. No. 333-232232) pursuant to Rule 415 promulgated under the Securities Act of 1933, as amended (the "Securities Act");
WHEREAS, pursuant to the terms of the Dealer Manager Agreement, dated as of June 28, 2016, as amended by Amendment No. 1 thereto, dated as of August 11, 2016, by and among the Company, the Manager and International Assets Advisory, LLC ("IAA"), as assigned by IAA to the Dealer Manager pursuant to that certain Amendment, Assignment and Assumption Agreement, effective as of May 31, 2019, by and among the Company, the Manager, IAA and the Dealer Manager, and as amended and restated by the terms of the Amended and Restated Dealer Manager Agreement, dated as of December 10, 2019 (the "A&R Agreement"), the Dealer Manager served as the exclusive dealer manager of the Company with respect to the Prior Offering commencing on May 31, 2019;
WHEREAS, the Company desires to terminate the Prior Offering and commence in its place the Offering under the shelf registration statement on Form S-3 (Reg. No. 333-233255), declared effective by the U.S. Securities and Exchange Commission (the "Commission") on November 27, 2019 (the "Shelf Registration Statement"), which Shelf Registration Statement registered an aggregate of up to $1,000,000,000 of newly issued (a) senior and subordinated debt securities of the Company, (b) Common Stock, (c) shares of preferred stock, par value $0.001 per share, of the Company ("Preferred Stock"), (d) warrants to purchase debt securities, Common Stock, Preferred Stock or other securities or properties of the Company, (e) rights to purchase Common Stock, Preferred Stock or other securities of the Company and (f) units comprised of two or more of the foregoing securities (collectively, "Securities"); and
WHEREAS, the Company, the Manager and the Dealer Manager desire that the Dealer Manager serve as the exclusive dealer manager of the Company with respect to the Offering.
NOW, THEREFORE, in consideration of foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree to amend and restate the A&R Agreement as follows:
1.Appointment. Upon the terms and subject to the conditions contained in this Agreement, the Company and the Dealer Manager hereby confirm the appointment of the Dealer Manager as the exclusive dealer manager for the Offering. The Dealer Manager hereby agrees not to, and hereby agrees to instruct all Soliciting Dealers (as defined below) not to, solicit or make any offers for the sale of Units under the Prior Offering following the date of this Agreement.
2.Representations and Warranties of the Company. The Company hereby represents and warrants to the Dealer Manager, as of the date of this Agreement and on each Effective Date (as defined below), as follows:
(a)Registration Statement and Prospectus. The Company has filed with the Commission the Shelf Registration Statement containing a base prospectus for the registration of the Preferred Shares under the Securities Act and the rules and regulations of the Commission promulgated thereunder (the "Securities Act Rules and Regulations"). Except where the context otherwise requires, the term "Registration Statement" shall refer to the most recently declared effective of (i) the Shelf Registration Statement, (ii) any subsequent registration statement in respect of the Offering filed with the Commission pursuant to Rule 415(a)(6) under the Securities Act, from and after the declaration of the effectiveness of such subsequent registration statement, and (iii) any post-effective amendment to the Shelf Registration Statement or any subsequent registration statement in respect of the Offering filed with the Commission, in each case from and after the declaration of effectiveness of such post-effective amendment or subsequent registration statement, and in each case including any information contained in a Prospectus (as defined below) subsequently filed with the Commission pursuant to Rule 424(b) under the Securities Act or deemed to be a part of such registration statement pursuant to the Securities Act Rules and Regulations. The term "Prospectus" shall refer to the base prospectus contained in the Registration Statement, as supplemented from time to time. The term "preliminary Prospectus" shall refer to a preliminary prospectus related to the Offering prior to the final determination of pricing terms included at any time as part of the Registration Statement. As used herein, the terms "Registration Statement", "Prospectus" and "preliminary Prospectus" shall include the documents, if any, incorporated or deemed to be incorporated by reference therein. Except where the context otherwise requires, the term "Effective Date" shall refer to the effective date of the Registration Statement.
(b)Documents Incorporated by Reference. The documents incorporated or deemed to be incorporated by reference in the Prospectus (if any), at the time they were filed with the Commission, complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder (the "Exchange Act Rules and Regulations"), and did not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(c) | Compliance with the Securities Act, Etc. |
(i)On (A) each applicable Effective Date of each Registration Statement, (B) the date of the preliminary Prospectus as to the preliminary Prospectus, (C) the date of each Prospectus as to the Prospectus, and (D) the date any supplement to the Prospectus is filed with the Commission as to such supplement, the Registration Statement, the Prospectus and any amendments or supplements thereto, as applicable, have complied, and will comply, in all material respects with the Securities Act, the Securities Act Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations, as applicable; and
(ii)The Shelf Registration Statement does not, and any future Registration Statement will not, in each case as of the applicable Effective Date, include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus does not, and any amendment or supplement thereto will not, as of the applicable filing date, include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading;
provided, however, that the foregoing provisions of this Section 2(c) will not extend to any statements contained in, incorporated by reference in or omitted from the Registration Statement, the Prospectus or any amendment or supplement thereto that are based upon written information furnished to the Company by the Dealer Manager expressly for use therein.
(d)Securities Matters. There has not been (i) any request by the Commission for any further amendment to the Registration Statement or the Prospectus or for any additional information in respect of the Offering that has not been complied with, (ii) any issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or, to the Company's knowledge, threat of any proceeding for that purpose, or (iii) any notification with respect to the suspension of the qualification of the Preferred Shares for sale in any jurisdiction or any initiation or, to the Company's knowledge, threat of any proceeding for such purpose. The Company is in compliance in all material respects with all federal and state securities laws, rules and regulations applicable to it and its activities, including, without limitation, with respect to the Offering and the sale of the Preferred Shares.
(e)Company Status. The Company is a corporation duly incorporated and validly existing under the general laws of the State of Maryland, with all requisite power and authority to enter into this Agreement and to carry out its obligations hereunder.
(f)Authorization of Agreement. This Agreement has been duly and validly authorized, executed and delivered by or on behalf of the Company and, assuming due authorization, execution and delivery of this Agreement by the Dealer Manager, will constitute a valid and binding agreement of the Company enforceable in accordance with its terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of the United States, any state or any political subdivision thereof which affect creditors' rights generally or by equitable principles relating to the availability of remedies or except to the extent that the enforceability of the indemnity and contribution provisions contained in this Agreement may be limited under applicable securities laws).
The execution and delivery of this Agreement by the Company and the performance of this Agreement by the Company and the consummation of the transactions contemplated herein, do not and will not conflict with, or result in a breach of any of the terms and provisions of, or constitute a default under: (i) the Company's or any of its subsidiaries' charter, by-laws, or other organizational documents, as applicable; (ii) any indenture, mortgage, stockholders' agreement, note, lease or other material agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their properties is bound; or (iii) any statute, rule or regulation or order of any court or other governmental agency or body having jurisdiction over the Company, any of its subsidiaries or any of their properties, except in the case of clause (ii) or (iii), for such conflicts, breaches or defaults that do not result in and would not reasonably be expected to result in, individually or in the aggregate, a Company MAE (as defined below in this Section 2(f)). No consent, approval, authorization or order of any court or other governmental agency or body has been obtained by the Company or is required for the performance of this Agreement by the Company or for the consummation by the Company of any of the transactions contemplated hereby, other than (A) such as have been obtained or will have been obtained at the Effective Date under the Securities Act or the Exchange Act, or from the Financial Industry Regulatory Authority, Inc. ("FINRA"), (B) as may be required under state securities or applicable blue sky laws in connection with the offer and sale of the Preferred Shares or under the laws of states in which the Company may own real properties in connection with its qualification to transact business in such states or as may be required by subsequent events which may occur or (C) any such approvals the failure of which to obtain would not reasonably be expected to result in, individually or in the aggregate, a Company
MAE. Neither the Company nor any of its subsidiaries is in violation of its charter, by-laws or other organizational documents, as applicable, in any material respect.
As used in this Agreement, "Company MAE" means any event, circumstance, occurrence, fact, condition, change or effect, individually or in the aggregate, that is materially adverse to (A) the financial condition, business affairs, properties or results of operations of the Company and its subsidiaries considered as one enterprise, or (B) the ability of the Company to perform its obligations under this Agreement or the validity or enforceability of this Agreement or the Preferred Shares; provided, however, that clause (A) excludes any development resulting from any event, circumstance, development, change or effect (1) in general economic or business conditions, (2) in financial or securities markets generally, or (3) generally affecting the business or industry in which the Company operates.
(g)Actions or Proceedings. As of the date of this Agreement, there are no actions, suits or proceedings against, or investigations of, the Company or its subsidiaries pending or, to the knowledge of the Company, threatened, before any court, arbitrator, administrative agency or other tribunal (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the issuance of the Preferred Shares or the consummation of any of the transactions contemplated by this Agreement, (iii) that would reasonably be expected to materially and adversely affect the performance by the Company of its obligations under, or the validity or enforceability of, this Agreement or the Preferred Shares, (iv) that would reasonably be expected to result in a Company MAE, or (v) seeking to affect materially and adversely the U.S. federal income tax attributes of the Preferred Shares, except as described in the Prospectus. The Company promptly will give notice to the Dealer Manager of the occurrence of any action, suit, proceeding or investigation of the type referred to in this Section 2(g) arising or occurring on or after the date of this Agreement.
(h)Sales Literature. Any supplemental sales literature or advertisement (including without limitation any "broker-dealer use only" material), regardless of how labeled or described, used in addition to the Prospectus in connection with the Offering which previously has been, or hereafter is, furnished or approved by the Company (collectively, "Approved Sales Literature"), shall, to the extent required, be filed with and approved by the appropriate securities agencies and bodies, provided that the Dealer Manager will make all FINRA filings, to the extent required. Any and all Approved Sales Literature, taken together with the Prospectus as then supplemented or amended, did not or will not at the time provided for use include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(i)Authorization of Preferred Shares. The Preferred Shares have been duly authorized and, when issued and sold as contemplated by the Prospectus and upon payment therefor as provided in this Agreement and the Prospectus, will be validly issued, fully paid and nonassessable and will conform in all material respects to the description thereof contained in the Prospectus. The shares of Common Stock that may be issued upon redemption of the Preferred Shares have been duly authorized and, when issued as contemplated by the Prospectus, will be validly issued, fully paid and nonassessable and will conform in all material respects to the description thereof contained in the Prospectus.
(j)Taxes. Any taxes, fees and other governmental charges in connection with the execution and delivery of this Agreement or the execution, delivery and sale of the Preferred Shares have been or will be paid when due.
(k)Investment Company. The Company is not, and after giving effect to the offer and sale of the Preferred Shares will not be, an "investment company", as such term is defined in the Investment Company Act of 1940, as amended.
(l)Tax Returns. Except as described in the Registration Statement and Prospectus, the Company has filed all federal, state and foreign income tax returns required to be filed by or on behalf of the Company on or before the due dates therefor (taking into account all extensions of time to file), except where failure to file such returns would not reasonably be expected to result in a Company MAE and has paid or provided for the payment
of all such taxes indicated by such tax returns and all assessments received by the Company to the extent that such taxes or assessments have become due, except for any such taxes that are currently being contested in good faith or as would not reasonably be expected to result in a Company MAE.
(m)REIT Qualifications. The Company is organized and, since the date of its inception for federal income tax purposes, has operated in conformity with the requirements for qualification and taxation as a real estate investment trust ("REIT"). The Company intends to continue to operate in a manner that would permit it to continue to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended (the "Code").
(n)Independent Registered Public Accounting Firm. BDO USA, LLP, which has certified certain financial statements appearing in the Prospectus, is an independent registered public accounting firm within the meaning of the Securities Act and the Securities Act Rules and Regulations.
The Company and its subsidiaries each maintains a system of internal accounting and other controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with general or specific authorizations of the Company's management; (ii) transactions are recorded as necessary to permit preparation of the Company's financial statements in conformity with generally accepted accounting principles as applied in the United States ("GAAP") and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with general or specific authorization of the Company's management or directors or the Manager; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
Except as described in the Registration Statement, since the end of the Company's most recent audited fiscal year, there has been (A) no material weakness in the Company's internal control over financial reporting (whether or not remediated), and (B) no significant changes in the Company's internal control over financial reporting that has materially adversely affected, or is reasonably likely to materially adversely affect, the Company's internal control over financial reporting.
(o)Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in or incorporated by reference into the Prospectus present fairly in all material respects the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with GAAP applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No pro forma financial statements or supporting schedules other than those included in or incorporated by reference into the Registration Statement or any applicable Prospectus are required to be included in the Registration Statement or any applicable Prospectus.
(p)Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as may otherwise be stated therein or contemplated thereby, there has not occurred a Company MAE, whether or not arising in the ordinary course of business.
(q)Government Permits. The Company and its subsidiaries possess such certificates, authorities or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, other than those which the failure to possess or own would not have, individually or in the aggregate, reasonably be expected to result in, a Company MAE. Neither the Company nor any of its subsidiaries has received any written notice of proceedings relating to the revocation or modification of any such certificate, authority or permit which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to result in a Company MAE.
(r)Properties. Except as otherwise disclosed in the Prospectus and except as would not reasonably be expected to result in, individually or in the aggregate, a Company MAE, (i) all properties and assets described in the Prospectus are owned with good and marketable title by the Company or one or more of its
subsidiaries, and (ii) all liens, charges, encumbrances, claims or restrictions on or affecting any of the properties and assets of the Company or any of its subsidiaries which are required to be disclosed in the Prospectus are disclosed therein.
(s)Hazardous Materials. The Company does not have any knowledge of (i) the unlawful presence of any hazardous substances, hazardous materials, toxic substances or waste materials (collectively, "Hazardous Materials") on any of the properties owned by it or its subsidiaries or subject to mortgage loans owned by the Company or any of its subsidiaries, or (ii) any unlawful spills, releases, discharges or disposal of Hazardous Materials that have occurred or are presently occurring off such properties as a result of any construction on or operation and use of such properties, which presence or occurrence in the case of clauses (i) and (ii) would reasonably be expected to result in, individually or in the aggregate, a Company MAE. In connection with the properties owned by the Company and its subsidiaries or subject to mortgage loans owned by the Company or any of its subsidiaries, the Company has no knowledge of any failure to comply with all applicable local, state and federal environmental laws, regulations, ordinances and administrative and judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and disposal of any Hazardous Materials, except where such failure to comply would not reasonably be expected to result in a Company MAE.
(t)Authorization of the MSA. The Manager is the current manager of the Company and provides services to the Company pursuant to the Master Services Agreement, dated as of March 11, 2014 (the "MSA"), by and between the Company and the Manager. The MSA has been duly and validly authorized, executed and delivered by or on behalf of the Company and constitutes a valid and binding agreement of the Company enforceable in accordance with its terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of the United States, any state or any political subdivision thereof which affect creditors' rights generally or by equitable principles relating to the availability of remedies or except to the extent that the enforceability of the indemnity and contribution provisions contained in such agreement may be limited under applicable securities laws).
(u)Relationships with FINRA Members. Except as described in the applicable Registration Statement and Prospectus, neither the Company nor any subsidiary of the Company directly or indirectly controls, is controlled by, or is under common control with, or is an associated person (within the meaning of Article I, Section 1(ee) of the By-laws of FINRA) of, any member firm of FINRA.
3.Representations and Warranties of the Manager. The Manager hereby represents and warrants to the Dealer Manager, as of the date of this Agreement and on each Effective Date, as follows:
(a)Organization Status. The Manager is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware.
(b)Authorization of the MSA. The MSA has been duly and validly authorized, executed and delivered by or on behalf of the Manager and constitutes a valid and binding agreement of the Manager enforceable in accordance with its terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of the United States, any state or any political subdivision thereof which affect creditors' rights generally or by equitable principles relating to the availability of remedies or except to the extent that the enforceability of the indemnity and contribution provisions contained in such agreement may be limited under applicable securities laws).
(c)Actions or Proceedings. As of the date of this Agreement, there is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Manager, threatened against the Manager (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the issuance of the Preferred Shares or the consummation of any of the transactions contemplated by this Agreement, (iii) that would reasonably be expected to materially and adversely affect the validity or enforceability of this Agreement or the Preferred Shares, (iv) that would reasonably be expected to result in a Company MAE, or (v) seeking to affect adversely the U.S. federal income tax attributes of the Preferred Shares, except as described in the Prospectus.
(d)Government Permits. The Manager possesses such certificates, authorities or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct the business now operated by it, other than those which the failure to possess or own would not have, individually or in the aggregate, reasonably be expected to result in (i) a material adverse effect on the financial condition, business affairs, properties or results of operations of the Manager, (ii) a Company MAE or (iii) a material adverse effect on the performance of the services under the Management Agreement by the Manager. The Manager has not received any written notice of proceedings relating to the revocation or modification of any such certificate, authority or permit, which, individually or in the aggregate, if subject of an unfavorable decision, ruling or finding, would reasonably be expected to result in (A) a material adverse effect on the financial condition, business affairs, properties or results of operations of the Manager, (B) a Company MAE or (C) a material adverse effect on the performance of the services under the Management Agreement by the Manager.
4.Representations and Warranties of the Dealer Manager. The Dealer Manager hereby represents and warrants to the Company, as of the date of this Agreement and on each Effective Date, as follows:
(a)Organization Status. The Dealer Manager is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware, with all requisite power and authority to enter into this Agreement and to carry out its obligations hereunder.
(b)Authorization of Agreement. This Agreement has been duly and validly authorized, executed and delivered by the Dealer Manager, and assuming due authorization, execution and delivery of this Agreement by the Company and the Manager, will constitute a valid and legally binding agreement of the Dealer Manager enforceable against the Dealer Manager in accordance with its terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of the United States, any state or any political subdivision thereof which affect creditors' rights generally or by equitable principles relating to the availability of remedies or except to the extent that the enforceability of the indemnity and contribution provisions contained in this Agreement may be limited under applicable securities laws).
(c)Absence of Conflict or Default. The execution and delivery of this Agreement by the Dealer Manager and the performance of this Agreement by the Dealer Manager and the consummation of the transactions contemplated herein, do not and will not conflict with, or result in a breach of any of the terms and provisions of, or constitute a default under: (i) the Dealer Manager's articles of formation, bylaws or other organizational documents, as applicable, (ii) any indenture, mortgage, stockholders' agreement, note, lease or other material agreement or instrument to which the Dealer Manager is a party or by which the Dealer Manager may be bound, or to which any of the property or assets of the Dealer Manager is subject, or (iii) any rule, regulation, writ, injunction or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Dealer Manager or its assets, properties or operations, except in the case of clause (ii) or (iii), for such conflicts or defaults that would not, individually or in the aggregate, have or reasonably be expected to have a material adverse effect on the financial condition, business affairs, properties or results of operations of the Dealer Manager.
(d)Broker-Dealer Registration; FINRA Membership. The Dealer Manager is, and during the term of this Agreement will be, (i) duly registered as a broker-dealer pursuant to the provisions of the Exchange Act, (ii) a member in good standing of FINRA, and (iii) a broker or dealer duly registered as such in those states where the Dealer Manager is required to be registered in order to carry out the Offering as contemplated by this Agreement and the Prospectus. Each of the Dealer Manager's employees and representatives has all required licenses and registrations to act under this Agreement and to carry out the Offering as contemplated thereby. There is no provision in the Dealer Manager's FINRA membership agreement that would restrict the ability of the Dealer Manager to carry out the Offering as contemplated by this Agreement and the Prospectus.
(e)Disclosure. The information under the caption "Plan of Distribution" in the Prospectus insofar as it relates to the Dealer Manager, and all other information furnished to the Company by the Dealer Manager in writing specifically for use in the Registration Statement, any preliminary Prospectus or the Prospectus, does
not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
5.Offering and Sale of the Preferred Shares. Upon the terms and subject to the conditions set forth in this Agreement, the Company confirms the appointment of the Dealer Manager as its agent and exclusive distributor to solicit securities dealers to solicit subscriptions for the Preferred Shares in connection with the Offering at the subscription price to be paid in cash (the "Soliciting Dealers") and to retain the Soliciting Dealers now or hereafter subject to Soliciting Dealer Agreements (as defined below). Upon the terms and subject to the conditions set forth in this Agreement, the Dealer Manager hereby confirms its acceptance of such agency and exclusive distributorship and agrees to use its reasonable best efforts during the Offering Period (as defined below) or until this Agreement is earlier terminated pursuant to Section 12 to sell or cause to be sold the Preferred Shares in such quantities and to such Persons in accordance with such terms as are set forth in this Agreement, the Prospectus and the Registration Statement. As used herein, "Person" means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, governmental authority or agency, or other entity of any kind.
For purposes of this Agreement, "Offering Period" shall mean the period commencing on the date hereof and ending on the date on which the Company has sold and issued $784,983,825, on an aggregate basis, of Series A Preferred Stock and Series D Preferred Stock in the Offering. During the period from the date hereof until the end of the Offering Period (or the earlier termination of this Agreement by the Company or the Dealer Manager pursuant to Section 12), the Company will not (and will cause its affiliates to not) engage or appoint any Person other than the Dealer Manager to solicit, or to retain any securities dealers to solicit, subscriptions for the Preferred Shares in a public offering.
The number of Preferred Shares, if any, to be reserved for sale by each Soliciting Dealer may be determined, from time to time, by the Dealer Manager upon prior approval of the Company. In the absence of such determination, the Company shall, subject to the provisions of Section 5(b), accept Subscription Agreements based upon a first-come, first accepted reservation or other similar method. Under no circumstances will the Dealer Manager be obligated to underwrite or purchase any Preferred Shares for its own account. In soliciting purchases of Preferred Shares, the Dealer Manager will act solely as the Company's agent and not as an underwriter or principal.
(a)Soliciting Dealers. The Preferred Shares offered and sold through the Dealer Manager under this Agreement shall be offered and sold only by the Dealer Manager and the Soliciting Dealers; provided, however, that (i) all Soliciting Dealers are registered with the Commission, are members in good standing of FINRA and are duly licensed or registered by the regulatory authorities in the jurisdictions in which they offer and sell Preferred Shares or are exempt from broker-dealer registration with the Commission and all other applicable regulatory authorities, (ii) all Soliciting Dealers may lawfully offer and sell Preferred Shares in the jurisdiction in which they offer and sell Preferred Shares, (iii) all such engagements are evidenced by written agreements, the terms and conditions of which substantially conform to the form of Soliciting Dealer Agreement approved by the Company and the Dealer Manager (the "Soliciting Dealer Agreement"), and (iv) the Company shall have previously approved each Soliciting Dealer (such approval not to be unreasonably withheld or delayed).
(b)Subscription Documents. Each Person desiring to purchase Preferred Shares through the Dealer Manager, or any other Soliciting Dealer, will be required to complete and execute the subscription documents described in the Prospectus.
(c)Completed Sale. A sale of a Preferred Share shall be deemed by the Company to be completed for purposes of Section 5(d) if and only if (i) the Company has received payment of the full purchase price of each purchased Preferred Share and, in the case Direct Registration Service is used for settlement, a properly completed and executed subscription agreement from an investor who satisfies the applicable suitability standards and minimum purchase requirements set forth in the Prospectus as determined by the Soliciting
Dealer, or the Dealer Manager, as applicable, in accordance with the provisions of this Agreement, (ii) the Company or its agent has accepted such subscription, and (iii) such investor has been admitted as a stockholder of the Company. In addition, no sale of Preferred Shares shall be completed until at least five business days after the date on which the subscriber receives a copy of the Prospectus. The Dealer Manager hereby acknowledges and agrees that the Company, in its sole and absolute discretion, may accept or reject any subscription, in whole or in part, for any reason whatsoever or no reason, and no commission or dealer manager fee will be paid to the Dealer Manager with respect to that portion of any subscription which is rejected. As used in this Agreement, "business day" means any day other than a Saturday, Sunday or a day on which banking institutions in the State of New York, the State of Texas or the State of California are authorized or obligated by law or executive order to close.
(d) | Dealer-Manager Compensation. |
(i)Subject to the discounts and other special circumstances described in or otherwise provided in the "Plan of Distribution" section of the Prospectus or this Section 5(d), the Company will pay to the Dealer Manager selling commissions in the amount of up to five and fifty one-hundredths of a percent (5.50%) of the selling price of each share of Series A Preferred Stock for which a sale is completed in the Offering; provided, however, no selling commissions will be paid in respect of certain sales of shares of Series A Preferred Stock to persons affiliated with the Company as described in the Prospectus. The Dealer Manager will reallow all the selling commissions, subject to federal and state securities laws, to the Soliciting Dealers who sell the relevant shares of Series A Preferred Stock in the Offering, as described more fully in the Soliciting Dealer Agreement. No selling commissions will be paid in respect of any shares of Series D Preferred Stock sold in the Offering.
(ii)Subject to the special circumstances described in or otherwise provided in the "Plan of Distribution" section of the Prospectus or this Section 5(d), as compensation for acting as the dealer manager, the Company will pay to the Dealer Manager an upfront dealer manager fee in the amount of one and one-quarter of a percent (1.25%) of the selling price of each Preferred Share for which a sale is completed in the Offering (the "Upfront Dealer Manager Fee"); provided, however, the Upfront Dealer Manager Fee will be one percent (1.00%) of the selling price of each Preferred Share sold to certain persons affiliated with the Company as described in the Prospectus. The Dealer Manager may retain or re-allow all or a portion of the Upfront Dealer Manager Fee, subject to federal and state securities laws, to the Soliciting Dealer who sold the relevant Preferred Shares, as described more fully in the Soliciting Dealer Agreement.
(iii)Except as otherwise provided in the "Plan of Distribution" section of the Prospectus or this Section 5(d), as compensation for acting as the dealer manager, the Company will pay to the Dealer Manager a trailing dealer manager fee per Preferred Share that accrues daily, from the date of original issuance of such Preferred Share until the earliest to occur of (A) the date on which such Preferred Share is no longer outstanding and (B) the date on which the Company determines that payment of such fee would cause the total underwriting compensation (as described below in Section 5(d)(v)) in respect of the Offering to exceed 10.00% of the aggregate gross proceeds of Preferred Shares sold in the Offering, in the amount of 11365th of one-quarter of a percent (0.25%) per annum of the selling price of each Preferred Share for which a sale is completed in the Offering (the "Trailing Dealer Manager Fee" and, together with the Upfront Dealer Manager Fee, the "Dealer Manager Fees").
(iv)The Upfront Dealer Manager Fee and any selling commissions payable to the Dealer Manager will be paid on the day the investor subscribing for the relevant Preferred Share is admitted as a stockholder of the Company, or as promptly thereafter as practical. The Trailing Dealer Manager Fee will be paid monthly in arrears and will be paid on a continuous basis from year to year on the terms and subject to the conditions set forth in the Prospectus or this Section 5(d).
(v)In no event shall the total aggregate compensation payable from any source to (A) the Dealer Manager and any Soliciting Dealers participating in the Offering, including, but not limited to, selling commissions and the Dealer Manager Fees, and (B) other expenses incurred by the Dealer Manager or
Soliciting Dealers associated with the Offering that are paid by or reimbursed by the Company, Manager or other Person and which are deemed components of "underwriting compensation" by FINRA exceed ten percent (10.0%) of the aggregate gross offering proceeds of the Offering.
(vi)Notwithstanding anything to the contrary contained herein, if the Company pays any selling commission to the Dealer Manager for sale by a Soliciting Dealer of one or more Preferred Shares and the subscription is rescinded as to one or more of the Preferred Shares covered by such subscription, then the Company shall decrease the next payment of selling commissions or other compensation otherwise payable to the Dealer Manager by the Company under this Agreement by an amount equal to the commission rate established in this Section 5(d), multiplied by the number of Preferred Shares as to which the subscription is rescinded. If no payment of selling commissions or other compensation is due to the Dealer Manager after such rescission occurs, then the Dealer Manager shall pay the amount specified in the preceding sentence to the Company within a reasonable period of time not to exceed fifteen (15) days following receipt of notice by the Dealer Manager from the Company stating the amount owed as a result of rescinded subscriptions.
(vii)Reasonable Bona Fide Due Diligence Expenses. In addition to compensation payable to the Dealer Manager or any Soliciting Dealer, but subject to the next sentence, the Company or the Manager shall reimburse the Dealer Manager or any Soliciting Dealer for reasonable bona fide due diligence expenses incurred by the Dealer Manager or any Soliciting Dealer. The Company shall only reimburse the Dealer Manager or any Soliciting Dealer for any bona fide due diligence expenses to the extent such expenses have been approved in each case by the Company in advance, actually been incurred and are supported by detailed and itemized invoice(s) provided to the Company and permitted pursuant to the rules and regulations of FINRA.
6.Conditions to the Dealer Manager's Obligations. The Dealer Manager's obligations hereunder shall be subject to the following terms and conditions:
(a)The representations and warranties on the part of the Company contained in this Agreement shall be true and correct in all material respects and the Company shall have complied with its covenants, agreements and obligations contained in this Agreement in all material respects.
(b)The Registration Statement shall be effective and no stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission and, to the knowledge of the Company, no proceedings for that purpose shall have been instituted, threatened or contemplated by the Commission; and any request by the Commission for additional information (to be included in the Registration Statement or Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Dealer Manager.
(c)The Prospectus, as then supplemented or amended, shall not contain any untrue statement of material fact, or omit to state a material fact that is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
7.Covenants of the Company. The Company covenants and agrees with the Dealer Manager as follows (and, where applicable, the Dealer Manager covenants and agrees with the Company):
(a)Registration Statement. The Company will use commercially reasonable efforts to maintain the effective status of the Registration Statement. The Company will comply in all material respects with all federal and state securities laws, rules and regulations which are required to be complied with in order to permit the continuance of offers and sales of the Preferred Shares in accordance with the provisions hereof and of the Prospectus.
(b)Commission Orders. If the Commission shall issue any stop order or any other order preventing or suspending the use of the Prospectus, or to the Company's knowledge, shall institute any proceedings for that purpose, then the Company will promptly notify the Dealer Manager and use commercially reasonable efforts to prevent the issuance of any such order and, if any such order is issued, to use commercially reasonable efforts to obtain the removal thereof as promptly as possible.
(c)Blue Sky Qualifications. The Company will use commercially reasonable efforts to qualify the Preferred Shares for offering and sale under the securities or blue sky laws of such jurisdictions as the Dealer Manager and the Company shall mutually agree upon and to make such applications, file such documents and furnish such information as may be reasonably required for that purpose. The Company will, at the Dealer Manager's request, furnish the Dealer Manager with a copy of such papers filed by the Company in connection with any such qualification. The Company will promptly advise the Dealer Manager of the issuance by such securities administrators of any stop order preventing or suspending the use of the Prospectus or to the Company's knowledge of the institution of any proceedings for that purpose, and will use commercially reasonable efforts to prevent the issuance of any such order and if any such order is issued, to use commercially reasonable efforts to obtain the removal thereof as promptly as possible. The Dealer Manager will cause its outside counsel to furnish it and the Company with supplements to an initial Blue Sky Survey, dated as of each initial Effective Date, reflecting any changes or additions to the information disclosed in such survey.
(d)Amendments and Supplements. If, at any time when a Prospectus relating to the Preferred Shares (or any portion thereof) is required to be delivered under the Securities Act, any event shall have occurred to the knowledge of the Company as a result of which the Prospectus as then supplemented or amended or any Approved Sales Literature as then amended or supplemented, taken together with the Prospectus as then supplemented or amended, would include any untrue statement of a material fact, or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading at the time it is so required to be delivered to a subscriber, or if it is necessary at any time to amend the Registration Statement or supplement the Prospectus relating to the Preferred Shares (or any portion thereof) to comply with the Securities Act, then the Company will reasonably promptly notify the Dealer Manager thereof (unless the information shall have been received from the Dealer Manager) and will prepare and file with the Commission an amendment or supplement which will correct such statement or effect such compliance to the extent required, and shall make available to the Dealer Manager thereof sufficient copies for its own use and1or distribution to the Soliciting Dealers.
(e)Requests From Commission. The Company will promptly advise the Dealer Manager of any request made by the Commission or a state securities administrator for amending the Registration Statement, supplementing the Prospectus or for additional information in connection with the Offering.
(f)Copies of Registration Statement. The Company will furnish the Dealer Manager with such copies of the Registration Statement and the Prospectus, and all amendments and supplements thereto, as the Dealer Manager may reasonably request in connection with the sale of the Preferred Shares.
(g)Authority to Perform Agreements. The Company undertakes to obtain all consents, approvals, authorizations or orders of any court or governmental agency or body which are required for the Company's performance of this Agreement and under the Company's articles of incorporation (as the same may be amended, supplemented or otherwise modified from time to time) and by-laws for the consummation of the transactions contemplated hereby.
(h)Sales Literature. The Company will furnish to the Dealer Manager as promptly as shall be reasonably practicable upon request any Approved Sales Literature (provided that the use of said material has been first approved for use by all appropriate regulatory agencies). Any supplemental sales literature or advertisement, regardless of how labeled or described, used in addition to the Prospectus in connection with the Offering which is furnished or approved by the Company (including, without limitation, Approved Sales Literature) shall, to the extent required, be filed with and, to the extent required, approved by the appropriate securities agencies and bodies, provided that the Dealer Manager will make all FINRA filings, to the extent required. The Company will be responsible for all Approved Sales Literature. The Company and the Dealer Manager agree that all sales literature developed in connection with the Offering shall be the property of the Company and the Company shall have control of all such sales literature. Each of the Company and the Manager will not (and will cause its affiliates to not): (i) show or give to any investor or prospective investor or reproduce any material or writing that is marked "broker-dealer use only" or otherwise bearing a legend denoting that it is not to be used in connection with the sale of Preferred Shares to members of the public, and (ii) show or give to
any investor or prospective investor in a particular jurisdiction any material or writing if such material bears a legend denoting that it is not to be used in connection with the sale of Preferred Shares to members of the public in such jurisdiction.
(i)Certificates of Compliance. The Company shall provide, from time to time upon reasonable request of the Dealer Manager, certificates of its chief executive officer and chief financial officer of compliance by the Company of the requirements of this Agreement.
(j)Use of Proceeds. The Company will apply the proceeds from the sale of the Preferred Shares as set forth in the Prospectus in all material respects.
(k)Certain Payments. Without the prior consent of the Dealer Manager, neither the Company nor the Manager will make any payment (cash or non-cash) to any associated Person or registered representative of the Dealer Manager.
8.Covenants of the Dealer Manager. The Dealer Manager covenants and agrees with the Company as follows (and, where applicable, the Company covenants and agrees with the Dealer Manager):
(a)Compliance With Laws. With respect to the Dealer Manager's participation and the participation by each Soliciting Dealer in the offer and sale of the Preferred Shares (including, without limitation, any resales and transfers of Preferred Shares), the Dealer Manager agrees, and each Soliciting Dealer in its Soliciting Dealer Agreement has agreed or will agree, to comply in all material respects with all applicable requirements of (i) the Securities Act, the Securities Act Rules and Regulations, the Exchange Act, the Exchange Act Rules and Regulations and all other federal regulations applicable to the Offering and the sale of Preferred Shares, (ii) all applicable state securities or blue sky laws and regulations, from time to time in effect and (iii) the Rules of FINRA applicable to the Offering, from time to time in effect, specifically including, but not in any way limited to, FINRA Conduct Rules 2111, 2040, 2340, 5130 and 5141 therein. The Dealer Manager has not offered and will not offer the Preferred Shares for sale in any jurisdiction unless and until it has been advised that the Preferred Shares are either registered in accordance with, or exempt from, the securities and other laws applicable thereto.
In addition, the Dealer Manager shall, in accordance with applicable law or as prescribed by any state securities administrator, provide, or require in the Soliciting Dealer Agreement that the Soliciting Dealer shall provide, to any prospective investor copies of the Prospectus and any supplements thereto during the course of the Offering and prior to the sale of any Preferred Shares. The Company may provide the Dealer Manager with certain Approved Sales Literature to be used by the Dealer Manager and the Soliciting Dealers in connection with the solicitation of purchasers of the Preferred Shares. If the Dealer Manager elects to use Approved Sales Literature, then the Dealer Manager agrees that such material shall not be used by it in connection with the solicitation of purchasers of the Preferred Shares and that it will direct Soliciting Dealers not to make such use unless accompanied or preceded by the Prospectus, as then amended or supplemented. The Dealer Manager will not use any Approved Sales Literature other than those provided to the Dealer Manager by the Company specifically for use in the Offering.
(b)No Additional Information. In offering the Preferred Shares for sale, the Dealer Manager shall not, and each Soliciting Dealer shall agree not to, give or provide any information or make any representation other than those contained in the Prospectus or the Approved Sales Literature. The Dealer Manager shall not and each Soliciting Dealer shall agree not to (i) show or give to any investor or prospective investor or reproduce any material or writing that is supplied to it by the Company and marked "broker-dealer use only" or otherwise bearing a legend denoting that it is not to be used in connection with the sale of Preferred Shares to members of the public, (ii) show or give to any investor or prospective investor in a particular jurisdiction any material or writing that is supplied to it by the Company if such material bears a legend denoting that it is not to be used in connection with the sale of Preferred Shares to members of the public in such jurisdiction or (iii) make any public oral communications relating to the Offering that have not been previously approved by the Company.
(c)Materials for Broker-Dealer Use Only. The Dealer Manager will not use, provide, make available, distribute or otherwise use any "broker-dealer use only" Approved Sales Literature with members of the public in connection with offers or sales of the Preferred Shares.
(d)Sales of Shares. The Dealer Manager shall, and each Soliciting Dealer shall agree to, solicit purchases of the Preferred Shares only in the jurisdictions in which the Dealer Manager and such Soliciting Dealer are legally qualified to so act.
(e)Subscription Agreement. The Dealer Manager has complied and will comply in all material respects with the subscription procedures and "Plan of Distribution" set forth in the Prospectus. Subscriptions will be submitted by the Dealer Manager and each Soliciting Dealer to the Company only on the form of Subscription Agreement in respect of the Offering most recently filed or incorporated by reference as an exhibit to the Registration Statement prior to the proposed effective date of such subscription. The Dealer Manager understands and acknowledges, and each Soliciting Dealer shall acknowledge, that the Subscription Agreement must be executed and initialed by the subscriber as provided for by the Subscription Agreement.
(f)Suitability. The Dealer Manager has and will offer Preferred Shares, and in its agreement with each Soliciting Dealer requires or will require that the Soliciting Dealer offer Preferred Shares, only to Persons in the states in which the Dealer Manager is advised in writing by its counsel that the Preferred Shares are qualified for sale or that such qualification is not required. In offering Preferred Shares, the Dealer Manager has complied and will comply and, in its agreements with the Soliciting Dealers, the Dealer Manager has required and will require that the Soliciting Dealers (i) comply, with the provisions of all applicable laws, rules and regulations relating to suitability of investors, including without limitation the FINRA Conduct Rules and (ii) in making such suitability determination, consider, based on the information provided by a given purchaser: such purchaser's age, investment objectives, investment experience, income, net worth, financial situation and other investments held by such purchaser; whether such purchaser can reasonably benefit from an investment in the Preferred Shares based on his, her or its overall investment objectives and portfolio structure and is able to bear the economic risk of the investment based on his, her or its overall financial situation; and whether such purchaser has an apparent understanding of the fundamental risks of an investment in the Preferred Shares, the risk that he, she or it may lose the entire investment, the lack of liquidity of the Preferred Shares, the restrictions on transferability of the Preferred Shares, the background and qualifications of the Company's advisor, and the tax, including ERISA, consequences of an investment in the Preferred Shares. Notwithstanding the foregoing, the Dealer Manager shall not, and each Soliciting Dealer shall agree not to, execute any transaction with respect to the Preferred Shares in a discretionary account without prior written approval of the transaction by the customer.
(g)Suitability Records. The Dealer Manager shall, and each Soliciting Dealer shall agree to, maintain, for at least six years or for a period of time not less than that required in order to comply with all applicable federal, state and other regulatory requirements, whichever is later, a record of the information obtained to determine that an investor meets the suitability standards imposed on the offer and sale of the Preferred Shares (both at the time of the initial subscription and at the time of any additional subscriptions) and a representation of the investor that the investor is investing for the investor's own account or, in lieu of such representation, information indicating that the investor for whose account the investment was made met the suitability standards. Except to the extent that the Dealer Manager makes any direct sales to investors, the Company agrees that the Dealer Manager can satisfy its obligation by contractually requiring such information to be maintained by the investment advisers or banks referred to in Section 3(b) of the Soliciting Dealer Agreement.
(h)Soliciting Dealer Agreements. All engagements of the Soliciting Dealers are and shall be evidenced by a Soliciting Dealer Agreement.
(i)Electronic Delivery. If the Dealer Manager uses electronic delivery to distribute the Prospectus to any Person, it will comply with all applicable requirements of the Commission, the blue sky laws and1or FINRA and any other laws or regulations related to the electronic delivery of documents.
(j)Anti-Money Laundering Compliance. Although acting as a wholesale distributor and not itself selling securities of the Company directly to investors, the Dealer Manager represents and warrants to the Company that it has established and implemented anti-money laundering compliance programs ("AML Program") in accordance with applicable law, including applicable FINRA Conduct Rules, the Exchange Act Rules and Regulations and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) of 2001, as amended (the "USA PATRIOT Act"), specifically including, but not limited to, Section 352 of the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the "Money Laundering Abatement Act", and together with the USA PATRIOT Act, the "AML Rules"), reasonably expected to detect and cause the reporting of suspicious transactions in connection with the Offering. The Dealer Manager further represents and warrants that it is currently in compliance with all AML Rules, specifically including, but not limited to, the Customer Identification Program requirements under Section 326 of the Money Laundering Abatement Act, and the Dealer Manager hereby covenants to remain in compliance with such requirements and shall, upon request by the Company, provide a certification to the Company that, as of the date of such certification (i) its AML Program is consistent with the AML Rules, and (ii) it is currently in compliance with all AML Rules, specifically including, but not limited to, the Customer Identification Program requirements under Section 326 of the Money Laundering Abatement Act.
(k)Cooperation. Following the Offering Period or the earlier termination of this Agreement, upon the Company's request, the Dealer Manager will cooperate fully with the Company and any other Person that may be necessary to accomplish an orderly transfer and1or the transfer to a successor dealer manager of the operation and management of any services the Dealer Manager is providing to the Company under this Agreement. The Dealer Manager will not be entitled to receive any additional fee in connection with the foregoing provisions of this Section 8(k), but the Company will pay or reimburse the Dealer Manager for any out-of-pocket expenses reasonably incurred by the Dealer Manager in connection therewith and approved in advance by the Company.
(l)Customer Information. The Dealer Manager will use commercially reasonable efforts to provide the Company with any and all subscriber information that the Company requests.
(m)Customer Information. The Dealer Manager shall:
(i)abide by and comply with (A) the privacy standards and requirements of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), (B) the privacy standards and requirements of any other applicable federal or state law, and (C) its own internal privacy policies and procedures, each as may be amended from time to time;
(ii)refrain from the use or disclosure of nonpublic personal information (as defined under the GLB Act) of all customers who have opted out of such disclosures except as necessary to service the customers or as otherwise necessary or required by applicable law; and
(iii)determine which customers have opted out of the disclosure of nonpublic personal information by periodically reviewing and, if necessary, retrieving an aggregated list of such customers from the Soliciting Dealers (the "List") to identify customers that have exercised their opt-out rights. If any Party uses or discloses nonpublic personal information of any customer for purposes other than servicing the customer, or as otherwise required by applicable law, that Party will consult the List to determine whether the affected customer has exercised his or her opt-out rights. Each Party understands that it is prohibited from using or disclosing any nonpublic personal information of any customer that is identified on the List as having opted out of such disclosures.
9. | Expenses. |
(a)Subject to Section 9(b), the Dealer Manager shall pay all its own costs and expenses incident to the performance of its obligations under this Agreement.
(b) | The Company agrees to pay all costs and expenses related to: |
(i)the registration fee payable to the Commission in connection with the offer and sale of the Preferred Shares;
(ii)expenses of printing the Registration Statement and the Prospectus and any amendment or supplement thereto as herein provided;
(iii)fees and expenses incurred in connection with any required filing with FINRA for the offer and sale of the Preferred Shares;
(iv)all the expenses of agents of the Company, excluding the Dealer Manager and any Soliciting Dealers, incurred in connection with the offer and sale of the Preferred Shares; and
(v)expenses of qualifying the Preferred Shares for offering and sale under state blue sky and securities laws (other than the expenses in connection with the preparation and printing of the Blue Sky Survey referred to above); and
(vi)any other reasonable, documented out-of-pocket costs and expenses directly related to the offer, sale and distribution of the Preferred Shares pre-approved by the Company, subject to FINRA rules in respect of underwriter compensation.
(c)The Company shall reimburse the Dealer Manager and Soliciting Dealers for approved or deemed approved reasonable bona fide due diligence expenses in accordance with Section 5(d)(vii).
10. | Indemnification. |
(a)Indemnified Parties Defined. For the purposes of this Agreement, an "Indemnified Party" shall mean a Person entitled to indemnification under this Section 10, as well as such Person's officers, directors (including with respect to the Company, any Person named in the Registration Statement with his or her consent as becoming a director in the future), employees, members, managers, partners, affiliates, agents and representatives, and each Person, if any, who controls such Person within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act.
(b)Indemnification of the Dealer Manager and Soliciting Dealers. The Company will indemnify, defend and hold harmless the Dealer Manager and the Soliciting Dealers, and their respective Indemnified Parties, from and against any losses, claims, expenses (including reasonable legal and other expenses incurred in investigating and defending such claims or liabilities), damages or liabilities, joint or several, to which any of the aforesaid parties may become subject under the Securities Act, the Exchange Act, the Securities Act Rules and Regulations, the Exchange Act Rules and Regulations or otherwise, insofar as such losses, claims, expenses, damages or liabilities (or actions in respect thereof) arise out of or are based upon or are related to (in whole or in part): (i) any material inaccuracy in a representation or warranty contained herein by the Company, any material breach of a covenant contained herein by the Company, or any material failure by the Company to perform its obligations hereunder or to comply with state or federal securities laws applicable to the Offering; (ii) any untrue statement or alleged untrue statement of a material fact contained (A) in any Registration Statement or any post-effective amendment thereto or in the Prospectus or any amendment or supplement to the Prospectus or (B) in any Approved Sales Literature; or (iii) the omission or alleged omission to state a material fact required to be stated in the Registration Statement or any post-effective amendment thereto to make the statements therein not misleading or the omission or alleged omission to state a material fact required to be stated in the Prospectus or any amendment or supplement to the Prospectus to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, expense, damage or liability arises out of, or is based upon (x) an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Dealer Manager expressly for use in the
Registration Statement or any post-effective amendment thereof or the Prospectus or any such amendment thereof or supplement thereto or (y) a violation of federal or state securities laws by the Dealer Manager. The Company will reimburse each Soliciting Dealer or the Dealer Manager, and their respective Indemnified Parties, for any reasonable legal or other expenses incurred by such Soliciting Dealer or the Dealer Manager, and their respective Indemnified Parties, in connection with investigating or defending such loss, claim, expense, damage, liability or action. This indemnity agreement will be in addition to any liability which the Company may otherwise have.
(c)Dealer Manager Indemnification of the Company and the Manager. The Dealer Manager will indemnify, defend and hold harmless the Company, the Manager, each of their Indemnified Parties and each Person who has signed the Registration Statement, from and against any losses, claims, expenses (including the reasonable legal and other expenses incurred in investigating and defending any such claims or liabilities), damages or liabilities to which any of the aforesaid parties may become subject under the Securities Act, the Securities Act Rules and Regulations, the Exchange Act, the Exchange Act Rules and Regulations or otherwise, insofar as such losses, claims, expenses, damages or liabilities (or actions in respect thereof) arise out of or are based upon or are related to (in whole or in part): (i) any material inaccuracy in a representation or warranty contained herein by the Dealer Manager, any material breach of a covenant contained herein by the Dealer Manager, or any material failure by the Dealer Manager to perform its obligations hereunder or to comply with state or federal securities laws applicable to the Offering; (ii) any untrue statement or any alleged untrue statement of a material fact contained (A) in any Registration Statement or any post-effective amendment thereto or in the Prospectus or any amendment or supplement to the Prospectus or (B) in any Approved Sales Literature; (iii) the omission or alleged omission to state a material fact required to be stated in the Registration Statement or any post- effective amendment thereof to make the statements therein not misleading or the omission or alleged omission to state a material fact required to be stated in the Prospectus or any amendment or supplement to the Prospectus to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Dealer Manager will not be liable in any such case to the extent that any such loss, claim, expense, damage or liability arises out of, or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Dealer Manager by the Company in the Registration Statement or any such post-effective amendments thereof or the Prospectus or any such amendment thereof or supplement thereto; or (iv) any use of sales literature, including "broker-dealer use only" materials, by the Dealer Manager or any Soliciting Dealer that is not Approved Sales Literature or use of unauthorized oral communications relating to the Offering by the Dealer Manager or any Soliciting Dealer. The Dealer Manager will reimburse the aforesaid parties for any reasonable legal or other expenses incurred in connection with investigation or defense of such loss, claim, expense, damage, liability or action. This indemnity agreement will be in addition to any liability which the Dealer Manager may otherwise have.
(d)Soliciting Dealer Indemnification of the Company. By virtue of entering into the Soliciting Dealer Agreement, each Soliciting Dealer severally will agree to indemnify, defend and hold harmless the Company, the Dealer Manager, each of their respective Indemnified Parties, and each Person who signs the Registration Statement, from and against any losses, claims, expenses, damages or liabilities to which the Company, the Dealer Manager, any of their respective Indemnified Parties or any Person who signs or signed the Registration Statement, may become subject, under the Securities Act or otherwise, as more fully described in the Soliciting Dealer Agreement.
(e)Action Against Parties; Notification. Promptly after receipt by any Indemnified Party under this Section 10 of notice of the commencement of any action, such Indemnified Party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 10, promptly notify the indemnifying party of the commencement thereof; provided, however, that the failure to give such notice shall not relieve the indemnifying party of its obligations hereunder except to the extent it shall have been actually prejudiced by such failure. In case any such action is brought against any Indemnified Party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled, to the extent it may wish, jointly with any other indemnifying party similarly notified, to participate in the defense thereof, with counsel (including local counsel) (the "Chosen Counsel") satisfactory to such Indemnified Party (who shall not, except
with the consent of the Indemnified Party, be counsel to the indemnifying party), and after notice from the indemnifying party to such Indemnified Party of its election so to assume the defense thereof, the indemnifying party will not be liable to such Indemnified Party under this Section 10 for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof, other than reasonable costs of investigation, unless (i) the use of counsel (including local counsel) chosen by the indemnifying party to represent the Indemnified Party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Party and the indemnifying party and the Indemnified Party shall have reasonably concluded that there may be one or more legal defenses available to it and1or other Indemnified Party that are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party within a reasonable time after receipt by the indemnifying party of notice of the institution of such action, or (iv) the indemnifying party has authorized in writing the employment of counsel for the Indemnified Party at the expense of the indemnifying party; provided, however, that the indemnifying party shall not, in connection with any one such action or proceeding or separate but substantially similar actions or proceedings arising out of the same general allegations, be liable for the fees and expenses of more than one separate firm of attorneys in addition to the Chosen Counsel at any time for all Indemnified Parties hereunder. Upon assumption by the indemnifying party of the defense thereof, the Indemnified Party shall have the right to participate in such action or claim and to retain its own counsel but, except as set forth in clauses (i) through (iv) of the preceding sentence, the indemnifying party shall not be liable to such Indemnified Party for any legal fees and expenses of other counsel subsequently incurred by such Indemnified Party in connection with the defense thereof. Any such indemnifying party shall not be liable to any such Indemnified Party on account of any settlement of any claim or action effected without the consent of such indemnifying party, such consent not to be unreasonably withheld or delayed.
11. | Contribution. |
(a)If the indemnification provided for in Section 10 is for any reason unavailable to or insufficient to hold harmless an Indemnified Party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such Indemnified Party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Dealer Manager and the Soliciting Dealer, respectively, from the proceeds received in the Offering pursuant to this Agreement and the relevant Soliciting Dealer Agreement, or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the Dealer Manager and the Soliciting Dealer, respectively, in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.
(b)The relative benefits received by the Company, the Dealer Manager and the Soliciting Dealer, respectively, in connection with the proceeds received in the Offering pursuant to this Agreement and the relevant Soliciting Dealer Agreement shall be deemed to be in the same respective proportion as the total net proceeds from the Offering pursuant to this Agreement and the relevant Soliciting Dealer Agreement (before deducting expenses), received by the Company, and the total selling commissions and Dealer Manager Fees received by the Dealer Manager and the Soliciting Dealer, respectively, in each case as set forth on the cover of the Prospectus bear to the aggregate offering price of the Preferred Shares sold in the Offering as set forth on such cover.
(c)The relative fault of the Company, the Dealer Manager and the Soliciting Dealer, respectively, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact related to information supplied by the Company, by the Dealer Manager or by the Soliciting Dealer, respectively, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
(d)The Company, the Dealer Manager and the Soliciting Dealer (by virtue of entering into the Soliciting Dealer Agreement) agree that it would not be just and equitable if contribution pursuant to this Section
11 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable contributions referred to above in this Section 11. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an Indemnified Party and referred to above in this Section 11 shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission or alleged omission.
(e)Notwithstanding the provisions of this Section 11, the Dealer Manager and the Soliciting Dealer shall not be required to contribute any amount by which the total price at which the Preferred Shares sold in the Offering to the public by them exceeds the amount of any damages which the Dealer Manager and the Soliciting Dealer have otherwise been required to pay by reason of any untrue or alleged untrue statement or omission or alleged omission.
(f)No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Party who was not guilty of such fraudulent misrepresentation.
(g)For the purposes of this Section 11, the Dealer Manager's officers, directors, employees, members, partners, agents and representatives, and each Person, if any, who controls the Dealer Manager within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution of the Dealer Manager, and each officers, directors, employees, members, partners, agents and representatives of the Company, each officer of the Company who signed the Registration Statement and each Person, if any, who controls the Company, within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution of the Company. The Soliciting Dealers' respective obligations to contribute pursuant to this Section 11 are several in proportion to the number of Preferred Shares sold by each Soliciting Dealer in the Offering and not joint.
12. | Termination of this Agreement. |
(a)Term; Expiration. Unless sooner terminated by the Company pursuant to Section 12(b) or by the Dealer Manager pursuant to Section 12(c), this Agreement shall expire at the end of the Offering Period. The date upon which this Agreement shall have so expired or been terminated earlier shall be referred to as the "Termination Date". For the avoidance of doubt, from and after the occurrence of the Termination Date, the Company shall have the right to commence and undertake preparations to commence a public offering of Preferred Shares.
(b) | Termination by the Company. This Agreement may be terminated by the Company: |
(i)At any time for convenience, upon at least thirty (30) days' prior written notice to the Dealer Manager; or
(ii)Upon written notice of termination from the Company to the Dealer Manager if any of the following events shall occur:
(A)A Cause Event (as defined below);
(B)A court of competent jurisdiction enters a decree or order for relief in respect of the Dealer Manager in any involuntary case under the applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Dealer Manager or for any substantial part of its property or orders the winding up or liquidation of the Dealer Manager's affairs;
(C)The Dealer Manager commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, or consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Dealer Manager or for any substantial part of its property, or makes any general assignment for the benefit of creditors, or fails generally to pay its debts as they become due;
As used herein, a "Cause Event" means (1) fraud, criminal conduct or willful misconduct by or on the part of the Dealer Manager, (2) a representation or warranty made by the Dealer Manager herein shall prove to be untrue in any material respect, or (3) a default in the due performance or observance by the Dealer Manager of any covenant or agreement contained in this Agreement and such default shall continue unremedied for a period of thirty (30) days after written notice thereof to the Dealer Manager by the Company.
(c)Termination by Dealer Manager. This Agreement may be terminated by the Dealer Manager immediately upon written notice of termination from the Dealer Manager to the Company if any of the following events occur:
(i)A Good Reason Event (as defined below);
(ii)A court of competent jurisdiction enters a decree or order for relief in respect of the Company or any of its subsidiaries in any involuntary case under the applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or any of its subsidiaries or for any substantial part of its property or orders the winding up or liquidation of the Company's or any of its subsidiaries' affairs;
(iii)The Company or any of its subsidiaries commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, or consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or any of its subsidiaries or for any substantial part of their property, or makes any general assignment for the benefit of creditors, or fails generally to pay its debts as they become due;
(iv)A stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission and is not rescinded within 15 business days after the issuance thereof;
(v)There shall have occurred a Company MAE, whether or not in the ordinary course of business; or
(vi)A material action, suit, proceeding or investigation of the type referred to in Section 2(g) shall have occurred or arisen after the date of this Agreement.
As used herein, a "Good Reason Event" means (A) fraud, criminal conduct or willful misconduct by or on the part of the Company, (B) a representation or warranty made by the Company herein shall prove to be untrue in any material respect, or (C) a default in the due performance or observance by the Company of any covenant or agreement contained in this Agreement and such default shall continue unremedied for a period of thirty (30) days after written notice thereof to the Company by the Dealer Manager.
(d)Delivery of Records Upon Expiration or Early Termination. Upon the expiration or early termination of this Agreement for any reason, the Dealer Manager shall (i) promptly forward any and all funds, if any, in its possession which were received from investors for the sale of Preferred Shares for the deposit of investor funds, (ii) to the extent not previously provided to the Company, provide a list of all investors who have subscribed for or purchased shares and all broker-dealers with whom the Dealer Manager has entered into a Soliciting Dealer Agreement, (iii) notify Soliciting Dealers of such termination, and (iv) promptly deliver to the Company copies of any sales literature designed for use specifically for the Offering that it is then in the process
of preparing. Upon expiration or earlier termination of this Agreement, the Company shall pay to the Dealer Manager all compensation to which the Dealer Manager is then entitled under Section 5(d) at such time as such compensation becomes payable.
13. | Miscellaneous. |
(a)Survival. The following provisions of the Agreement shall survive the expiration or earlier termination of this Agreement: Section 8(g); Section 8(l); Section 9; Section 10; Section 11; Section 12; and Section 13. Notwithstanding anything else that may be to the contrary herein, the expiration or earlier termination of this Agreement shall not relieve a Party for liability for any breach occurring prior to such expiration or earlier termination. In no event shall the Dealer Manager be entitled to payment of any compensation in connection with the Offering, other than for completed sales of Preferred Shares pursuant to Section 5 hereof.
(b)Notices. All notices, consents, approvals, waivers or other communications (each, a "Notice") required or permitted hereunder, except as herein otherwise specifically provided, shall be in writing and shall be: (i) delivered personally or by commercial messenger; (ii) sent via a recognized overnight courier service; or (iii) sent by facsimile transmission, provided confirmation of receipt is received by sender and such Notice is sent or delivered contemporaneously by an additional method provided in this Section 13(b); in each case so long as such Notice is addressed to the intended recipient thereof as set forth below:
If to the Company:
CIM Commercial Trust Corporation
17950 Preston Road, Suite 600
Dallas, Texas 75252
Tel: (972) 349-3200
Fax: (972) 349-3269
Attention: Jan Salit 1 David Thompson
With a copy to
CIM Commercial Trust Corporation
c1o CIM Investment Advisors, LLC
4700 Wilshire Boulevard
Los Angeles, California 90010
Fax: (323) 860-4901
Attention: General Counsel
E-mail: generalcounsel@cimgroup.com
If to the Dealer Manager:
CCO Capital, LLC
2398 East Camelback Road, 4th Floor Phoenix, Arizona 85016
Attention: President
Any Party may change its address specified above by giving each Party a Notice of such change in accordance with this Section 13(b). Any Notice shall be deemed given upon actual receipt (or refusal of receipt).
(c)Successors and Assigns. No Party shall assign (voluntarily, by operation of law or otherwise) this Agreement or any right, interest or benefit under this Agreement without the prior written consent of each other Party. Subject to the foregoing, this Agreement shall be fully binding upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and assigns.
(d)Invalid Provision. The invalidity or unenforceability of any provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision was omitted.
(e)Applicable Law. This Agreement and any disputes relative to the interpretation or enforcement hereto shall be governed by and construed under the internal laws, as opposed to the conflicts of laws provisions, of the State of New York.
(f)WAIVER. EACH OF THE PARTIES HERETO WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) RELATED TO OR ARISING OUT OF THIS AGREEMENT. The parties hereto each hereby irrevocably submits to the exclusive jurisdiction of the courts of the State of New York and the Federal courts of the United States of America located in the Borough of Manhattan, New York City, in respect of the interpretation and enforcement of the terms of this Agreement, and in respect of the transactions contemplated hereby, and each hereby waives, and agrees not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement may not be enforced in or by such courts, and the parties hereto each hereby irrevocably agrees that all claims with respect to such action or proceeding shall be heard and determined in such a New York State or Federal court.
(g)Attorneys' Fees. If a dispute arises concerning the performance, meaning or interpretation of any provision of this Agreement or any document executed in connection with this Agreement, then the prevailing party in such dispute shall be awarded any and all costs and expenses incurred by the prevailing party in enforcing, defending or establishing its rights hereunder or thereunder, including, without limitation, court costs and attorneys and expert witness fees. In addition to the foregoing award of costs and fees, the prevailing party also shall be entitled to recover its attorneys' fees incurred in any post-judgment proceedings to collect or enforce any judgment.
(h)No Partnership. Nothing in this Agreement shall be construed or interpreted to constitute the Dealer Manager or the Soliciting Dealers as being in association with or in partnership with the Company or one another, and instead, this Agreement only shall constitute the Dealer Manager as a broker authorized by the Company to sell and to manage the sale by others of the Preferred Shares according to the terms set forth in the Registration Statement, the Prospectus or this Agreement. Nothing herein contained shall render the Dealer Manager or the Company liable for the obligations of any of the Soliciting Dealers or one another.
(i)Third Party Beneficiaries. Except for the Persons referred to in Section 10 and Section 11, there shall be no third party beneficiaries of this Agreement, and no provision of this Agreement is intended to be for the benefit of any Person not a Party, and no third party shall be deemed to be a beneficiary of any provision of this Agreement. Except for the Persons referred to in Section 10 and Section 11, no third party shall by virtue of any provision of this Agreement have a right of action or an enforceable remedy against any Party. Each of the Persons referred to in Section 10 and Section 11 shall be a third party beneficiary of this Agreement.
(j)Entire Agreement. This Agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and1or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing.
(k)Nonwaiver. The failure of any Party to insist upon or enforce strict performance by any other Party of any provision of this Agreement or to exercise any right under this Agreement shall not be construed as
a waiver or relinquishment to any extent of such Party's right to assert or rely upon any such provision or right in that or any other instance; rather, such provision or right shall be and remain in full force and effect.
(l)Access to Information. The Company may authorize the Company's transfer agent to provide information to the Dealer Manager and each Soliciting Dealer regarding recordholder information about the clients of such Soliciting Dealer who have invested with the Company on an on-going basis for so long as such Soliciting Dealer has a relationship with such clients. The Dealer Manager shall require in the Soliciting Dealer Agreement that Soliciting Dealers not disclose any password for a restricted website or portion of a restricted website provided to such Soliciting Dealer in connection with the Offering and not disclose to any Person, other than an officer, director, employee or agent of such Soliciting Dealers, any material downloaded from such a restricted website or portion of a restricted website.
(m)Counterparts. This Agreement may be executed (including by facsimile transmission) with counterpart signature pages or in counterpart copies, each of which shall be deemed an original but all of which together shall constitute one and the same instrument comprising this Agreement.
(n)Absence of Fiduciary Relationships. The Parties acknowledge and agree that (i) the Dealer Manager's responsibility to the Company and the Manager is solely contractual in nature, and (ii) the Dealer Manager does not owe the Company, the Manager, any of their respective affiliates or any other Person any fiduciary (or other similar) duty as a result of this Agreement or any of the transactions contemplated hereby.
(o)Dealer Manager Information. The Parties will expressly acknowledge and agree as to the information furnished to the Company by the Dealer Manager expressly for use in the Registration Statement.
(p)Promotion of Dealer Manager Relationship. The Company and the Dealer Manager shall not promote or advertise their relationship without the approval of the other Party in advance, provided that nothing in this Section 13(p) shall prevent or restrict the Company from making any disclosures required by securities laws, rules or regulations or applicable stock exchange rules or listing standards.
(q)Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
If the foregoing is in accordance with your understanding of our agreement, kindly sign and return it to us, whereupon this instrument will become a binding agreement between you and the Company in accordance with its terms.
[Signatures on following page]
IN WITNESS WHEREOF, the parties hereto have each duly executed this Amended and Restated Dealer Manager Agreement as of the date first set forth above.
CIM COMMERCIAL TRUST CORPORATION
By: /s/ David Thompson |
Name: David Thompson |
Title: Chief Executive Officer |
CIM SERVICE PROVIDER, LLC |
By: /s/ David Thompson |
Name: David Thompson |
Title: Chief Executive Officer |
CCO Capital, LLC |
By: /s/ Emily Vande Krol |
Name: Emily Vande Krol |
Title: President |
Exhibit 21.1
CIM COMMERCIAL TRUST CORPORATION
LIST OF SUBSIDIARIES
Entity | State of Formation | Type of Organization | ||
1130 Howard (SF) GP, LLC | Delaware | LLC | ||
1130 Howard (SF) Owner, L.P. | Delaware | LP | ||
9460 Wilshire Blvd GP, LLC | Delaware | LLC | ||
9460 Wilshire Blvd (BH) Owner, L.P. | Delaware | LP | ||
4750 Wilshire Blvd. (LA) Owner, LLC | Delaware | LLC | ||
CIM Commercial Trust Corporation | Maryland | Corporation | ||
CIM Small Business Loan Trust 2018-1 | Delaware | Trust | ||
CIM Urban Holdings, LLC | Delaware | LLC | ||
CIM Urban Partners, L.P. | Delaware | LP | ||
CIM Urban REIT GP I, LLC | California | LLC | ||
CIM Urban REIT GP II, LLC | Delaware | LLC | ||
CIM Urban REIT Holdings, LLC | Delaware | LLC | ||
CIM Urban REIT Properties IX, L.P. | Delaware | LP | ||
CIM Urban REIT Properties XIII, L.P. | Delaware | LP | ||
CIM Wilshire (Los Angeles) Investor, LLC | Delaware | LLC | ||
CIM Wilshire (Los Angeles) Manager, LLC | Delaware | LLC | ||
CIM/11600 Wilshire (Los Angeles) GP, LLC | Delaware | LLC | ||
CIM/11600 Wilshire (Los Angeles), LP | Delaware | LP | ||
CIM 11620 Wilshire (Los Angeles) GP, LLC | Delaware | LLC | ||
CIM 11620 Wilshire (Los Angeles), LP | Delaware | LP | ||
CIM/J Street Garage Sacramento GP, LLC | California | LLC | ||
CIM/J Street Garage Sacramento, L.P | California | LLC | ||
CIM/J Street Hotel Sacramento GP, LLC | California | LLC | ||
CIM/J Street Hotel Sacramento, Inc. | California | Corporation | ||
CIM/J Street Hotel Sacramento, L.P. | California | LP | ||
CIM/Oakland 1 Kaiser Plaza GP, LLC | Delaware | LLC | ||
CIM/Oakland 1 Kaiser Plaza, LP | Delaware | LP | ||
First Western SBLC, Inc. | Florida | Corporation | ||
FW Asset Holding, LLC | Delaware | LLC | ||
Lindblade Media Center (LA) Owner, LLC | Delaware | LLC | ||
PMC Commercial Lending, LLC | Delaware | LLC | ||
PMC Funding Corp. | Florida | Corporation | ||
PMC Mortgage Corp., LLC | Delaware | LLC | ||
PMC Preferred Capital Trust-A | Delaware | Trust | ||
PMC Properties, Inc. | Delaware | Corporation | ||
Two Kaiser Plaza (Oakland) Owner, LLC | Delaware | LLC | ||
Urban Partners GP, LLC | Delaware | LLC | ||
Urban Partners GP Manager, LLC | Delaware | LLC | ||
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
CIM Commercial Trust Corporation
Dallas, Texas
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-127531) and Form S-3 (No. 333-233255) of CIM Commercial Trust Corporation and subsidiaries of our reports dated March 16, 2020, relating to the consolidated financial statements and financial statement schedules, and the effectiveness of CIM Commercial Trust Corporation and its subsidiaries' internal control over financial reporting which appear in this Form 10-K.
/s/ BDO USA, LLP
Los Angeles, California
March 16, 2020
Exhibit 31.1
Certification
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, David Thompson, certify that:
1. | I have reviewed this report on Form 10-K for the year ended December 31, 2019 of CIM Commercial Trust Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: March 16, 2020 | /s/ David Thompson |
David Thompson | |
Chief Executive Officer | |
Exhibit 31.2
Certification
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Nathan D. DeBacker, certify that:
1. | I have reviewed this report on Form 10-K for the year ended December 31, 2019 of CIM Commercial Trust Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: March 16, 2020 | /s/ Nathan D. DeBacker |
Nathan D. DeBacker | |
Chief Financial Officer | |
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned officer of CIM Commercial Trust Corporation (the "Company"), hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2019 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 16, 2020 | /s/ David Thompson | |
Name: | David Thompson | |
Title: | Chief Executive Officer | |
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and is not being filed as part of the Report or as a separate disclosure document.
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned officer of CIM Commercial Trust Corporation (the "Company"), hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2019 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 16, 2020 | /s/ Nathan D. DeBacker | |
Name: | Nathan D. DeBacker | |
Title: | Chief Financial Officer | |
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and is not being filed as part of the Report or as a separate disclosure document.