SEC Filing | Creative Media & Community Trust Corporation

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cmct-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q


(Mark One):
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	June 30, 2023
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number 1-13610

CREATIVE MEDIA & COMMUNITY TRUST CORPORATION

(Exact name of registrant as specified in its charter)

Maryland

75-6446078

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

17950 Preston Road,

Suite 600,

Dallas,

Texas

75252

(Address of Principal Executive Offices)

(Zip Code)

(972)

349-3200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Tel Aviv Stock Exchange

(Title of each class)

(Trading symbol)

(Name of each exchange on which registered)

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

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. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 3, 2023, the Registrant had outstanding 22,786,741 shares of common stock, par value $0.001 per share.

Table of Contents

CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

INDEX


			PAGE NO.
PART I.	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets — June 30, 2023 and December 31, 2022	1
		Consolidated Statements of Operations — Three and Six Months Ended June 30, 2023 and 2022	2

		Consolidated Statements of Equity — Six Months Ended June 30, 2023 and 2022	3
		Consolidated Statements of Cash Flows — Six Months Ended June 30, 2023 and 2022	5
		Notes to Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
	Item 4.	Controls and Procedures	55

PART II.	Other Information
	Item 1.	Legal Proceedings	56
	Item 1A.	Risk Factors	56
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
	Item 3.	Defaults Upon Senior Securities	56
	Item 4.	Mine Safety Disclosures	56
	Item 5.	Other Information	56
	Item 6.	Exhibits	57

Table of Contents

PART I

Financial Information

Item 1.

Financial Statements

CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts) (Unaudited)


	June 30, 2023		December 31, 2022
ASSETS
Investments in real estate, net	$	711,848	$	502,006
Investments in unconsolidated entities	27,525		12,381
Cash and cash equivalents	24,561		46,190
Restricted cash	23,783		11,290
Loans receivable, net (Note 5)	60,451		62,547
Accounts receivable, net	4,673		3,780
Deferred rent receivable and charges, net	32,773		37,543
Other intangible assets, net	13,552		4,461
Other assets	20,529		10,050

TOTAL ASSETS	$	919,695	$	690,248
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND EQUITY
LIABILITIES:
Debt, net	$	487,802	$	184,267
Accounts payable and accrued expenses	31,482		107,220
Intangible liabilities, net	93		20
Due to related parties	4,725		3,155
Other liabilities	14,271		17,856

Total liabilities	538,373		312,518
COMMITMENTS AND CONTINGENCIES (Note 15)
REDEEMABLE PREFERRED STOCK: Series A cumulative redeemable preferred stock, $0.001 par value; 35,061,620 shares authorized; no shares issued or outstanding as of June 30, 2023 and 693,741 and 693,741 shares issued and outstanding, respectively, as of December 31, 2022; liquidation preference of $25.00 per share, subject to adjustment	—		15,697
EQUITY:
Series A cumulative redeemable preferred stock, $0.001 par value; 35,061,620 shares authorized; 8,820,338 and 7,881,958 shares issued and outstanding, respectively, as of June 30, 2023 and 8,126,597 and 7,565,349 shares issued and outstanding, respectively, as of December 31, 2022; liquidation preference of $25.00 per share, subject to adjustment	196,911		189,048
Series A1 cumulative redeemable preferred stock, $0.001 par value; 27,966,000 shares authorized; 8,194,099 and 8,160,099 shares issued and outstanding, respectively, as of June 30, 2023 and 5,966,077 and 5,956,147 shares issued and outstanding, respectively, as of December 31, 2022; liquidation preference of $25.00 per share, subject to adjustment	202,069		147,514
Series D cumulative redeemable preferred stock, $0.001 par value; 26,991,590 shares authorized; 56,857 and 48,447 shares issued and outstanding, respectively, as of June 30, 2023 and 56,857 and 48,857 shares issued and outstanding, respectively, as of December 31, 2022; liquidation preference of $25.00 per share, subject to adjustment	1,190		1,200

Common stock, $0.001 par value; 900,000,000 shares authorized; 22,737,853 shares issued and outstanding as of June 30, 2023 and 22,737,853 shares issued and outstanding as of December 31, 2022.	23		23
Additional paid-in capital	856,235		861,721
Distributions in excess of earnings	(878,854)		(837,846)
Total stockholders’ equity	377,574		361,660
Noncontrolling interests	3,748		373
Total equity	381,322		362,033
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND EQUITY	$	919,695	$	690,248

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share amounts) (Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
REVENUES:
Rental and other property income	$	18,052	$	14,194	$	32,938	$	28,290
Hotel income	11,182		9,107		22,105		16,511
Interest and other income	3,526		3,102		6,629		6,384
Total Revenues	32,760		26,403		61,672		51,185
EXPENSES:
Rental and other property operating	16,979		12,731		32,204		24,223
Asset management and other fees to related parties	627		920		1,347		1,841
Expense reimbursements to related parties—corporate	677		526		1,205		948
Expense reimbursements to related parties—lending segment	910		604		1,518		1,073
Interest	8,709		2,403		14,945		4,573
General and administrative	1,684		1,253		3,609		3,068
Transaction-related costs	—		—		3,360		—
Depreciation and amortization	20,472		4,974		29,974		9,978



Total Expenses	50,058		23,411		88,162		45,704
(Loss) income from unconsolidated entities	(904)		260		(136)		380
Gain on sale of real estate (Note 3)	—		—		1,104		—
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES	(18,202)		3,252		(25,522)		5,861
Provision for income taxes	159		321		415		628
NET (LOSS) INCOME	(18,361)		2,931		(25,937)		5,233
Net loss (income) attributable to noncontrolling interests	1,002		(9)		1,627		(14)
NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY	(17,359)		2,922		(24,310)		5,219
Redeemable preferred stock dividends declared or accumulated (Note 11)	(6,141)		(5,161)		(11,532)		(10,179)
Redeemable preferred stock deemed dividends (Note 11)	—		(4)		—		(19)
Redeemable preferred stock redemptions (Note 11)	(315)		(106)		(688)		(181)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(23,815)	$	(2,349)	$	(36,530)	$	(5,160)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE:
Basic	$	(1.05)	$	(0.10)	$	(1.61)	$	(0.22)
Diluted	$	(1.05)	$	(0.10)	$	(1.61)	$	(0.22)
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic	22,707		23,353		22,707		23,351
Diluted	22,707		23,353		22,707		23,351

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

Consolidated Statements of Equity

(In thousands, except share and per share amounts) (Unaudited)


	Six Months Ended June 30, 2023
	Common Stock			Preferred Stock
	Shares	Par Value		Shares	Par Value		Additional Paid-in Capital		Distributions in Excess of Earnings		Total Stockholders’ Equity		Non-controlling Interests		Total Equity
Balances, December 31, 2022	22,737,853	$	23	13,570,353	$	337,762	$	861,721	$	(837,846)	$	361,660	$	373	$	362,033
Cumulative-effect adjustment upon adoption of ASU 2016-13 (Note 2)	—	—		—	—		—		(619)		(619)		—		(619)
Adjustment to noncontrolling interests	—	—		—	—		—		—		—		5,002		5,002

Stock based compensation expense	—	—		—	—		55		—		55		—		55
Common dividends ($0.085 per share)	—	—		—	—		—		(1,933)		(1,933)		—		(1,933)
Issuance of Series A1 Preferred Stock	—	—		1,032,433	25,569		(2,291)		—		23,278		—		23,278
Redemption of Series A1 Preferred Stock	—	—		(12,870)	(319)		28		(11)		(302)		—		(302)
Dividends to holders of Series A1 Preferred Stock ($0.39563 per share)	—	—		—	—		—		(2,559)		(2,559)		—		(2,559)

Dividends to holders of Series D Preferred Stock ($0.35313 per share)	—	—		—	—		—		(17)		(17)		—		(17)
Reclassification of Series A Preferred stock to permanent equity	—	—		389,325	9,699		(887)		—		8,812		—		8,812

Redemption of Series A Preferred Stock	—	—		(189,753)	(4,723)		403		(362)		(4,682)		—		(4,682)
Dividends to holders of Series A Preferred Stock ($0.34375 per share)	—	—		—	—		—		(2,810)		(2,810)		—		(2,810)
Net loss	—	—		—	—		—		(6,951)		(6,951)		(625)		(7,576)
Balances, March 31, 2023	22,737,853	$	23	14,789,488	$	367,988	$	859,029	$	(853,108)	$	373,932	$	4,750	$	378,682
Contributions to noncontrolling interests	—	—		—	—		—		—		—		—		—
Distributions to noncontrolling interests	—	—		—	—		—		—		—		—		—
Stock based compensation expense	—	—		—	—		37		—		37		—		37
Common dividends ($0.085 per share)	—	—		—	—		—		(1,933)		(1,933)		—		(1,933)
Issuance of Series A1 Preferred Stock	—	—		1,195,589	29,582		(2,597)		—		26,985		—		26,985
Redemption of Series A1 Preferred Stock	—	—		(11,200)	(277)		23		(24)		(278)		—		(278)
Dividends to holders of Series A1 Preferred Stock ($0.4425 per share)	—	—		—	—		—		(3,373)		(3,373)		—		(3,373)
Redemption of Series D Preferred Stock	—	—		(410)	(10)		—		—		(10)		—		(10)
Dividends to holders of Series D Preferred Stock ($0.35313 per share)	—	—		—	—		—		(17)		(17)		—		(17)
Reclassification of Series A Preferred stock to permanent equity	—	—		300,846	7,462		(658)		—		6,804		—		6,804

Redemption of Series A Preferred Stock	—	—		(183,809)	(4,575)		401		(291)		(4,465)		—		(4,465)
Dividends to holders of Series A Preferred Stock ($0.34375 per share)	—	—		—	—		—		(2,749)		(2,749)		—		(2,749)
Net loss	—	—		—	—		—		(17,359)		(17,359)		(1,002)		(18,361)





Balances, June 30, 2023	22,737,853	$	23	16,090,504	$	400,170	$	856,235	$	(878,854)	$	377,574	$	3,748	$	381,322

Table of Contents


	Six Months Ended June 30, 2022
	Common Stock			Preferred Stock
	Shares	Par Value		Shares	Par Value		Additional Paid-in Capital		Distributions in Excess of Earnings		Total Stockholders’ Equity		Non-controlling Interests		Total Equity
Balances, December 31, 2021	23,369,331	$	24	11,715,354	$	310,661	$	866,746	$	(804,227)	$	373,204	$	345	$	373,549
Stock based compensation expense	—	—		—	—		55		—		55		—		55
Common dividends ($0.085 per share)	—	—		—	—		—		(1,986)		(1,986)		—		(1,986)
Dividends to holders of Series A Preferred Stock ($0.34375 per share)	—	—		—	—		—		(2,896)		(2,896)		—		(2,896)
Dividends to holders of Series D Preferred Stock ($0.35313 per share)	—	—		—	—		—		(21)		(21)		—		(21)
Reclassification of Series A Preferred stock to permanent equity	—	—		329,921	8,304		(637)		—		7,667		—		7,667
Redeemable preferred stock accretion	—	—		—	—		—		(15)		(15)		—		(15)
Redemption of Series A Preferred Stock	—	—		(49,341)	(1,228)		108		(75)		(1,195)		—		(1,195)
Net income	—	—		—	—		—		2,297		2,297		5		2,302
Balances, March 31, 2022	23,369,331	$	24	11,995,934	$	317,737	$	866,272	$	(806,923)	$	377,110	$	350	$	377,460
Contributions to noncontrolling interests	—	—		—	—		—		—		—		5		5
Distributions to noncontrolling interests	—	—		—	—		—		—		—		(3)		(3)
Stock based compensation expense	30,984	—		—	—		37		—		37		—		37
Repurchase of common stock	(41,374)	—		—	—		(303)		—		(303)		—		(303)
Common dividends ($0.085 per share)	—	—		—	—		—		(1,986)		(1,986)		—		(1,986)
Issuance of Series A1 Preferred Stock	—	—		192,440	4,770		(416)		—		4,354		—		4,354
Dividends to holders of Series A1 Preferred Stock ($0.37500 per share)	—	—		—	—		—		(79)		(79)		—		(79)
Dividends to holders of Series A Preferred Stock ($0.34375 per share)	—	—		—	—		—		(2,960)		(2,960)		—		(2,960)
Dividends to holders of Series D Preferred Stock ($0.35313 per share)	—	—		—	—		—		(21)		(21)		—		(21)
Reclassification of Series A Preferred stock to permanent equity	—	—		430,082	10,857		(1,189)		—		9,668		—		9,668
Redeemable preferred stock accretion	—	—		—	—		—		(4)		(4)		—		(4)
Redemption of Series A Preferred Stock	—	—		(88,225)	(2,188)		201		(106)		(2,093)				(2,093)
Net income	—	—		—	—		—		2,922		2,922		9		2,931
Balances, June 30, 2022	23,358,941	$	24	12,530,231	$	331,176	$	864,602	$	(809,157)	$	386,645	$	361	$	387,006

The accompanying notes are an integral part of these consolidated financial statements.

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CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)


	Six Months Ended June 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(25,937)	$	5,233
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization, net	30,056		10,054



Gain on sale of real estate	(1,104)		—




Amortization of deferred debt origination costs	1,025		580
Amortization of premiums and discounts on debt	18		13
Unrealized premium adjustment	520		1,095
Amortization of deferred costs and accretion of fees on loans receivable, net	(195)		(294)
Write-offs of uncollectible receivables	(136)		39

Gain on interest rate caps	(275)		—
Deferred income taxes	31		47
Stock-based compensation	92		92
Loss (income) from unconsolidated entities	136		(380)

Loans funded, held for sale to secondary market	(13,359)		(18,426)
Proceeds from sale of guaranteed loans	12,722		23,638
Principal collected on loans subject to secured borrowings	708		441
Commitment fees remitted and other operating activity	(245)		(839)

Changes in operating assets and liabilities:
Accounts receivable	(848)		15
Other assets	(4,491)		(1,174)
Accounts payable and accrued expenses	13,152		(180)
Deferred leasing costs	(435)		(748)
Other liabilities	(3,585)		3,610
Due to related parties	1,570		2,472
Net cash provided by operating activities	9,420		25,288
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(6,455)		(4,601)
Acquisition of real estate	(96,731)		(8,115)
Proceeds from sale of real estate, net	30,613		—
Investment in unconsolidated entity	(6,680)		(22,408)

Loans funded	(4,769)		(12,256)
Principal collected on loans	6,333		11,634

Net cash used in investing activities	(77,689)		(35,746)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of revolving credit facilities, mortgages payable, term notes and principal on SBA 7(a) loan-backed notes	(151,162)		(33,481)
Proceeds from revolving credit facilities, term notes and mortgages	222,415		40,000
Proceeds from the issuance of SBA 7(a) loan-backed notes	54,141		—
Payment of principal on secured borrowings	(708)		(441)

Payment of deferred preferred stock offering costs	(501)		(408)
Payment of deferred debt origination costs	(3,167)		—
Payment of common dividends	(3,866)		(3,739)

Repurchase of Common Stock	—		(303)




Net proceeds from issuance of Preferred Stock	51,024		20,246
Payment of preferred stock dividends	(15,713)		(14,038)

Redemption of Preferred Stock	(93,330)		(3,343)
Noncontrolling interests’ distributions	—		(3)
Noncontrolling interests’ contributions	—		5
Net cash provided by financing activities	59,133		4,495

(Continued)

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CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

(In thousands) (Unaudited)


	Six Months Ended June 30,
	2023		2022
NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH	(9,136)		(5,963)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Beginning of period	57,480		33,651
End of period	$	48,344	$	27,688
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents	$	24,561	$	16,480
Restricted cash	23,783		11,208
Total cash and cash equivalents and restricted cash	$	48,344	$	27,688
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	13,032	$	3,789
Federal income taxes paid	$	500	$	555
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accrued capital expenditures, tenant improvements and real estate developments	$	3,813	$	2,477
Proceeds from the sale of real estate committed but not yet received	$	3,787	$	—






Other amounts due from unconsolidated joint venture partners included in other assets	$	1,445	$	—
Non-cash contributions to unconsolidated joint venture	$	8,600	$	—
Accrued preferred stock offering costs	$	134	$	392
Accrual of dividends payable to common stockholders	$	1,933	$	—
Accrual of dividends payable to preferred stockholders	$	2,088	$	3,984
Preferred stock offering costs offset against redeemable preferred stock	$	842	$	296
Reclassification of Series A Preferred Stock from temporary equity to permanent equity	$	15,616	$	17,335


Reclassification of Series A Preferred Stock from permanent equity to accounts payable and accrued expenses	$	328	$	—






Mortgage notes assumed in connection with our acquisition of real estate	$	181,318	$	—
Redeemable preferred stock deemed dividends	$	—	$	19
Accrued redeemable preferred stock fees	$	369	$	563
Adjustment to noncontrolling interests	$	5,002	$	—

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023 (Unaudited)

1. ORGANIZATION AND OPERATIONS

Creative Media & Community Trust Corporation (formerly known as CIM Commercial Trust Corporation) (the “Company”), is a Maryland corporation and real estate investment trust (“REIT”). The Company primarily acquires, develops, owns and operates both premier multifamily properties situated in vibrant communities throughout the United States and Class A and creative office real assets in markets with similar business and employment characteristics to its multifamily investments. The Company also owns one hotel in northern California and a lending platform that originates loans under the Small Business Administration (“SBA”) 7(a) loan program. The Company seeks to apply the expertise of CIM Group, L.P. (“CIM Group”) to the acquisition, development and operation of premier multifamily properties and creative office assets that cater to rapidly growing industries such as technology, media and entertainment in vibrant and emerging communities throughout the United States.

The Company’s 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.” The Company has authorized for issuance 900,000,000 shares of common stock and 100,000,000 shares of preferred stock (“Preferred Stock”).

Since June 2022, the Company has been conducting a continuous public offering with respect to shares of its Series A1 Preferred Stock, par value $0.001 per share with an initial stated value of $25.00 per share, subject to adjustment (Note 11).

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For more information regarding the Company’s significant accounting policies and estimates, please refer to “Basis of Presentation and Summary of Significant Accounting Policies” contained in Note 2 to the Company’s consolidated financial statements for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2023.

Interim Financial Information—The accompanying interim consolidated financial statements of the Company have been prepared by the Company’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and note disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial information reflects all adjustments which are, in the opinion of the Company’s management, of a normal recurring nature and necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The accompanying interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto, included in the 2022 Form 10-K.

Principles of Consolidation—The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. In determining whether the Company has controlling interests in an entity and the requirement to consolidate the accounts in that entity, the Company analyzes its investments in real estate in accordance with standards set forth in GAAP to determine whether they are variable interest entities (“VIEs”), and if so, whether the Company is the primary beneficiary. The Company’s judgment with respect to its level of influence or control over an entity and whether the Company is the primary beneficiary of a VIE involves consideration of various factors, including the form of the Company’s ownership interest, the Company’s voting interest, the size of the Company’s investment (including loans), and the Company’s ability to participate in major policy-making decisions. The Company’s ability to correctly assess its influence or control over an entity affects the presentation of these investments in real estate on the Company’s consolidated financial statements. As of June 30, 2023, the Company has determined that the trust formed for the benefit of the note holders (the “Trust”) for the securitization of the unguaranteed portion of certain of the Company’s SBA 7(a) loans receivable is considered a VIE. Applying the consolidation requirements for VIEs, the Company determined that it is the primary beneficiary based on its power to direct activities through its role as servicer and its obligations to absorb losses and right to receive benefits. In addition, as of June 30, 2023, the Company has determined that its Unconsolidated Joint Ventures (as defined below) are considered VIEs. Applying the consolidation requirements for VIEs, the Company determined that it is not the primary beneficiary based on its lack of power to direct activities and its obligations to absorb losses and right to receive benefits. Therefore, the Unconsolidated Joint Ventures do not qualify for consolidation. The Company accounts for its investments in Unconsolidated Joint Ventures as equity method investments.

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CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023 (Unaudited) – (Continued)

Investments in Real Estate—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						Lesser of useful life or lease term

The fair value of real estate acquired is recorded to acquired tangible assets, consisting primarily of land, land improvements, building and improvements, tenant improvements, 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.

Capitalized Project Costs

The Company capitalizes project costs, including pre-construction costs, interest expense, property taxes, insurance, and other costs directly related and essential to the development, redevelopment, or construction of a project, while activities are ongoing to prepare an asset for its intended use. Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred. Improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. Ordinary repairs and maintenance are expensed as incurred.

Recoverability of Investments in Real Estate—The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Investments in real estate are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If, and when, such events or changes in circumstances are present, the recoverability of assets to be held and used requires significant judgment and estimates and is measured by a comparison of the carrying amount to the future undiscounted cash flows expected to be generated by the assets and their eventual disposition. If the undiscounted cash flows are less than the carrying amount of the assets, an impairment is recognized to the extent the carrying amount of the assets exceeds the estimated fair value of the assets. The process for evaluating real estate impairment requires management to make significant assumptions related to certain inputs, including rental rates, lease-up period, occupancy, estimated holding periods, capital expenditures, growth rates, market discount rates and terminal capitalization rates. These inputs require a subjective evaluation based on the specific property and market. Changes in the assumptions could have a significant impact on either the fair value, the amount of impairment charge, if any, or both. Any asset held for sale is reported at the lower of the asset’s carrying amount or fair value, less costs to sell. When an asset is identified by the Company as held for sale, the Company will cease recording depreciation and amortization of the asset. The Company did not recognize any impairment of long-lived assets during the three and six months ended June 30, 2023 and 2022 (Note 3).

Investments in Unconsolidated Entities—The Company accounts for its investments in the unconsolidated joint ventures (the “Unconsolidated Joint Ventures”) under the equity method, as the Company has the ability to exercise significant influence over the investments. The Unconsolidated Joint Ventures record their assets and liabilities at fair value. As such, the Company records its share of the Unconsolidated Joint Ventures’ unrealized gains or losses as well as its share of the revenues and expenses on a quarterly basis as an adjustment to the carrying value of the investment on the Company’s consolidated balance sheet and such share is recognized within the Company’s income from unconsolidated entities on the consolidated statements of operations.

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.

Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company has interest rate caps that are used to manage exposure to interest rate movements, but do not meet the requirements to be designated as hedging instruments. The change in fair value of the derivative instruments that are not designated as hedges is recorded directly to earnings as interest expense on the accompanying consolidated statements of operations. See Note 8 for further disclosures about our derivative financial instruments and hedging activities.

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CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023 (Unaudited) – (Continued)

Revenue Recognition—At the inception of a revenue-producing contract, the Company determines if a contract qualifies as a lease and if not, then as a customer contract. Based on this determination, the appropriate treatment in accordance with GAAP is applied to the contract, including its revenue recognition.

Revenue from leasing activities

The Company operates as a lessor of both office and multifamily real estate assets. When the Company enters into a contract or amends an existing contract, the Company evaluates if the contracts meet the definition of a lease using the following criteria:

•One party (lessor) must hold an identified asset;

•The counterparty (lessee) must have the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of the contract; and

•The counterparty (lessee) must have the right to direct the use of the identified asset throughout the period of the contract.

The Company determined that the Company’s contracts with its tenants explicitly identify the premises and that any substitution rights to relocate tenants to other premises within the same building stated in the contract are not substantive. Additionally, so long as payments are made timely under such contracts, the Company’s tenants have the right to obtain substantially all the economic benefits from the use of the identified asset and can direct how and for what purpose the premises are used to conduct their operations. Therefore, the contracts with the Company’s tenants constitute leases.

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases when collectability is probable 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, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is considered the owner of the improvements, any tenant improvement allowance that is funded is treated as an incentive. Lease incentives paid to tenants are included in other assets and amortized as a reduction to rental revenue on a straight-line basis over the term of the related lease. As of June 30, 2023 and December 31, 2022, lease incentives of $3.9 million and $3.9 million, respectively, are presented net of accumulated amortization of $3.1 million and $3.0 million, respectively.

Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes, insurance, and other recoverable costs, are recognized as revenue and are included in rental and other property income in the period the expenses are incurred, with the corresponding expenses included in rental and other property operating expense. Tenant reimbursements are recognized and presented on a gross basis when the Company is primarily responsible for fulfilling the promise to provide the specified good or service and control that specified good or service before it is transferred to the tenant. The Company has elected not to separate lease and non-lease components as the pattern of revenue recognition does not differ for the two components, and the non-lease component is not the primary component in the Company’s leases.

In addition to minimum rents, certain leases, including the Company’s parking leases with third-party operators, provide for additional rents based upon varying percentages of tenants’ sales in excess of annual minimums. Percentage rent is recognized once lessees’ specified sales targets have been met.

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CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023 (Unaudited) – (Continued)

For the three and six months ended June 30, 2023 and 2022, the Company recognized rental income as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Rental and other property income
Fixed lease payments (1)	$	15,198	$	11,561	$	27,672	$	23,184
Variable lease payments (2)	2,854		2,633		5,266		5,106
Rental and other property income	$	18,052	$	14,194	$	32,938	$	28,290

______________________

(1)Fixed lease payments include contractual rents under lease agreements with tenants recognized on a straight-line basis over the lease term, including amortization of acquired above-market leases, below-market leases and lease incentives.

(2)Variable lease payments include expense reimbursements billed to tenants and percentage rent, net of bad debt expense from the Company’s operating leases plus cash payments from tenants deemed not probable of collection.

Collectability of Lease-Related Receivables

The Company continually reviews whether collection of lease-related receivables, including any straight-line rent, and current and future operating expense reimbursements from tenants is probable. The determination of whether collectability is probable takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Upon the determination that the collectability of a receivable is not probable, the Company will record a reduction to rental and other property income and a decrease in the outstanding receivable. Revenue from leases where collection is deemed to be not probable is recorded on a cash basis until collectability becomes probable. Management’s estimate of the collectability of lease-related receivables is based on the best information available at the time of estimate. The Company does not use a general reserve approach. As of June 30, 2023 and December 31, 2022, the Company had identified certain tenants where collection was no longer considered probable and decreased outstanding receivables by $663,000 and $387,000, respectively, across all operating leases.

Revenue from lending activities

Interest income included in interest and other income is comprised of interest earned on loans and the Company’s short-term investments and the accretion of loan discounts. Interest income on loans is accrued as earned with the accrual of interest suspended when the related loan becomes a Non-Accrual Loan (as defined below).

Revenue from hotel activities

The Company recognizes revenue from hotel activities separate from its leasing activities. 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 when the good or service is delivered to the customer.

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CREATIVE MEDIA & COMMUNITY TRUST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023 (Unaudited) – (Continued)

At inception of a contract with a customer for hotel goods and services, the contractual price is equivalent to the transaction price as there are no elements of variable consideration to estimate.

The Company presents hotel revenues net of sales, occupancy, and other taxes.

Below is a reconciliation of the hotel revenue from contracts with customers to the total hotel segment revenue disclosed in Note 17 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Hotel properties
Hotel income	$	11,182	$	9,107	$	22,105	$	16,511
Rental and other property income	402		448		892		822
Interest and other income	84		21		163		36
Hotel revenues	$	11,668	$	9,576	$	23,160	$	17,369

Tenant recoveries outside of the lease agreements

Tenant recoveries outside of the lease agreements are related to construction projects in which the Company’s tenants have agreed to fully reimburse the Company for all costs related to construction. These services include architectural, permit expediter and construction services. At inception of the contract with the customer, the contractual price is equivalent to the transaction price as there are no elements of variable consideration to estimate. While these individual services are distinct, in the context of the arrangement with the customer, all of these services are bundled together and represent a single package of construction services requested by the customer. The Company satisfies its performance obligation and recognizes revenues associated with these services over time as the construction is completed.