Description

I recommend the purchase of the Series L preferred stock issued by CIM Commercial Trust Corporation (CMCT).  The Series L preferred stock is listed on NASDAQ and the Tel Aviv Stock Exchange (TASE).  These are a PA security for most, as the Series L shares are very thinly traded on NASDAQ.

The Series L preferred stock has a stated value of $28.37 and a cumulative 5.5% dividend paid annually.  Beginning in November 2022, shareholders have the right to require CMCT to redeem their Series L preferred shares at stated value plus accrued dividends.  A purchase of Series L shares today with a subsequent redemption at the first opportunity yields an IRR of approximately 14%.

CMCT is a real estate investment trust that owns and operates Class A and creative office assets in the western United States.  Its office properties are located in Austin, TX, Los Angeles, and the San Francisco Bay Area.  Broncos727 posted two good write-ups pitching CMCT's common stock, one in 2019 and one in 2020.  The write-ups and the accompanying comment threads provide a good overview of (1) the significant corporate actions taken by CMCT since 2018 and (2) the current state of the company.  Since broncos' second write-up, two activists have become involved, namely Engine Capital and Lionbridge Capital, with each submitting a slate of directors to stand for election at the 2021 annual meeting (the date of which has not yet been established).

Business Overview.

Real Estate.  CMCT owns twelve properties, including nine office buildings containing 1.3 million rentable square feet, a 503 room hotel in Sacramento, California, and two development parcels:  1 Kaiser Plaza, a 538,000 square foot office building in the Lake Merritt submarket of Oakland, California; 2 Kaiser Plaza, an immediately adjacent development site; a 21,000 square foot creative office building in the South of Market submarket of San Francisco; five office properties totaling 523,000 square feet spread throughout the Los Angeles metro (Mid-Wilshire, Beverly Hills, Culver City, and West Los Angeles); two office properties in Austin, Texas totaling 239,000 square feet; and the 503 room Sheraton Grand Hotel in downtown Sacramento plus the adjacent parking structure.

Lending Segment.  CMCT's lending segment consists of a SBA 7(a) lending platform, a national lender that primarily originates loans to small businesses in the hospitality industry.  In addition, as a SBA 7(a) licensee, CMCT is an authorized lender under the Paycheck Protection Program (PPP) included in Covid relief legislation enacted during 2020.

Capital Structure.  CMCT's capital structure is relatively simple, albeit highly leveraged.  CMCT has a non-recourse mortgage secured by 1 Kaiser Plaza, a revolving credit facility secured by most of its remaining real estate, a relatively small amount of junior subordinated notes, and debt related to its SBA lending program.  CMCT has three classes of preferred stock outstanding, the Series L pitched here, and Series A and Series D, neither of which are listed on an exchange.  CMCT is currently conducting a continuous public offering of the Series A and Series D preferred stock.

The enterprise value, capital structure, and selected credit metrics are as follows:

Enterprise Value.

Selected Credit Metrics.

As noted above, after taking its preferred stock into account, CMCT is highly leveraged.  While CMCT currently has adequate cash flow to comfortably cover the interest on its debt, it does not have sufficient cash flow to cover its preferred dividends, even assuming related party asset management fees are paid in stock rather than cash.  CMCT has sufficient cash on hand to pay over a year's worth of dividends, and in the first quarter of 2021 CMCT sold over $5 million (annual run rate of over $20 million) in Series A and Series D preferred stock pursuant to its continuous public offering.  This works for now, but is not sustainable.

Series L Preferred.  The terms of the Series L preferred stock are as follows:

Stated Value.  $28.37.

Dividends.  The Series L preferred pays a 5.5% dividend.  Series L dividends are paid annually and are cumulative.  The Series L dividend ranks senior to dividends on CMCT's common stock (except with respect to an "initial dividend" which, so far, has not been a limiting factor) and junior to dividends on the Series A and Series D preferred stock.

Liquidation Preference.  Upon liquidation, the Series L preferred stock ranks (1) senior to CMCT's common stock to the extent of the Series L stated value and (except with respect to the "initial dividend" discussed above) to the extent of any accrued and unpaid Series L dividends and (2) on parity with the Series A and Series D preferred stock to the extent of the Series L stated value and junior to the Series A and Series D preferred stock with respect to any accrued and unpaid Series L dividends.

Redeemable.  From and after November 21, 2022, holders of Series L preferred stock may require CMCT to redeem their shares at a price equal to the Series L stated value plus accrued and unpaid Series L dividends.  Likewise, beginning in November 2022, CMCT has the right to redeem any or all of the Series L shares on similar payment terms.

Redemption – Notice and Dates.  Holders' redemption rights begin on November 21, 2022.  From and after that date, redemption rights may be exercised quarterly.  Notice must be given during the period beginning on the 15th day and ending on the 20th day of the last month of the calendar quarter.  If proper notice is given, the redemption is deemed to be effective as of the last day of the quarter in which the demand is made, and the redemption price is generally paid on the 18th day of the first month of the following quarter. 

Complications.  There are several complications that add brain damage to this investment.

Dividends Payable in Israeli New Shekels.  Notwithstanding that the Series L preferred stock is listed on NASDAQ, Series L dividends are not paid in U.S. dollars.  Rather, the dividends are paid in Israeli New Shekels (ILS) based on the then-current exchange rate.

Payment of Redemption Price.  The redemption price for the Series L preferred stock is payable, at CMCT's option, either:  (1) in cash, in ILS, based on the exchange rate three trading prior to the payment date; (2) in shares of CMCT common stock based on the lower of (a) the NAV per common share as most recently published by CMCT as of the redemption date and (b) the volume-weighted average price of common stock for the 20 trading days prior to the redemption date; or (3) in any combination of cash (in ILS) and common stock based on the foregoing conversion mechanisms.

(Two notes regarding payment of the redemption price in common stock:  (1) The common stock closed at $11.23 per share on May 21, 2021 while the most recently published NAV is $22.27 per share; accordingly, if the redemption price were paid in common stock today it would be based on the market price of the stock.  (2) In the (unlikely) event that, at the time of redemption, the stock price is higher than per share NAV and if the redemption price is paid in common stock, holders would receive payment in excess of the Series L stated value.)

Exercise of Redemption Option.  As noted at beginning of this write-up, the Series L preferred is listed on the Tel Aviv Stock Exchange in additional to NASDAQ.  On redemption, this becomes especially relevant.  Holders of Series L preferred stock who hold their shares through a TASE member may exercise their redemption rights by delivering written notice to their respective TASE member during the six-day redemption notice window (i.e., from the 15th to the 20th day of the last month of a calendar quarter).  However, investors who do not hold their Series L preferred stock through a TASE member must deliver written notice of redemption during the redemption notice window directly to CMCT at an address announced by CMCT prior to the redemption window.

Mitigations of Redemption Complications.  To the extent CMCT elects to pay the redemption price in ILS, a redeeming holder runs currency risk for the approximately one month period from the notice date to the payment date.  While theoretically hedgeable, as a practical matter currency hedging brings too much brain damage into an otherwise simple PA investment.  However, given the amount of leverage carried by CMCT, I believe the most likely outcome is that CMCT elects to pay the redemption price in common shares.  This payment is more readily hedgeable, although since the redemption price is based on a 20 day weighted average price, the hedging will not be one to one.

For those who do not hold the Series L preferred through TASE members (i.e., most American holders), actually exercising the redemption rights is cumbersome.  Further, the mechanics are unclear with respect to securities held in street name – must the holder deliver physical certificates to complete the redemption; is the redemption payment made to the holder's broker or directly to the holder; etc. etc.  I am working to get more clarity from IR and will report on what, if anything, I learn.  As a practical matter, however, I believe this complication will be mitigated by arbitrage as the redemption date nears.  Unless it appears likely that CMCT is legally precluded from honoring redemption requests (in which case the thesis is broken and holders have bigger problems), arbitrage from buyers trading through TASE members should drive the market price of the Series L preferred close to the anticipated redemption price as the date of the first redemption notice window nears, giving U.S. holders an exit relatively close to the redemption price.  In this regard, CMCT common stock is also listed on the Tel Aviv stock exchange in addition to NASDAQ.

Risks.

CMCT is legally prohibited from redeeming the Series L preferred stock.

CMCT imposes difficult-to-hurdle administrative barriers inhibiting the ability of U.S. holders of Series L preferred stock to effectively exercise their redemption rights.

Currency volatility (to the extent the redemption price is paid in ILS) and common stock price volatility (to the extent the redemption price is paid in CMCT common stock) between the redemption notice date and the redemption payment date.

Catalyst

Exercise of redemption rights.