424B3 1 a17-20080_4424b3.htm 424B3

 

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-210880

 

CIM COMMERCIAL TRUST CORPORATION

 

SUPPLEMENT NO. 9, DATED AUGUST 14, 2017,

TO THE PROSPECTUS, DATED JULY 1, 2016

 

This prospectus supplement (this “Supplement No. 9”) is part of the prospectus of CIM Commercial Trust Corporation (the “Company”), dated July 1, 2016 (the “Prospectus”), as supplemented by Supplement No. 6, dated April 14, 2017 (“Supplement No. 6”), Supplement No. 7, dated May 12, 2017 (“Supplement No. 7”), and Supplement No. 8, dated July 14, 2017 (“Supplement No. 8”).  This Supplement No. 9 supplements certain information contained in the Prospectus. This Supplement No. 9 should be read, and will be delivered, with the Prospectus, Supplement No. 6, Supplement No. 7 and Supplement No. 8.  Unless otherwise defined in this Supplement No. 9, capitalized terms used in this Supplement No. 9 shall have the same meanings as set forth in the Prospectus.

 

The purpose of this Supplement No. 9 is to:

 

·                  update the Applicable NAV, as defined in the Prospectus; and

 

·                  attach as Annex A the Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (excluding the exhibits thereto) filed with the Securities and Exchange Commission on August 9, 2017.

 



 

PROSPECTUS UPDATES

 

Estimated Net Asset Value

 

The following disclosure replaces in its entirety the “Estimated Net Asset Value” section of the Prospectus:

 

As of the date hereof, we have established an estimated NAV per share of Common Stock of $22.56. Neither FINRA nor the SEC provides rules on the methodology we must use to determine our estimated NAV per share. The determination of estimated NAV involves a number of subjective assumptions, estimates and judgments that may not be accurate or complete. 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 could be significantly different from our estimated NAV. Thus, other public REITs’ methodologies used to calculate estimated NAV may differ materially from ours. Additionally, the estimated NAV does not give effect to changes in value, investment activities, capital activities, indebtedness levels, and other various activities occurring after June 30, 2017 that would have an impact on our estimated NAV.

 

Overview

 

The estimated NAV per share of $22.56 was calculated by our Advisor, relying in part on appraisals of our real estate investments and the assets of our lending segment. The table below sets forth the material items included in the calculation of our estimated NAV.

 

 

 

($ in thousands,
except per

share amount)

 

 

(unaudited)

Investments in real estate—at fair value (1)

 

$

2,019,159

Loans receivable—at fair value (1)

 

72,080

Debt (1)

 

(872,461)

Cash and other assets net of other liabilities (1)

 

95,065

Redeemable preferred stock (1)

 

(7,050)

Noncontrolling interests (1)

 

(1,047)

Estimated NAV available to common shareholders

 

$

1,305,746

Shares of Common Stock outstanding (1)

 

57,875,848

Estimated NAV per share of Common Stock

 

$

22.56

 

 

 

 

 

(1)                                 As of June 30, 2017.

 

We engaged various third party appraisal firms to perform appraisals of our real estate investments and the assets of our lending segment as of December 31, 2016. These appraisals were performed in accordance with standards set forth by the American Institute of Certified Public Accountants. Each of our appraisals were prepared by personnel who are subject to and in compliance with the code of professional ethics and the standards of professional conduct set forth by the certification programs of the professional appraisal organizations of which they are members.

 

The estimated per share NAV does not represent the fair value of our assets less liabilities in accordance with U.S. generally accepted accounting principles, and such estimated per share NAV is not a representation, warranty or guarantee that (i) the exercise price for the Warrants, which is established based on Applicable NAV, will be indicative of the price at which the shares of Common Stock for which the Warrants may be exercised would trade, or that the shares of Common Stock would trade at the estimated per share NAV; (ii) a stockholder would be able to realize an amount equal to the estimated per share NAV if such stockholder attempts to sell his or her shares of Common Stock; (iii) a stockholder would ultimately realize distributions per share equal to the estimated per share NAV upon our liquidation or sale; or (iv) a third party would offer the estimated per share NAV in an arm’s-length transaction to purchase all or substantially all of our shares of Common Stock.

 

Further, the estimated per share NAV was calculated as of a moment in time, and, although the values of shares of our Common Stock will fluctuate over time as a result of, among other things, developments related to individual assets, purchases and sale of additional assets, changes in the real estate and capital markets, distribution by us and changes in corporate policies and strategies, we do not undertake to update the estimated per share NAV on a regular basis.

 



 

Fair Value of Real Estate

 

As of June 30, 2017, our real estate portfolio consisted of (i) 20 office properties (including one parking garage and two development sites, one of which is being used as a parking lot), totaling approximately 4.1 million rentable square feet, (ii) two multifamily properties comprised of 418 units, and (iii) one hotel with 503 rooms. As of June 30, 2017, our investments in real estate had an aggregate estimated fair value of approximately $2,019,159,000, which, except for two multifamily properties and two office properties held for sale at August 11, 2017, are based on appraisals obtained as of December 31, 2016 plus capital expenditures, at cost, incurred thereafter.

 

The fair values of all our real estate assets, with the exception of our parking garage, the two development sites and the two multifamily properties and two office properties held for sale at August 11, 2017, were determined using the income capitalization approach and more specifically utilizing discounted cash flow analyses as the primary methodology with the sales comparison approach being used as a secondary methodology. The fair value of our parking garage was determined using the income capitalization approach and more specifically utilizing the direct capitalization methodology with the sales comparison approach being used as a secondary methodology. The sales comparison approach was utilized exclusively to value the two development sites.  The fair values of our two multifamily properties and two office properties held for sale at August 11, 2017 were based on negotiated sales prices with unrelated third parties.

 

The discounted cash flow approach to valuing real estate investments involves projecting annual cash flows over a defined holding period as well as calculating a residual value for an investment at the end of the holding period. The residual value is calculated by applying a capitalization rate to the projected net operating income in the year following the projected sale. The present value of the future cash flows, including the residual value, is then calculated using an appropriate discount rate and the summation of these present values is the basis for an investment’s fair value.

 

The direct capitalization approach to valuing real estate investments involves applying a capitalization rate to current annual net operating income with the resulting value being the basis for an investment’s fair value.

 

The sales comparison approach to valuing real estate investments uses actual sales prices for comparable assets to determine the investment’s fair value. The sales prices of the comparable assets are adjusted to reflect their condition relative to the subject property, the time and resources necessary to ready the comparable properties for sale, and the terms of the comparable properties sales.

 

The ranges of certain key assumptions used in the fair value measurement of the investments in real estate as of June 30, 2017 were as follows:

 

Asset Type / Key Assumption

 

Range

 

Weighted
Average

Office and hotel assets

 

 

 

 

Discount rate

 

6.5% - 9.5%

 

7.6%

Capitalization rate

 

5.8% - 8.3%

 

6.6%

 

Fair Value of Loans Receivable

 

As of June 30, 2017, we held 176 loans whose aggregate fair value was approximately $72,080,000, which is based on an appraisal obtained as of December 31, 2016 plus loan activity, at cost, incurred thereafter. The fair values were determined using a present value technique for the anticipated future cash flows of the loans using certain key assumptions. Credit risk, or lack of credit risk in the case of our government guaranteed loans, was considered in the determination of the key assumptions used to fair value our loans receivable.

 

Debt

 

As of June 30, 2017, our outstanding debt consisted of fixed rate property-level mortgage notes payable, floating rate junior subordinated notes, and a floating rate term loan facility whose interest rate has been effectively converted to a fixed rate through interest rate swaps.

 

As of June 30, 2017, the carrying amount of our fixed rate mortgages payable was approximately $464,902,000, net of deferred loan costs, and the carrying amount of our floating rate debt which includes our junior subordinated notes, unsecured credit facility and term loan facility was approximately $407,559,000, net of deferred loan costs.

 



 

The fair value of our debt is calculated for disclosure purposes only and we do not include the mark to market adjustments related to our debt in our estimated NAV calculation. As of June 30, 2017, the estimated fair value of our debt was approximately $3,637,000 higher than the carrying amount of our debt net of deferred loan costs.

 

Fair Value of Cash, Other Assets and Other Liabilities

 

As of June 30, 2017, the carrying amounts of our cash, other assets and other liabilities approximates their fair values due to the liquid nature of such assets and the short-term nature of such liabilities.

 

Redeemable Preferred Stock

 

As of June 30, 2017, our redeemable preferred stock consisted of gross proceeds allocated to the Series A Preferred Stock of $7,668,000 offset by specifically identifiable issuance costs and non-issuance specific costs allocated to the Series A Preferred Stock of $594,000 and $24,000, respectively.

 

Sensitivity Analysis

 

While we believe that the assumptions used in determining the appraised values of our investments in real estate are reasonable, certain changes in these assumptions could impact the calculation of such values.

 

The table below illustrates the impact on the estimated NAV per share if the capitalization rates or discount rates were adjusted by 25 basis points, assuming all other factors remain unchanged.

 

 

 

Change in the NAV
Per Share Due To

 

 

Decrease
of 25 bps

 

Increase
of 25 bps

Capitalization rates

 

$

0.77

 

$

(0.69)

Discount rates

 

$

0.60

 

$

(0.53)

 



 

Annex A

 



 

 

Annex A

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One):

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

OR

 

o  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

 

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, TX 75252
(Address of principal executive offices)

 

(972) 349-3200
(Registrant’s telephone number)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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, 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 o

 

Non-accelerated filer o

 

 

 

 

 

Smaller reporting company x

 

Emerging growth company o

 

(Do not check if a
smaller reporting 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.                                                o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o    NO x

 

As of August 4, 2017, the Registrant had outstanding 57,875,848 shares of common stock, par value $0.001 per share.

 

 

 



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

 

 

PAGE NO.

 

 

 

 

PART I.

Financial Information

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets—June 30, 2017 and December 31, 2016 (Unaudited)

A-2

 

 

 

 

 

 

Consolidated Statements of Operations—Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

A-3

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

A-4

 

 

 

 

 

 

Consolidated Statements of Equity—Six Months Ended June 30, 2017 and 2016 (Unaudited)

A-5

 

 

 

 

 

 

Consolidated Statements of Cash Flows—Six Months Ended June 30, 2017 and 2016 (Unaudited)

A-6

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

A-8

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

A-41

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

A-59

 

 

 

 

 

Item 4.

Controls and Procedures

A-59

 

 

 

 

PART II.

Other Information

 

 

 

 

 

Item 1.

Legal Proceedings

A-61

 

 

 

 

 

Item 1A.

Risk Factors

A-61

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

A-61

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

A-61

 

 

 

 

 

Item 4.

Mine Safety Disclosures

A-61

 

 

 

 

 

Item 5.

Other Information

A-61

 

 

 

 

 

Item 6.

Exhibits

A-62

 

 



 

PART I

Financial Information

 

Item 1.

Financial Statements

 

A-1



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

Investments in real estate, net

 

$

1,141,460

 

$

1,606,942

 

Cash and cash equivalents

 

129,006

 

144,449

 

Restricted cash

 

26,706

 

32,160

 

Accounts receivable, net

 

15,511

 

13,086

 

Deferred rent receivable and charges, net

 

95,369

 

116,354

 

Other intangible assets, net

 

15,610

 

17,623

 

Other assets

 

89,155

 

92,270

 

Assets held for sale, net

 

125,138

 

 

TOTAL ASSETS

 

$

1,637,955

 

$

2,022,884

 

LIABILITIES, REDEEMABLE PREFERRED STOCK AND EQUITY

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Debt, net

 

$

846,833

 

$

967,886

 

Accounts payable and accrued expenses

 

42,287

 

39,155

 

Intangible liabilities, net

 

1,138

 

3,576

 

Due to related parties

 

10,005

 

10,196

 

Other liabilities

 

31,275

 

34,056

 

Liabilities associated with assets held for sale, net

 

52,886

 

 

Total liabilities

 

984,424

 

1,054,869

 

COMMITMENTS AND CONTINGENCIES (Note 16)

 

 

 

 

 

REDEEMABLE PREFERRED STOCK: Series A, $0.001 par value; 36,000,000 shares authorized; 308,775 and 61,435 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively; liquidation preference of $25.00 per share

 

7,050

 

1,426

 

EQUITY:

 

 

 

 

 

Common stock, $0.001 par value; 900,000,000 shares authorized; 57,875,848 and 84,048,081 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

58

 

84

 

Additional paid-in capital

 

1,077,151

 

1,566,073

 

Accumulated other comprehensive income (loss)

 

603

 

(509

)

Distributions in excess of earnings

 

(432,220

)

(599,971

)

Total stockholders’ equity

 

645,592

 

965,677

 

Noncontrolling interests

 

889

 

912

 

Total equity

 

646,481

 

966,589

 

TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND EQUITY

 

$

1,637,955

 

$

2,022,884

 

 

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

 

A-2



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share data)

 

 

 

Three Months Ended 
June 30,

 

Six Months Ended
June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(Unaudited)

 

REVENUES:

 

 

 

 

 

 

 

 

 

Rental and other property income

 

$

55,956

 

$

61,624

 

$

116,765

 

$

124,472

 

Expense reimbursements

 

2,526

 

3,316

 

5,556

 

6,244

 

Interest and other income

 

2,817

 

3,420

 

5,927

 

6,261

 

 

 

61,299

 

68,360

 

128,248

 

136,977

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Rental and other property operating

 

27,249

 

32,299

 

50,209

 

63,577

 

Asset management and other fees to related parties

 

7,863

 

8,376

 

16,563

 

17,007

 

Interest

 

9,513

 

7,295

 

19,286

 

14,110

 

General and administrative

 

1,647

 

2,131

 

3,326

 

4,073

 

Transaction costs (Note 16)

 

11,615

 

118

 

11,628

 

267

 

Depreciation and amortization

 

14,761

 

18,480

 

31,992

 

36,538

 

Impairment of real estate (Note 3)

 

13,100

 

 

13,100

 

 

 

 

85,748

 

68,699

 

146,104

 

135,572

 

Gain on sale of real estate (Note 3)

 

116,283

 

 

304,017

 

24,739

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES

 

91,834

 

(339

)

286,161

 

26,144

 

Provision for income taxes

 

462

 

471

 

854

 

661

 

NET INCOME (LOSS) FROM CONTINUING OPERATIONS

 

91,372

 

(810

)

285,307

 

25,483

 

DISCONTINUED OPERATIONS:

 

 

 

 

 

 

 

 

 

Income from operations of assets held for sale (Note 7)

 

 

1,668

 

 

2,358

 

NET INCOME FROM DISCONTINUED OPERATIONS

 

 

1,668

 

 

2,358

 

NET INCOME

 

91,372

 

858

 

285,307

 

27,841

 

Net income attributable to noncontrolling interests

 

(9

)

(9

)

(14

)

(12

)

NET INCOME ATTRIBUTABLE TO THE COMPANY

 

91,363

 

849

 

285,293

 

27,829

 

Redeemable preferred stock dividends (Note 11)

 

(72

)

 

(103

)

 

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

 

$

91,291

 

$

849

 

$

285,190

 

$

27,829

 

BASIC AND DILUTED NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS PER SHARE:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.16

 

$

(0.01

)

$

3.50

 

$

0.26

 

Discontinued operations

 

$

 

$

0.02

 

$

 

$

0.02

 

Net income

 

$

1.16

 

$

0.01

 

$

3.50

 

$

0.29

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

78,871

 

96,683

 

81,445

 

97,173

 

Diluted

 

78,871

 

96,683

 

81,445

 

97,173

 

 

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

 

A-3



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

Three Months Ended 
June 30,

 

Six Months Ended
June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(Unaudited)

 

NET INCOME

 

$

91,372

 

$

858

 

$

285,307

 

$

27,841

 

Other comprehensive income (loss): cash flow hedges

 

(440

)

(2,445

)

1,112

 

(10,370

)

COMPREHENSIVE INCOME (LOSS)

 

90,932

 

(1,587

)

286,419

 

17,471

 

Comprehensive income attributable to noncontrolling interests

 

(9

)

(9

)

(14

)

(12

)

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY

 

$

90,923

 

$

(1,596

)

$

286,405

 

$

17,459

 

 

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

 

A-4



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

Consolidated Statements of Equity

(In thousands, except share and per share data)

 

 

 

Six Months Ended June 30, 2017

 

 

 

Common
Stock
Outstanding

 

Common
Stock
Par Value

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Distributions
in Excess of 
Earnings

 

Noncontrolling
Interests

 

Total
Equity

 

 

 

(Unaudited)

 

Balances, December 31, 2016

 

84,048,081

 

$

84

 

$

1,566,073

 

$

(509

)

$

(599,971

)

$

912

 

$

966,589

 

Distributions to noncontrolling interests

 

 

 

 

 

 

(37

)

(37

)

Stock-based compensation expense

 

9,585

 

 

78

 

 

 

 

78

 

Share repurchase

 

(26,181,818

)

(26

)

(489,027

)

 

(86,947

)

 

(576,000

)

Special cash dividends paid to certain common stockholders ($2.26 per share) (Note 12)

 

 

 

 

 

(4,872

)

 

(4,872

)

Common dividends ($0.34375 per share)

 

 

 

 

 

(25,620

)

 

(25,620

)

Issuance of Warrants

 

 

 

27

 

 

 

 

27

 

Dividends to holders of Series A Preferred Stock ($0.6875 per share)

 

 

 

 

 

(103

)

 

(103

)

Other comprehensive income (loss)

 

 

 

 

1,112

 

 

 

1,112

 

Net income

 

 

 

 

 

285,293

 

14

 

285,307

 

Balances, June 30, 2017

 

57,875,848

 

$

58

 

$

1,077,151

 

$

603

 

$

(432,220

)

$

889

 

$

646,481

 

 

 

 

Six Months Ended June 30, 2016

 

 

 

Common
Stock
Outstanding

 

Common
Stock
Par Value

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Distributions
in Excess of
Earnings

 

Noncontrolling
Interests

 

Total
Equity

 

 

 

(Unaudited)

 

Balances, December 31, 2015

 

97,589,598

 

$

98

 

$

1,820,451

 

$

(2,519

)

$

(521,620

)

$

937

 

$

1,297,347

 

Distributions to noncontrolling interests

 

 

 

 

 

 

(36

)

(36

)

Stock-based compensation expense

 

10,176

 

 

65

 

 

 

 

65

 

Issuance of shares pursuant to employment agreements

 

76,423

 

 

 

 

 

 

 

Share repurchase

 

(10,000,000

)

(10

)

(186,781

)

 

(23,541

)

 

(210,332

)

Common dividends ($0.4375 per share)

 

 

 

 

 

(40,544

)

 

(40,544

)

Other comprehensive income (loss)

 

 

 

 

(10,370

)

 

 

(10,370

)

Net income

 

 

 

 

 

27,829

 

12

 

27,841

 

Balances, June 30, 2016

 

87,676,197

 

$

88

 

$

1,633,735

 

$

(12,889

)

$

(557,876

)

$

913

 

$

1,063,971

 

 

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

 

A-5



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

285,307

 

$

27,841

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Deferred rent and amortization of intangible assets, liabilities and lease inducements

 

(2,662

)

(2,637

)

Depreciation and amortization

 

31,992

 

36,538

 

Transfer of right to collect supplemental real estate tax reimbursements

 

(5,097

)

 

Gain on sale of real estate

 

(304,017

)

(24,739

)

Impairment of real estate

 

13,100

 

 

Straight line rent, below-market ground lease and amortization of intangible assets

 

881

 

885

 

Amortization of deferred loan costs

 

808

 

1,967

 

Amortization of premiums and discounts on debt

 

(458

)

(543

)

Unrealized premium adjustment

 

722

 

835

 

Amortization and accretion on loans receivable, net

 

140

 

(419

)

Bad debt expense (recovery)

 

187

 

(60

)

Deferred income taxes

 

459

 

76

 

Stock-based compensation

 

78

 

65

 

Loans funded, held for sale to secondary market

 

(17,906

)

(22,105

)

Proceeds from sale of guaranteed loans

 

16,737

 

21,579

 

Principal collected on loans subject to secured borrowings

 

4,935

 

1,883

 

Other operating activity

 

(441

)

1,020

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable and interest receivable

 

(2,682

)

(1,574

)

Other assets

 

(1,653

)

(1,107

)

Accounts payable and accrued expenses

 

5,631

 

(1,779

)

Deferred leasing costs

 

(2,557

)

(6,532

)

Other liabilities

 

(1,748

)

2,063

 

Due to related parties

 

4

 

301

 

Net cash provided by operating activities

 

21,760

 

33,558

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Additions to investments in real estate

 

(9,915

)

(18,121

)

Proceeds from sale of real estate property, net

 

642,886

 

42,782

 

Loans funded

 

(5,969

)

(27,871

)

Principal collected on loans

 

5,496

 

26,164

 

Restricted cash

 

5,403

 

(76,956

)

Other investing activity

 

67

 

1,042

 

Net cash provided by (used in) investing activities

 

637,968

 

(52,960

)

 

(Continued)

 

A-6



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

(In thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

(Payment of) proceeds from mortgages payable

 

(65,569

)

309,170

 

Payment of unsecured revolving lines of credit, revolving credit facilities and term notes

 

 

(107,000

)

Payment of principal on secured borrowings

 

(4,935

)

(11,965

)

Proceeds from secured borrowings

 

 

9,956

 

Payment of deferred preferred stock offering costs

 

(862

)

(362

)

Payment of deferred loan costs

 

(4

)

(1,076

)

Payment of common dividends

 

(25,620

)

(40,544

)

Payment of special cash dividends

 

(4,872

)

 

Repurchase of Common Stock

 

(576,000

)

(210,060

)

Net proceeds from issuance of Warrants

 

27

 

 

Net proceeds from issuance of Series A Preferred Stock

 

5,645

 

 

Payment of preferred stock dividends

 

(40

)

 

Noncontrolling interests’ distributions

 

(37

)

(36

)

Net cash used in financing activities

 

(672,267

)

(51,917

)

Change in cash balances included in assets held for sale

 

(2,904

)

(14,265

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(15,443

)

(85,584

)

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

Beginning of period

 

144,449

 

139,101

 

End of period

 

$

129,006

 

$

53,517

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for interest

 

$

19,303

 

$

13,717

 

Federal income taxes paid

 

$

259

 

$

50

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

Additions to investments in real estate included in accounts payable and accrued expenses

 

$

6,883

 

$

9,392

 

Net increase (decrease) in fair value of derivatives applied to other comprehensive income (loss)

 

$

1,112

 

$

(10,370

)

Reduction of loans receivable and secured borrowings due to the SBA’s repurchase of the guaranteed portion of a loan

 

$

534

 

$

2,663

 

Additions to deferred loan costs included in accounts payable and accrued expenses

 

$

 

$

626

 

Expenses related to repurchase of common stock included in accounts payable and accrued expenses

 

$

 

$

272

 

Proceeds receivable from closed mortgage loans included in other assets

 

$

 

$

80,687

 

Additions to preferred stock offering costs included in accounts payable and accrued expenses

 

$

1,387

 

$

984

 

Accrual of dividends payable to preferred stockholders

 

$

72

 

$

 

Preferred stock offering costs offset against redeemable preferred stock

 

$

21

 

$

 

 

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

 

A-7



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

1. ORGANIZATION AND OPERATIONS

 

CIM Commercial Trust Corporation (“CIM Commercial” or the “Company”), a Maryland corporation and real estate investment trust (“REIT”), or together with its wholly-owned subsidiaries (“we,” “us” or “our”) primarily invests in, owns, and operates Class A and creative office investments in vibrant and improving urban communities throughout the United States. These communities are located in areas that include traditional downtown areas and suburban main streets, which have high barriers to entry, high population density, improving demographic 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 (the “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 transaction (the “Merger”) was completed on March 11, 2014 (the “Acquisition Date”). As a result of the Merger and related transactions, CIM Urban became our wholly-owned subsidiary.

 

Our common stock, $0.001 par value per share (“Common Stock”), is currently traded on the NASDAQ Global Market under the ticker symbol “CMCT.” We have authorized for issuance 900,000,000 shares of Common Stock and 100,000,000 shares of preferred stock.

 

CIM Commercial has qualified and intends to continue to qualify as a REIT, as defined in the Internal Revenue Code of 1986, as amended.

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

For more information regarding our significant accounting policies and estimates, please refer to “Basis of Presentation and Summary of Significant Accounting Policies” contained in Note 3 to our consolidated financial statements for the year ended December 31, 2016, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2017.

 

Interim Financial Information—The accompanying interim consolidated financial statements of CIM Commercial have been prepared by our 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 our management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. Our accompanying interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K filed with the SEC on March 16, 2017.

 

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.

 

A-8



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

Investments in Real Estate—Real estate acquisitions are recorded at cost as of the acquisition date. Costs related to the acquisition of properties are expensed as incurred. 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

 

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, or on the sales comparison approach to similar properties. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. We recognized impairment of long-lived assets of $13,100,000 and $0 during the three months ended June 30, 2017 and 2016, respectively, and $13,100,000 and $0 during the six months ended June 30, 2017 and 2016, respectively (Note 3).

 

Derivative Financial Instruments—As part of our 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 that is highly effective and that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, 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). Any hedge ineffectiveness (which represents the amount by which the changes in the estimated fair value of the derivative differ from the variability in the cash flows of the forecasted transaction) is recognized in current-period earnings as a component of interest expense. When an interest rate swap designated as a cash flow hedge no longer qualifies for hedge accounting, we recognize changes in 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 from 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 13 for disclosures about our derivative financial instruments and hedging activities.

 

Loans Receivable—Our loans receivable included in other assets 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.

 

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 (Note 7). Acquisition discounts of $1,563,000 remained as of June 30, 2017 which have not yet been accreted to income.

 

A-9



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

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.

 

On a quarterly basis, and more frequently if indicators exist, we evaluate the collectability of our loans receivable. Our evaluation of collectability involves 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 three and six months ended June 30, 2017, we recorded a net impairment of $0 and $12,000 on our loans receivable, respectively. For the three and six months ended June 30, 2016, we recorded a net impairment (recovery) of $7,000 and $(236,000) on our loans receivable, respectively. We 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.

 

Deferred Rent Receivable and Charges—Deferred rent receivable and charges consist of deferred rent, deferred leasing costs, deferred offering costs (Note 11) and other deferred costs. Deferred rent receivable is $56,406,000 and $64,010,000 at June 30, 2017 and December 31, 2016, 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 $60,116,000 and $76,063,000 are presented net of accumulated amortization of $25,338,000 and $25,914,000 at June 30, 2017 and December 31, 2016, respectively. Deferred offering costs represent direct costs incurred in connection with our offering of Units (as defined in Note 11), excluding costs specifically identifiable to a closing, such as commissions, dealer-manager fees, and other registration fees. For a specific issuance of Units, associated offering costs are reclassified as a reduction of proceeds raised on the issuance date. Offering costs incurred but not directly related to a specifically identifiable closing are deferred. Deferred offering costs are first allocated to each issuance on a pro-rata basis equal to the ratio of Units issued in an issuance to the maximum number of Units that are expected to be issued. Then, the deferred offering costs allocated to such issuance are further allocated to the Series A Preferred Stock (as defined in Note 11) and Warrants (as defined in Note 11) 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 Warrants are reductions to temporary equity and permanent equity, respectively. Deferred offering costs of $2,771,000 and $2,060,000 related to our offering of Units are included in deferred rent receivable and charges at June 30, 2017 and December 31, 2016, respectively. Other deferred costs are $1,414,000 and $135,000 at June 30, 2017 and December 31, 2016, respectively.

 

Redeemable Preferred Stock—Beginning on the date of original issuance of any given shares of Series A Preferred Stock (Note 11), the holder of such shares will have the right to require the Company to redeem such shares at a redemption price of 100% of the Stated Value (as defined in Note 11), 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 Stated Value, 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 Stated Value, plus accrued and unpaid dividends.  The applicable redemption

 

A-10



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

price payable upon redemption of any Series A Preferred Stock will be 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. 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 Warrants (Note 11) in permanent equity. On the first anniversary of the date of original issuance of a particular share of Series A Preferred Stock, we intend to 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. Proceeds and expenses from the sale of the Units are allocated to the Series A Preferred Stock and Warrants using their relative fair values on the date of issuance.

 

Noncontrolling Interests—Noncontrolling interests represent the interests in various properties owned by third parties.

 

Restricted Cash—Our mortgage loan and hotel management agreements provide for depositing cash into restricted accounts reserved for property taxes, insurance, 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.

 

Assets Held for Sale and Discontinued Operations—In the ordinary course of business, we may periodically enter into agreements relating to dispositions of investments.  Some of these agreements are non-binding because either they do not obligate either party to pursue any transactions until the execution of a definitive agreement or they provide the potential buyer with the ability to terminate without penalty or forfeiture of any material deposit, subject to certain specified contingencies, such as completion of due diligence at the discretion of such buyer.  We 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 board of directors (the “Board of Directors”), 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 have assessed the sale of three of our multifamily properties and our agreements to sell two multifamily 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 during the three and six months ended June 30, 2017 and for the years ended December 31, 2016 and 2015. Based on our qualitative and quantitative assessment, we concluded the disposals do not represent a strategic shift that will have a major effect on our operations and financial results and they should not be classified as discontinued operations in our consolidated financial statements.

 

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 our consolidated financial statements.

 

A-11



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

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. These reclassifications had no effect on previously reported net income or cash flows.

 

Recently Issued Accounting Pronouncements—In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is designed to improve the recognition and measurement of financial instruments through targeted changes to existing GAAP. The ASU requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price; and (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax assets. In addition, the ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. For public business entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption by public entities to financial statements that have not yet been issued is permitted only for the provision related to instrument-specific credit risk. We are currently in the process of evaluating the impact of adoption of this new accounting guidance on our consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is intended to improve financial reporting about leasing transactions. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires a lessee to recognize only capital leases on the balance sheet, the new ASU will require a lessee to recognize both types of leases on the balance sheet. The lessor accounting will remain largely unchanged from current GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. For public entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2018. We are currently in the process of evaluating the impact of adoption of this new accounting guidance on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions, including accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. In addition, the ASU eliminates certain guidance in ASC 718, which was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. For public entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is permitted and an entity that elects early adoption must adopt all of the amendments in the same period. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

A-12



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

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 replaces 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. For public entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2019. Early adoption is permitted for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2018. We are currently in the process of evaluating the impact of adoption of this new accounting guidance on our consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. For public entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of this new accounting guidance on our consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update do not provide a definition of restricted cash or restricted cash equivalents. For public entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of this new accounting guidance on our consolidated financial statements.

 

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which make certain technical corrections and improvements to ASU 2014-09. For public entities, the ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption is permitted for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business, which narrows the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. For public entities, the ASU is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. Early adoption is permitted under certain circumstances as outlined in the ASU. We are currently in the process of evaluating the impact of adoption of this new accounting guidance 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.

 

A-13



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

There were no acquisitions during the six months ended June 30, 2017.

 

On March 28, 2017, we sold a 100% fee-simple interest in 211 Main Street located in San Francisco, California to an unrelated third party. Transaction costs expensed in connection with this sale totaled $2,943,000 and included a prepayment penalty of $1,508,000 incurred in connection with the prepayment of the property’s mortgage (Note 8).

 

On May 30, 2017, we sold a 100% fee-simple interest in 3636 McKinney Avenue and 3839 McKinney Avenue, both located in Dallas, Texas, to an unrelated third party. Transaction costs expensed in connection with these sales totaled $2,258,000 and included prepayment penalties of $1,901,000 incurred in connection with the prepayment of the properties’ mortgages (Note 8).

 

On June 8, 2017, we sold a 100% fee-simple interest in 200 S College Street located in Charlotte, North Carolina to an unrelated third party. Transaction costs expensed in connection with this sale totaled $833,000.

 

On June 20, 2017, we sold a 100% fee-simple interest in 980 9th Street and 1010 8th Street, both located in Sacramento, California, to an unrelated third party. Transaction costs expensed in connection with these sales totaled $952,000.

 

On June 23, 2017, we sold a 100% fee-simple interest in 4649 Cole Avenue located in Dallas, Texas to an unrelated third party. Transaction costs expensed in connection with this sale totaled $3,311,000 and included a prepayment penalty of $2,812,000 incurred in connection with the prepayment of the property’s mortgage (Note 8).

 

The results of operations of the aforementioned properties have been included in the consolidated statements of operations through their respective disposition dates.

 

Property

 

Asset
Type

 

Date of Sale

 

Square Feet /
Units

 

Sales
Price

 

Gain on
Sale

 

 

 

 

 

 

 

 

 

(in thousands)

 

211 Main Street, San Francisco, CA

 

Office

 

March 28, 2017

 

417,266

 

$

292,882

 

$

187,734

 

3636 McKinney Avenue, Dallas, TX

 

Multifamily

 

May 30, 2017

 

103

 

$

20,000

 

$

5,488

 

3839 McKinney Avenue, Dallas, TX

 

Multifamily

 

May 30, 2017

 

75

 

$

14,100

 

$

4,224

 

200 S College Street, Charlotte, NC

 

Office

 

June 8, 2017

 

567,865

 

$

148,500

 

$

45,906

 

980 9th Street and 1010 8th Street, Sacramento, CA

 

Office & Parking Garage

 

June 20, 2017

 

485,926

 

$

120,500

 

$

34,829

 

4649 Cole Avenue, Dallas, TX

 

Multifamily

 

June 23, 2017

 

334

 

$

64,000

 

$

25,836

 

 

A-14



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

The following is the detail of the carrying amount of assets and liabilities at the time of the sales of the properties in 2017:

 

 

 

(in thousands)

 

Assets

 

 

 

Investments in real estate, net

 

$

319,078

 

Deferred rent receivable and charges, net

 

22,089

 

Other intangible assets, net

 

129

 

Other assets

 

38

 

Total assets

 

$

341,334

 

Liabilities

 

 

 

Debt, net (1)

 

$

64,777

 

Intangible liabilities, net

 

1,800

 

Total liabilities

 

$

66,577

 

 


(1)                                 Net of $665,000 of premium on assumed mortgage.

 

There were no acquisitions during the six months ended June 30, 2016.

 

On February 2, 2016, we sold a 100% fee-simple interest in the Courtyard Oakland located in Oakland, California to an unrelated third party. The results of operations of this hotel have been included in the consolidated statement of operations through the date of disposition.

 

Property

 

Asset
Type

 

Date of Sale

 

Rooms

 

Sales
Price

 

Gain on
Sale

 

 

 

 

 

 

 

 

 

(in thousands)

 

Courtyard Oakland, Oakland, CA

 

Hotel

 

February 2, 2016

 

162

 

$

43,800

 

$

24,739

 

 

We have entered into three purchase and sale agreements, each as a separate transaction with unrelated third parties, for the sale of an office property located at 7083 Hollywood Boulevard in Los Angeles, California; a multifamily property located at 4200 Scotland Street in Houston, Texas; and a multifamily property located at 47 E 34th Street in New York, New York. The aggregate contract sales price for these properties is $186,325,000. In connection with these dispositions, $50,568,000 of the outstanding mortgages payable at June 30, 2017 will be repaid or assumed by the buyer. We expect the closing of these sales transactions to occur during the second half of 2017. These purchase and sale agreements were entered into and became subject to non-refundable deposits on or prior to June 30, 2017. Therefore, these properties have been classified as held for sale as of June 30, 2017.

 

A-15



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

The following is the detail of the carrying amounts of assets and liabilities of the properties that are classified as held for sale on our consolidated balance sheet as of June 30, 2017:

 

 

 

(in thousands)

 

Assets

 

 

 

Investments in real estate, net (1)

 

$

118,221

 

Cash and cash equivalents

 

2,904

 

Restricted cash

 

51

 

Accounts receivable, net

 

251

 

Deferred rent receivable and charges, net

 

1,865

 

Other intangible assets, net (2)

 

1,124

 

Other assets

 

722

 

Total assets held for sale, net

 

$

125,138

 

Liabilities

 

 

 

Debt, net (3)

 

$

50,230

 

Accounts payable and accrued expenses

 

1,402

 

Due to related parties

 

195

 

Other liabilities

 

1,059

 

Total liabilities associated with assets held for sale, net

 

$

52,886

 

 


(1)                                 Investments in real estate of $136,153,000 are presented net of accumulated depreciation of $17,932,000.

 

(2)                                 Other intangible assets, net, represents a tax abatement asset of $4,273,000 associated with 47 E 34th Street, which is presented net of accumulated amortization of $3,149,000.

 

(3)                                 Debt includes the outstanding principal balances of 7083 Hollywood Boulevard and 4200 Scotland Street, which are $21,700,000 and $28,868,000, respectively. Debt is presented net of deferred loan costs of $524,000 and the accumulated amortization of $186,000.

 

In August 2017, we negotiated an agreement with an unrelated third party for the sale of an office property. We expect the sale to close during the second half of 2017. The purchase and sale agreement has not yet been finalized and is not subject to a non-refundable deposit. Therefore, the property has not been classified as held for sale as of June 30, 2017 as not all the held for sale criteria had been met at such time. 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 as of June 30, 2017. Our determination of fair value was based on negotiations with the third party buyer.

 

A-16



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

4. INVESTMENTS IN REAL ESTATE

 

Investments in real estate consist of the following:

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

(in thousands)

 

Land

 

$

244,072

 

$

343,564

 

Land improvements

 

17,746

 

26,177

 

Buildings and improvements

 

1,064,191

 

1,475,415

 

Furniture, fixtures, and equipment

 

3,525

 

4,955

 

Tenant improvements

 

130,481

 

159,677

 

Work in progress

 

9,528

 

11,706

 

Investments in real estate

 

1,469,543

 

2,021,494

 

Accumulated depreciation

 

(328,083

)

(414,552

)

Net investments in real estate

 

$

1,141,460

 

$

1,606,942

 

 

We recorded depreciation expense of $12,670,000 and $16,030,000 for the three months ended June 30, 2017 and 2016, respectively, and $27,354,000 and $31,703,000 for the six months ended June 30, 2017 and 2016, respectively.

 

5. OTHER INTANGIBLE ASSETS

 

A schedule of our intangible assets and liabilities and related accumulated amortization and accretion as of June 30, 2017 and December 31, 2016 is as follows:

 

 

 

Assets

 

Liabilities

 

June 30, 2017

 

Acquired
In-Place
Leases

 

Acquired
Below-

Market
Ground
Lease

 

Trade

Name and

License

 

Acquired
Below-

Market
Leases

 

 

 

 

 

(in thousands)

 

 

 

Gross balance

 

$

10,181

 

$

11,685

 

$

2,957

 

$

(5,722

)

Accumulated amortization

 

(7,581

)

(1,632

)

 

4,584

 

 

 

$

2,600

 

$

10,053

 

$

2,957

 

$

(1,138

)

Average useful life (in years)

 

10

 

84

 

Indefinite

 

7

 

 

A-17



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

 

 

Assets

 

Liabilities

 

December 31, 2016

 

Acquired
Above-

Market
Leases

 

Acquired
In-Place
Leases

 

Tax
Abatement

(1)

 

Acquired
Below-

Market
Ground
Lease

 

Trade

Name and

License

 

Acquired
Below-

Market
Leases

 

 

 

(in thousands)

 

Gross balance

 

$

215

 

$

11,551

 

$

4,273

 

$

11,685

 

$

2,957

 

$

(18,893

)

Accumulated amortization

 

(180

)

(8,443

)

(2,873

)

(1,562

)

 

15,317

 

 

 

$

35

 

$

3,108

 

$

1,400

 

$

10,123

 

$

2,957

 

$

(3,576

)

Average useful life (in years)

 

8

 

10

 

8

 

84

 

Indefinite

 

8

 

 


(1)                                 Tax abatement is associated with 47 E 34th Street, which is classified as held for sale on our consolidated balance sheet at June 30, 2017 (Note 3).

 

The amortization of the acquired above-market leases which decreased rental and other property income was $0 and $26,000 for the three months ended June 30, 2017 and 2016, respectively, and $3,000 and $64,000 for the six months ended June 30, 2017 and 2016, respectively. The amortization of the acquired in-place leases included in depreciation and amortization expense was $195,000 and $368,000 for the three months ended June 30, 2017 and 2016, respectively, and $411,000 and $748,000 for the six months ended June 30, 2017 and 2016, respectively. Included in depreciation and amortization expense was franchise affiliation fee amortization of $0 and $0 for the three months ended June 30, 2017 and 2016, respectively, and $0 and $33,000 for the six months ended June 30, 2017 and 2016, respectively. Tax abatement amortization of $138,000 for each of the three months ended June 30, 2017 and 2016, and $276,000 for each of the six months ended June 30, 2017 and 2016 was included in rental and other property operating expenses. The amortization of the acquired below-market ground lease of $35,000 for each of the three months ended June 30, 2017 and 2016, and $70,000 for each of the six months ended June 30, 2017 and 2016 was included in rental and other property operating expenses. The amortization of the acquired below-market leases included in rental and other property income was $219,000 and $631,000 for the three months ended June 30, 2017 and 2016, respectively, and $638,000 and $1,262,000 for the six months ended June 30, 2017 and 2016, respectively.

 

A schedule of future amortization and accretion of acquisition related intangible assets and liabilities as of June 30, 2017, is as follows:

 

 

 

Assets

 

Liabilities

 

Years Ending December 31,

 

Acquired
In-Place
Leases

 

Acquired
Below-Market
Ground Lease

 

Acquired
Below-Market
Leases

 

 

 

(in thousands)

 

2017 (Six months ending December 31, 2017)

 

$

373

 

$

70

 

$

(428

)

2018

 

723

 

140

 

(510

)

2019

 

464

 

140

 

(200

)

2020

 

207

 

140

 

 

2021

 

207

 

140

 

 

Thereafter

 

626

 

9,423

 

 

 

 

$

2,600

 

$

10,053

 

$

(1,138

)

 

A-18



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

6. OTHER ASSETS

 

Other assets consist of the following:

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

(in thousands)

 

SBA 7(a) loans, subject to credit risk

 

$

46,276

 

$

43,623

 

SBA 7(a) loans, subject to secured borrowings

 

24,162

 

29,524

 

Other assets

 

18,717

 

19,123

 

 

 

$

89,155

 

$

92,270

 

 

SBA 7(a) Loans, Subject to Credit Risk—Represents the non-government guaranteed retained portion of loans originated under the SBA 7(a) Program and the government guaranteed portion of loans that have not yet been fully funded or sold.

 

SBA 7(a) Loans, Subject to Secured Borrowings—Represents 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.

 

At June 30, 2017 and December 31, 2016, 99.5% and 99.7%, respectively, of our loans subject to credit risk were current with the remainder ($236,000 and $249,000, respectively) greater than 29 days delinquent. We classify loans with negative characteristics in substandard categories ranging from special mention to doubtful. At June 30, 2017 and December 31, 2016, $593,000 and $804,000, respectively, of loans subject to credit risk were classified in substandard categories.

 

At June 30, 2017 and December 31, 2016, our loans subject to credit risk were 95.9% and 94.6%, respectively, concentrated in the hospitality industry.

 

7. DISCONTINUED OPERATIONS

 

We had reflected the lending segment, which was acquired on the Acquisition Date as disclosed in Note 1, as held for sale commencing in 2014, based on a plan approved by the Board of Directors to sell the lending segment that, when completed, would have resulted in the deconsolidation of the lending segment, which at that time was focused on small business lending in the hospitality industry. In July 2015, to maximize value, we modified our strategy from a strategy of selling the lending segment as a whole to a strategy of soliciting buyers for components of the business, including our commercial mortgage loans and the SBA 7(a) lending platform. This change in the sale methodology resulted in the need to extend the period to complete the sale of the lending segment beyond one year. In connection with our plan, we expensed transaction costs of $11,000 and $20,000 as incurred during the three and six months ended June 30, 2016, respectively.

 

On December 17, 2015, pursuant to the modified plan, 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.  In September 2016, we discontinued our efforts to sell the SBA 7(a) lending platform, and the activities related to the SBA 7(a) lending platform have been reclassified to continuing operations for all periods presented.

 

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.

 

A-19



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

The following is the detail of income from operations of assets held for sale classified as discontinued operations on the consolidated statements of operations for the three and six months ended June 30, 2016:

 

 

 

Three Months Ended

June 30, 2016

 

Six Months Ended

June 30, 2016

 

 

 

(in thousands)

 

Revenue—Interest and other income

 

$

2,416

 

$

3,531

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Interest expense

 

588

 

876

 

Fees to related party

 

148

 

280

 

General and administrative

 

12

 

17

 

Total expenses

 

748

 

1,173

 

Income from operations of assets held for sale

 

$

1,668

 

$

2,358

 

 

During the three months ended June 30, 2017, we sold three of our five multifamily properties to unrelated third parties and we entered into purchase and sale agreements subject to non-refundable deposits, each as a separate transaction with unrelated third parties, for the remaining two multifamily properties, which have been classified as held for sale on our consolidated balance sheet as of June 30, 2017. We expect the closing of these sales to occur during the second half of 2017.

 

We have assessed the sale of three of our multifamily properties and our agreements to sell two multifamily 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 during the three and six months ended June 30, 2017 and for the years ended December 31, 2016 and 2015. Based on our qualitative and quantitative assessment, we concluded the disposals do not represent a strategic shift that will have a major effect on our operations and financial results and they should not be classified as discontinued operations in our consolidated financial statements.

 

A-20



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

8. DEBT

 

Information on our debt is as follows:

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

(in thousands)

 

Mortgage loans with a fixed interest rate of 4.14% per annum, with monthly payments of interest only, and balances totaling $370,300,000 due on July 1, 2026. The loans are nonrecourse. One loan with an outstanding principal balance of $21,700,000 was reclassified to liabilities associated with assets held for sale at June 30, 2017 (Note 3).

 

$

370,300

 

$

392,000

 

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 has a $42,008,000 balance due on January 5, 2027. The loan is nonrecourse.

 

46,000

 

46,000

 

Mortgage loans with a fixed interest rate of 5.39% per annum, with monthly payments of principal and interest, and balances totaling $35,695,000 due on March 1, 2021. The loans were nonrecourse. The loans were repaid in May and June 2017 in connection with the sale of the properties that were collateral for the loans.

 

 

39,134

 

Mortgage loan with a fixed interest rate of 5.18% per annum, with monthly payments of principal and interest, and a balance of $26,232,000 due on June 5, 2021. The loan is nonrecourse. The loan was reclassified to liabilities associated with assets held for sale at June 30, 2017 (Note 3).

 

 

29,167

 

Mortgage loan with a fixed interest rate of 6.65% per annum, with monthly payments of principal and interest. The loan had a 25-year amortization schedule with a $21,136,000 balance due on July 15, 2018. The loan was nonrecourse. The loan was repaid in March 2017 in connection with the sale of the property that was collateral for the loan.

 

 

26,136

 

 

 

416,300

 

532,437

 

Deferred loan costs related to mortgage loans

 

(1,628

)

(2,366

)

Premiums and discounts on assumed mortgages, net

 

 

722

 

Total Mortgages Payable

 

414,672

 

530,793

 

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 4.55% and 4.13% at June 30, 2017 and December 31, 2016, respectively.

 

18,504

 

23,122

 

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 2.33% and 1.83% at June 30, 2017 and December 31, 2016, respectively.

 

4,460

 

4,777

 

 

 

22,964

 

27,899

 

Unamortized premiums

 

1,638

 

2,077

 

Total Secured Borrowings—Government Guaranteed Loans

 

24,602

 

29,976

 

Unsecured term loan facility

 

385,000

 

385,000

 

Junior subordinated notes with a variable interest rate which resets quarterly based on the 90-day LIBOR plus 3.25%, with quarterly interest only payments. Balance due at maturity on March 30, 2035.

 

27,070

 

27,070

 

Unsecured credit facility

 

 

 

 

 

412,070

 

412,070

 

Deferred loan costs related to unsecured term loan and credit facilities

 

(2,534

)

(2,938

)

Discount on junior subordinated notes

 

(1,977

)

(2,015

)

Total Other

 

407,559

 

407,117

 

Total Debt

 

$

846,833

 

$

967,886

 

 

A-21



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

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.

 

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 $5,835,000 and $7,122,000 are presented net of accumulated amortization of $1,673,000 and $1,818,000 at June 30, 2017 and December 31, 2016, 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 consisting of a $450,000,000 revolver, a $325,000,000 term loan and a $75,000,000 delayed-draw term loan. CIM Commercial is subject to certain financial maintenance covenants and a minimum property ownership condition. Outstanding advances under the revolver bear 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. The revolver is also subject to an unused commitment fee of 0.15% or 0.25% depending on the amount of aggregate unused commitments. The delayed-draw term loan was also subject to an unused line fee of 0.25%. Proceeds from the unsecured credit facility were used to repay mortgage loans and outstanding balances under our prior unsecured credit facilities, for acquisitions, short-term funding of a Common Stock tender offer in June 2016, short-term funding of a private repurchase of Common Stock in June 2017, and general corporate purposes. 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. The June 2017 borrowing used to fund the private share repurchase was repaid using proceeds from subsequent asset sales. The credit facility was set to mature in September 2016 and prior to maturity, we exercised the first of two one year extension options through September 2017 and we permanently reduced the revolving credit commitment under the credit facility to $200,000,000. In August 2017, we exercised the second of two one year extension options through September 2018 and, in connection with such exercise, we will pay an extension fee of $300,000. At June 30, 2017 and December 31, 2016, $0 was outstanding under the credit facility. The unused capacity on the unsecured credit facility, based on covenant restrictions at June 30, 2017 and December 31, 2016, was approximately $89,000,000 and $200,000,000, respectively.

 

In May 2015, CIM Commercial entered into an unsecured term loan facility with a bank syndicate pursuant to which CIM Commercial can borrow up to a maximum of $385,000,000. The term loan facility ranks pari passu with CIM Commercial’s unsecured credit facility described above; covenants under the term loan facility are substantially the same as those in the unsecured credit facility. Outstanding advances under the term loan facility bear 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. The unused portion of the term loan facility was also subject to an unused fee of 0.20%. With some exceptions, any prepayment of the term loan facility prior to May 9, 2017 was subject to a prepayment fee up to 2.00% of the outstanding principal amount. The term loan facility matures in May 2022. On November 2, 2015, $385,000,000 was drawn under the term loan facility. At June 30, 2017 and December 31, 2016, $385,000,000 was outstanding under the term loan facility. Proceeds from the term loan facility were used to repay balances outstanding under our unsecured credit facility. At June 30, 2017 and December 31, 2016, the variable interest rate on this unsecured term loan facility was 2.65% and 2.22%, respectively. The interest rate of the loan has been effectively converted to a fixed rate of 3.16% until May 8, 2020 through interest rate swaps (Note 13). On August 3, 2017, we repaid $65,000,000 of outstanding borrowings on our unsecured term loan facility. In connection with such pay down, we terminated three interest rate swaps with an aggregate notional value of $65,000,000 (Note 13).  Costs incurred to terminate such swaps totaled $38,000, which will be reflected in earnings.

 

A-22



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

At June 30, 2017 and December 31, 2016, we were in compliance with all of our respective financial covenants under the unsecured credit and term loan facilities.

 

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. Additionally, we paid a prepayment penalty of $1,508,000 in connection with the prepayment of this mortgage (Note 3).

 

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 balance of $15,448,000 using proceeds from the sales. Additionally, we paid aggregate prepayment penalties of $1,901,000 in connection with the prepayment of these mortgages (Note 3).

 

On June 23, 2017, in connection with the sale of a multifamily property in Dallas, Texas, we paid off a mortgage with an outstanding balance of $23,333,000 using proceeds from the sale. Additionally, we paid a prepayment penalty of $2,812,000 in connection with the prepayment of this mortgage (Note 3).

 

As of June 30, 2017, two mortgage loans are included in liabilities associated with assets held for sale on our consolidated balance sheet. The first mortgage loan is nonrecourse, is secured by an office property located at 7083 Hollywood Boulevard in Los Angeles, California, and has a balance of $21,700,000 at June 30, 2017 with a fixed interest rate of 4.14% per annum, requiring monthly payments of interest only, with a maturity date of July 1, 2026. The second mortgage loan is nonrecourse, is secured by a multifamily property located at 4200 Scotland Street in Houston, Texas, and has a balance of $28,868,000 at June 30, 2017 with a fixed interest rate of 5.18% per annum, requiring monthly payments of principal and interest, with a maturity date of June 5, 2021 (Note 3).

 

At June 30, 2017 and December 31, 2016, accrued interest and unused commitment fees payable of $2,765,000 and $3,133,000, respectively, are included in accounts payable and accrued expenses.

 

Future principal payments on our debt (face value) at June 30, 2017 are as follows:

 

Years Ending December 31,

 

Secured
Borrowings
Principal (1)

 

Mortgages
Payable (2)

 

Other (3)

 

Total

 

 

 

(in thousands)

 

2017 (Six months ending December 31, 2017)

 

$

605

 

$

 

$

 

$

605

 

2018

 

835

 

 

 

835

 

2019

 

867

 

 

 

867

 

2020

 

902

 

 

 

902

 

2021

 

940

 

 

 

940

 

Thereafter

 

18,815

 

416,300

 

412,070

 

847,185

 

 

 

$

22,964

 

$

416,300

 

$

412,070

 

$

851,334

 

 


(1)                                 Principal payments are generally dependent upon cash flows received from the underlying loans. Our estimate of their repayment is based on scheduled principal 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)                                 Excludes the future principal payments for 7083 Hollywood Boulevard and 4200 Scotland Street, which are classified as liabilities associated with assets held for sale on our consolidated balance sheet at June 30, 2017 (Note 3).

 

(3)                                 Represents the junior subordinated notes and unsecured term loan facility.

 

A-23



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

9. STOCK-BASED COMPENSATION PLANS

 

In April 2015, we granted awards of 2,000 restricted shares of Common Stock to each of the independent members of the Board of Directors (6,000 in aggregate) under the 2015 Equity Incentive Plan, which fully vested in April 2016 based on one year of continuous service. In May 2016, we granted awards of 3,392 restricted shares of Common Stock to each of the independent members of the Board of Directors (10,176 in aggregate) under the 2015 Equity Incentive Plan, which fully vested in May 2017 based on one year of continuous service. In addition, in June 2017, we granted awards of 3,195 restricted shares of Common Stock to each of the independent members of the Board of Directors (9,585 in aggregate) under the 2015 Equity Incentive Plan, which will vest over one year of continuous service. Compensation expense related to these restricted shares of Common Stock is recognized over the vesting period. We recorded compensation expense of $29,000 and $32,000 for the three months ended June 30, 2017 and 2016, respectively, and $77,000 and $59,000 for the six months ended June 30, 2017 and 2016, respectively, related to these restricted shares of Common Stock.

 

We issued to two of our executive officers an aggregate of 2,000 restricted shares of Common Stock on May 6, 2014, which were fully vested in May 2016, and an aggregate of 2,000 restricted shares of Common Stock on March 6, 2015, which were 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 and $1,000 for the three months ended June 30, 2017 and 2016, respectively, and $1,000 and $6,000 for the six months ended June 30, 2017 and 2016, respectively, related to these restricted shares of Common Stock.

 

As of June 30, 2017, there was $137,000 of total unrecognized compensation expense related to shares of Common Stock which will be recognized over the next year.

 

10. EARNINGS PER SHARE (“EPS”)

 

The computations of basic EPS are based on our weighted average shares outstanding. The basic weighted average shares of Common Stock outstanding were 78,871,000 and 96,683,000 for the three months ended June 30, 2017 and 2016, respectively, and 81,445,000 and 97,173,000 for the six months ended June 30, 2017 and 2016, respectively. We had no dilutive securities outstanding for each of the three and six months ended June 30, 2017 and 2016. Outstanding shares of Series A Preferred Stock and Warrants were not included in the computation of diluted EPS for the three and six months ended June 30, 2017 because their impact was deemed to be anti-dilutive. No shares of Series A Preferred Stock or Warrants were outstanding during the three and six months ended June 30, 2016.

 

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.

 

A-24



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

The following table reconciles the numerator and denominator used in computing our basic and diluted per-share computations for net income available to common stockholders for the three and six months ended June 30, 2017 and 2016:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

91,372

 

$

(810

)

$

285,307

 

$

25,483

 

Net income attributable to noncontrolling interests

 

(9

)

(9

)

(14

)

(12

)

Redeemable preferred stock dividends

 

(72

)

 

(103

)

 

Numerator for basic and diluted net income (loss) from continuing operations available to common stockholders

 

91,291

 

(819

)

285,190

 

25,471

 

Net income from discontinued operations

 

 

1,668

 

 

2,358

 

Numerator for basic and diluted net income available to common stockholders

 

$

91,291

 

$

849

 

$

285,190

 

$

27,829

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

78,871

 

96,683

 

81,445

 

97,173

 

Effect of dilutive securities—contingently issuable shares and stock options

 

 

 

 

 

Diluted weighted average shares and common stock equivalents outstanding

 

78,871

 

96,683

 

81,445

 

97,173

 

Basic and diluted net income (loss) available to common stockholders per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.16

 

$

(0.01

)

$

3.50

 

$

0.26

 

Discontinued operations

 

$

 

$

0.02

 

$

 

$

0.02

 

Net income

 

$

1.16

 

$

0.01

 

$

3.50

 

$

0.29

 

 

A-25



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

11. REDEEMABLE PREFERRED STOCK

 

We have an effective registration statement with the Securities and Exchange Commission (“SEC”) with respect to the offer and sale of up to $900,000,000 of units (collectively, the “Units”), with each unit consisting of (i) 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 (“Stated Value”) and (ii) one warrant (collectively, the “Warrants”) to purchase 0.25 of a share of Common Stock (Note 12). The registration statement allows us to sell up to a maximum of 36,000,000 Units. Our Series A Preferred Stock ranks senior to our Common Stock with respect to payment of dividends and distributions of amounts upon liquidation, dissolution or winding up. Proceeds and expenses from the sale of the Units are allocated to the Series A Preferred Stock and Warrants using their relative fair values on the date of issuance.

 

Our Series A Preferred Stock is redeemable at the option of the holder (the “Holder”) or CIM Commercial. The redemption schedule of the Series A Preferred Stock allows redemptions at the option of the Holder from the date of original issuance of any given shares of Series A Preferred Stock through the second year at Stated Value, plus accrued and unpaid dividends, subject to the payment of a 13.0% redemption fee.  After year two, the redemption fee decreases to 10.0% and after year five there is no redemption fee. Also, CIM Commercial has the right to redeem the Series A Preferred Stock after year five at 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 June 30, 2017, no shares of Series A Preferred Stock have been redeemed.

 

As of June 30, 2017, we had issued 308,775 Units and received gross proceeds of $7,720,000 ($7,668,000 of which were allocated to the Series A Preferred Stock in temporary equity and the remaining $52,000 were allocated to the Warrants in permanent equity). In connection with such issuance, costs specifically identifiable to the offering of Units, such as commissions, dealer manager fees and other registration fees, totaled $614,000 ($594,000 of which were allocated to the Series A Preferred Stock in temporary equity and the remaining $20,000 were allocated to the Warrants in permanent equity). In addition, as of June 30, 2017, non issuance specific costs related to this offering totaled $2,795,000. As of June 30, 2017, we have reclassified $24,000 and a de minimis amount from deferred rent receivable and charges to temporary equity and stockholders’ equity, respectively, as a reduction to the gross proceeds received. Such reclassification was based on the number of Units issued during the period relative to the maximum number of Units expected to be issued under the offering.

 

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 Stated Value (i.e., the equivalent of $0.34375 per share per quarter). Dividends on each share of Series A Preferred Stock will begin accruing on, and will be cumulative from, the date of issuance. Cash dividends declared on our Series A Preferred Stock for the three and six months ended June 30, 2017 consist of the following:

 

 

 

 

 

 

 

Aggregate

 

Declaration Date

 

Payment Date

 

Number of Shares

 

Dividends Declared

 

 

 

 

 

 

 

(in thousands)

 

June 12, 2017

 

July 17, 2017

 

308,775

 

$

72

 

March 8, 2017

 

April 17, 2017

 

144,698

 

$

31

 

 

A-26



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

12. STOCKHOLDERS’ EQUITY

 

Dividends

 

Dividends per share of Common Stock declared during the six months ended June 30, 2017 and 2016 consist of the following:

 

Declaration Date

 

Payment Date

 

Type

 

Dividend Per
Common Share

 

June 12, 2017

 

June 27, 2017

 

Special Cash

 

$

1.98000

 

June 12, 2017

 

June 27, 2017

 

Regular Quarterly

 

$

0.12500

 

April 5, 2017

 

April 24, 2017

 

Special Cash

 

$

0.28000

 

March 8, 2017

 

March 27, 2017

 

Regular Quarterly

 

$

0.21875

 

 

 

 

 

 

 

 

 

June 10, 2016

 

June 28, 2016

 

Regular Quarterly

 

$

0.21875

 

March 8, 2016

 

March 29, 2016

 

Regular Quarterly

 

$

0.21875

 

 

On June 12, 2017, we declared a special cash dividend of $1.98 per share of Common Stock, or $4,271,000 in the aggregate, that was paid on June 27, 2017 to stockholders of record on June 20, 2017. This special cash dividend allowed common stockholders that did not participate in the June 12, 2017 private repurchase to receive the economic benefit of such repurchase. Urban Partners II, LLC (“Urban II”), a fund managed by an affiliate of CIM Group, the Manager and Advisor of CIM Commercial (each as defined in Note 15), and an affiliate of CIM REIT and CIM Urban, waived its right to receive this special cash dividend.

 

In addition, on April 5, 2017, we declared a special cash dividend of $0.28 per share of Common Stock, or $601,000 in the aggregate, that was paid on April 24, 2017 to stockholders of record on April 17, 2017. This special cash dividend allowed common stockholders that did not participate in the September 14, 2016 private repurchase to receive the economic benefit of such repurchase. Urban II waived its right to receive this special cash dividend.

 

Share Repurchases

 

On June 12, 2017, we repurchased, in a privately negotiated transaction, canceled and retired 26,181,818 shares of Common Stock from Urban II. The aggregate purchase price was $576,000,000, or $22.00 per share. 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 September 14, 2016, we repurchased, in a privately negotiated transaction, canceled and retired 3,628,116 shares of Common Stock from Urban II. The aggregate purchase price was $79,819,000, or $22.00 per share. We funded the repurchase using proceeds from the six mortgage loans obtained in June 2016. As a result of the repurchase, our stockholders’ equity was further 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 April 24, 2017 that allowed stockholders that did not participate in the September 14, 2016 private repurchase to receive the economic benefit of such repurchase.

 

In addition, on May 16, 2016, we commenced a cash tender offer to purchase up to 10,000,000 shares of our Common Stock at a price of $21.00 per share. The tender offer expired on June 13, 2016. The tender offer was oversubscribed and, pursuant to the terms of the tender offer, shares of Common Stock were accepted on a pro rata basis. In connection with the tender offer, we repurchased, canceled and retired 10,000,000 shares of our Common Stock for an aggregate purchase price of $210,000,000, excluding fees and expenses related to the tender offer, which were $301,000. Based on the actual total number of shares tendered, Urban II received $208,140,000 of the aggregate purchase price paid. We funded the tender offer using available cash from asset sales and borrowings on our unsecured credit facility. The purchased shares represented approximately 10.24% of our then-outstanding shares of Common Stock. As a result of the repurchase, our stockholders’ equity was reduced by the amount we paid for the repurchased shares and the related expenses.

 

A-27



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

Warrants

 

Each Unit consists of (i) one share of Series A Preferred Stock (Note 11) and (ii) one Warrant (Note 11) which allows the holder to purchase 0.25 of a share of Common Stock. The 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. The exercise price of each Warrant is at a 15.0% premium to the per share estimated net asset value of our Common Stock (as most recently published by us at the time of each issuance).

 

Proceeds and expenses from the sale of the Units are allocated to the Series A Preferred Stock and Warrants using their relative fair values on the date of issuance. As of June 30, 2017, we had issued 308,775 Warrants in connection with our offering of Units and allocated net proceeds of $32,000, after specifically identifiable offering costs and allocated general offering costs, to the Warrants in permanent equity.

 

13. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

 

Hedges of Interest Rate Risk

 

In order to manage financing costs and interest rate exposure related to our $385,000,000 unsecured term loan facility (Note 8), on August 13, 2015, we entered into interest rate swap agreements with multiple counterparties. These swap agreements became effective on November 2, 2015. Each of our interest rate swap agreements meets the criteria for cash flow hedge accounting treatment and we have designated the interest rate swap agreements as cash flow hedges of the risk of variability attributable to changes in the one-month LIBOR on the term loan facility. Accordingly, the interest rate swaps are recorded on the consolidated balance sheets at fair value and the changes in the fair value of the swaps are recorded in OCI and reclassified to earnings as an adjustment to interest expense as interest becomes receivable or payable (Note 2). We do not expect any significant losses from counterparty defaults related to our swap agreements.

 

Summary of Derivatives

 

The following table sets forth the key terms of our interest rate swap contracts:

 

Number of Interest
Rate Swaps(1)(2)

 

Total Notional
Amount

 

Fixed Rates

 

Floating Rate Index

 

Effective
Date

 

Expiration
Date

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

10

 

$

385,000

 

1.559% - 1.569%

 

One-Month LIBOR

 

11/2/2015

 

5/8/2020

 

 


(1)                                 See Note 14 for our fair value disclosures.

 

(2)                                 Our interest rate swaps are not subject to master netting arrangements.

 

These swaps hedge the future cash flows of interest payments on our $385,000,000 unsecured term loan facility by fixing the rate until May 8, 2020 at a weighted average rate of 1.563% plus the credit spread, which was 1.60% at June 30, 2017 and December 31, 2016, or an all-in rate of 3.16%.

 

Credit-Risk-Related Contingent Features

 

Each of our interest rate swap agreements contains a provision under which we could also be declared in default under such agreements if we default on the term loan facility. As of June 30, 2017 and December 31, 2016, there have been no events of default under our interest rate swap agreements.

 

A-28



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

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:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(in thousands)

 

Accumulated other comprehensive income (loss), at beginning of period

 

$

1,043

 

$

(10,444

)

$

(509

)

$

(2,519

)

Other comprehensive income (loss) before reclassifications

 

(983

)

(3,535

)

(189

)

(12,568

)

Amounts reclassified from accumulated other comprehensive income (loss) (1)

 

543

 

1,090

 

1,301

 

2,198

 

Net current period other comprehensive income (loss)

 

(440

)

(2,445

)

1,112

 

(10,370

)

Accumulated other comprehensive income (loss), at end of period

 

$

603

 

$

(12,889

)

$

603

 

$

(12,889

)

 


(1)                                 The amounts from AOCI are reclassified as an increase to interest expense in the statements of operations.

 

Future Reclassifications from AOCI

 

We estimate that $1,108,000 related to our derivatives designated as cash flow hedges will be reclassified out of AOCI as an increase to interest expense during the next twelve months.

 

On August 3, 2017, we repaid $65,000,000 of outstanding borrowings on our unsecured term loan facility. In connection with such pay down, we terminated three interest rate swaps with an aggregate notional value of $65,000,000. Costs incurred to terminate such swaps totaled $38,000, which will be reflected in earnings. At June 30, 2017, a positive fair value of $101,000 was included in accumulated other comprehensive income on our consolidated balance sheet related to the swaps that we terminated.

 

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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.

 

A-29



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

Our derivative financial instruments (Note 13) are measured at fair value on a recurring basis and are 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:

 

 

 

June 30, 2017

 

December 31, 2016

 

Level

 

Balance Sheet
Location

 

 

 

(in thousands)

 

 

 

 

 

Assets (Liabilities):

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

603

 

$

(509

)

2

 

Other assets (Other liabilities)

 

 

Interest Rate Swaps—We estimate 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 incorporates the contractual terms of the derivatives, observable market interest rates which we consider 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:

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

Carrying
Amount

 

Estimated
Fair
Value

 

Carrying
Amount

 

Estimated
Fair
Value

 

Level

 

 

 

(in thousands)

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Loans receivable subject to credit risk

 

$

46,276

 

$

46,176

 

$

43,623

 

$

43,621

 

3

 

SBA 7(a) loans receivable, subject to secured borrowings

 

24,162

 

24,607

 

29,524

 

29,976

 

3

 

Other loans receivable

 

1,356

 

1,297

 

2,593

 

2,550

 

3

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Mortgages payable (1)

 

414,672

 

417,912

 

530,793

 

516,892

 

3

 

Junior subordinated notes

 

25,093

 

25,490

 

25,055

 

25,173

 

3

 

 


(1)                                 The June 30, 2017 carrying amount and estimated fair value of mortgages payable excludes two mortgage loans that have been classified as liabilities associated with assets held for sale on our consolidated balance sheet at June 30, 2017 (Notes 3 and 8).

 

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 other than our interest rate swaps 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.

 

A-30



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

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 and unsecured credit and term loan facilities approximate their fair values, as the interest rates on these securities are variable and approximate current market interest rates.

 

Loans Receivable Subject to Credit Risk and Other Loans Receivable—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 June 30, 2017, our assumptions included discount rates ranging from 8.75% to 13.75% and prepayment rates ranging from 5.80% to 20.00%. At December 31, 2016, our assumptions included discount rates ranging from 8.25% to 13.25% and prepayment rates ranging from 5.80% to 20.00%.

 

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 and using a range of prepayment rates from 6.70% to 20.00% at both June 30, 2017 and December 31, 2016.

 

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 rates ranging from 4.11% to 4.26% and 4.60% to 4.72% at June 30, 2017 and December 31, 2016, respectively.

 

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 5.05% and 4.83% at June 30, 2017 and December 31, 2016, respectively.

 

15. RELATED-PARTY TRANSACTIONS

 

In May 2005, CIM Urban and CIM Urban REIT Management, L.P., each an affiliate of CIM REIT and CIM Group, entered into an Investment Management Agreement, pursuant to which CIM Urban engaged CIM Urban REIT Management, L.P. to provide investment advisory services to CIM Urban. CIM Investment Advisors, LLC, an affiliate of CIM REIT and CIM Group, registered with the SEC as an investment adviser and, in connection with such registration, CIM Urban entered into a new Investment Management Agreement with CIM Investment Advisors, LLC, in December 2015, on terms substantially similar to those in the previous Investment Management Agreement, pursuant to which CIM Urban engaged CIM Investment Advisors, LLC to provide investment advisory services, and the previous Investment Management Agreement was terminated. “Advisor” refers to CIM Urban REIT Management, L.P. prior to December 10, 2015 and to CIM Investment Advisors, LLC on and after December 10, 2015.

 

A-31



 

CIM COMMERCIAL TRUST CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements as of June 30, 2017 and December 31, 2016, and

for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

CIM Urban pays asset management fees to the Advisor on a quarterly basis in arrears. The fee is calculated as a percentage of the daily average adjusted fair value of CIM Urban’s investments, as defined, as follows:

 

Daily Average Adjusted Fair

 

 

 

Value of CIM Urban’s Investments

 

Quarterly Fee

 

From Greater of

 

To and Including

 

Percentage

 

(in thousands)