Description

CIM Commercial Trust presents a good risk / reward opportunity that the VIC community might find interesting.  Like most of my ideas, this one is discounted by a lack of liquidity and also due to a majority shareholder completely controlling the company.  However, unlike most of my ideas there is a catalyst.  

Normally I am skeptical of “catalyst” based investment ideas.  The issue I have with investing around a catalyst is that you are normally expected to pay a higher price because of the anticipated catalyst and, as a result,  the catalyst occurring or not occurring becomes the primary risk.  However, in this particular case I don’t believe the catalyst is fully implied in the current price, and, perhaps more importantly, I also think it is highly likely to occur.

Please note that although the market cap is approximately $700 million, the actual float is closer to $30 million.  I suggest using limit orders and this idea might find a better audience with those VIC members managing smaller amounts of capital.

CIM Commercial Trust Corp acquires, owns, and operates Class A and creative office assets in urban communities throughout the United States.  They describe their locations as being in “vibrant and improving” cities.  Below are the 20 properties they currently own:

As you can see they have a heavy tilt toward Oakland (Hopefully it formats correctly).  Oakland office property has done exceptionally well over the last decade, a beneficiary of the tech spillover from Silicon Valley and San Francisco.

CIM Commercial Trust Corp is the result of a merger in 2014 between CIM Urban (also referred to as “Urban Partners II, LLC”) and PMC Commercial Trust.  Prior to the merger CIM Urban was a very large private real estate fund and PMC Commercial Trust was a fairly small publicly traded REIT.  Following the merger Urban Partners II now beneficially own 41,627,739 shares, or approximately 95% of the outstanding shares of CMCT.  When you add the holdings of various affiliates within CIM the number is slightly more than 96%.  The shares that trade under the symbol CMCT on Nasdaq have a “float” of approximately $27 million…and have for the majority of time between 2014 and now traded at a substantial discount to what CIM Group thinks is NAV.  This is likely due to the float being very small, which creates limited liquidity and the non-existence of any sort of corporate democracy. 

What changed and why is this interesting now?  It appears that Urban Partners II is reaching a maturation point where both the limited partners general partners agree that it is time to harvest gains and pursue what the company describes as a “recapitalization.”  On November 13, 2018 the company presented shareholders with a plan in which they will monetize assets in Oakland, San Francisco, and Washington DC to unlock embedded value that has been created since 2006.  They plan on using the net proceeds to return capital to common stockholders for consideration approximating NAV of $23 per share.  They are not liquidating their entire portfolio, and are they won’t be completely liquidating.  As best I can tell, they will be tendering for approximately 72% of the outstanding shares.  At the current price of 16.25, current shareholders should get all of their money back and be left with approximately 28% of their original shares.  For what it is worth, CIM Group believes that they can grow NAV after this recapitalization over the next 5 years from $23 to $38. 

On December 26^th San Francisco Business Times came out with an update on this sales process with a title “CIM Group nears sale of five-building Oakland office portfolio.”  The article hinted that Starwood was the lead buyer in a deal that could “rake in” close to $1 billion.  CIM Group did not respond to requests for comment.  That isn’t something you want to bet the ranch on but does suggest that the process in moving forward.

I think the risks of this not happening here are small.  This isn’t some minority investor taking an activist role and demanding a catalyst.  This was the idea of a shareholder who owns 96%.  So I think it is safe to assume they have the votes.  I’m hoping that they are smart enough to set a low expectation that they can easily exceed.  I am encouraged by what I have learned and observed about downtown Oakland in recent years, and the recent press coverage is also encouraging.  (I live in Bay Area and go to Oakland frequently, if that matters).

However, I think there is slight risk here if they decide to treat minority shareholders differently from the majority shareholder.  In the recent past CMCT has pursued several different “return of capital” strategies.  In June of 2016 they made a tender to all shareholders on equal terms.  In April, June, and December of 2017 they pursued a split strategy of special dividends to minority shareholders combined with private purchases from the majority holder.  This transaction is substantially larger, and involves more asset sales.  A special dividend to minority shareholders and a tender to the majority shareholder I think presents at a minimum the appearance of being fundamentally unfair.  For that reason, my perception is that they will tender for shares equally between both the Urban Partners and the minority shareholders.

After the tender or “return of capital” CIM Group intends to liquidate CIM REIT by distributing to its members all shares of CMCT then held by CIM REIT.  CIM REIT / Urban Partners has 27 different institutional investors.  My guess is that quite a few of these investors might decide to sell their stock in the open market.  I have no basis for that, but it wouldn’t surprise me.  I am making the assumption that after the tender, there might also be a different or second buying opportunity in the shares.  (This is another reason we prefer a tender made equally to all shareholders).

I did my best to describe a fairly complicated transaction.  The best source of information is the “CMCT Investor Presentation” link below:

https://shareholders.cimcommercial.com/static-files/29ac294a-6a64-4b2e-8640-ff0945c569a1

Catalyst

Return of capital sometime in first half of 2019.