CaliberCos Inc. (CWD) Q1 2024 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Caliber First Quarter 2024 Earnings Call. All lines have been placed on you to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Lisa Fortuna of Investor Relations. You may begin.

Good afternoon, everyone. Welcome to Caliber's first quarter 2024 financial results conference call. With me today are Chris Loeffler, Chief Executive Officer and Co-Founder; and Jade Leung, Chief Financial Officer of Caliber. Please note that we have a quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on the Investor Relations section of our website at www.caliberco.com. After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect and anticipate refer to our best estimates as of this call, and there can be no assurances that these will actually take place. So our actual figures could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. It is now my pleasure to turn the call over to Chris. Please go ahead.

Thank you, Lisa, and thank you to everyone joining on the call today. Since we just reported our fourth quarter and full year results from 2023 a few weeks ago. I thought I'd keep my prepared remarks as brief as possible, providing an update on fundraising and transaction activity, our first quarter 2024 performance, the deconsolidation of six of our hotel assets, as well as our cost reduction initiatives that we spoke about in mid-April. The goal, of course, being to bring Caliber to profitability as soon as possible. Let me begin with some observations about the current fundraising environment. As I mentioned in our last call, we are stepping up our activities in fundraising and despite the ongoing muted conditions of refining in the market. We are focusing on things within our control to enhance our fundraising capabilities and move into new target areas. These include building products that are attractive to registered investment advisers and institutions, building and supporting our wholesale platform to raise capital through registered investment advisors and broker-dealers, formerly engaging with family office investors to grow our family office direct channel, issuing institutional equity offerings for the Caliber Hospitality Trust or CHT in both the equity and debt markets, directly engaging with new high net worth individuals and ultra-high net worth individuals via low-cost live and digital events and transforming our digital marketing platform with new talent and strategies to reduce our marketing costs while increasing lead generation. We're confident that a more diversified and fundraising infrastructure will support our long-term goals. Furthermore, we are now gaining improved visibility to increasing fundraising activity and pipeline levels. For example, in wholesale to date, we have signed 26 selling agreements with regional broker-dealers and registered investment advisers for investments in company-sponsored products. In total, these partners have approximately 380 representatives, representing $3.4 billion of accessible AUM. It generally takes three to six months to build momentum in this channel once the selling agreement has been executed, and we are now starting to see the initial dollars coming in. We expect progress in the channel to accelerate this year as it has driven much of the recent growth of our fundraising pipeline. Additionally, in our family office direct channel, we recently doubled the committed capital to CHT via a $10 million equity commitment from qualified investors. This capital continues momentum for CHT, which we expect will allow us to close our pipeline of contributed assets while recovering some of the capital that Caliber had invested in the CHT to launch the investment strategy in 2023. We have also made meaningful progress in the past few months on our assets. On April 29, 2024, we announced the sale of Areas B and C of the Ridge development in Colorado, each approximately 20-acre parcels of land in Johnstown for an aggregate of about $12.3 million. Earlier this week, we announced the sale of approximately 50-acre parcel of land in Johnstown for another $7.7 million, which was purchased in 2021 by a caliber sponsored single-asset syndication, the Encore Funko LLC. This latest transaction was the fourth asset sale in Northern Colorado by Caliber sponsored entities since the end of 2023, bringing the total acreage sold to approximately 170 for total proceeds of nearly $28 million. Given the current industry conditions and low transaction volume, these profitable transactions serve as further proof that Caliber is investing in the right markets, which is allowing us to help investors make money across all market cycles. Additionally, the impact of some of these sales includes potential performance fees for Caliber as the sales are captured within the underlying partnerships that caliber manages. In some cases, the performance fees will not be realized until by Caliber until the partnerships complete a full sale of all the underlying land. The funding of Phase 1 of our SP10 project, which is the conversion of an existing Phoenix based hotel to apartments, initiates the turnaround of an asset that was negatively affected by the COVID pandemic. And capitalizing a new construction loan, Caliber paid off an existing $11 million loan, which was past its original maturity and combined with new investor equity has fully capitalized the conversion of the hotel to apartments. This demonstrates our unwavering dedication to find a path forward for each of our assets and to protect our investors' capital to the best of our ability. I look forward to seeing this plan fully executed over the coming three to five years and including the SP 10 project and Caliber's track record as a successful turnaround story. Turning to the deconsolidation. As we alluded to in our recent full year 2023 earnings call, Caliber has been working diligently with our internal team and our auditors at Deloitte to evaluate the presentation of our financial information. At the end of 2023, we changed our reporting segments to reflect a single segment. Presentation, we believe matches our current view of the business and simplifies our financial reporting. As of March 7, 2024, after completing the seventh hotel contribution to CHT, we concluded that Caliber is no longer needed to consolidate six hotels we had consolidated in 2023. It's important to note that the change excludes hotel results from our Q1 2024 financial information, which was a primary driver of the year-over-year decline in our revenues. For those of you who may not enjoy technical accounting, I'll share that the consolidation of an asset is typically done when an asset management business like Caliber, controls an asset, has a sizable economic interest in that asset and may provide some form of loan guarantees. The effect of that consolidation is that we bring the financial results of the asset itself into Caliber's financial results, including the debt on that asset's balance sheet, and we often eliminate other financial results, such as the fees that we are in managing that asset from the presentation of Caliber's results. This influences our income statement and our balance sheet, and it may make it appear, for example, that Caliber has debt inside the public company that is not -- it is not actually the borrower for -- why I'm spending so much time on the topic, I think because it's a change in the current period that creates a lack of comparability to the prior period. And we want to make sure investors understand this lack of comparability. Going forward, this change will continue to affect period-over-period comparability and Caliber will seek to provide investors with an understanding of what our prior history would look like on a comparison basis, excluding the deconsolidated assets. Importantly, we expect this deconsolidation to help investors better understand our balance sheet. As an example, the change was a primary contributor to the $98 million reduction of our assets from $299 million in Q1 2023 to $201 million in Q1 of 2024 as well as the reduction in our liabilities by $118 million from $233 million in Q1 2023 to $115 million in Q1 of 2024. Caliber will continue to take a critical eye to the structure of each of its investments in funds, and we will continue to evaluate opportunities to enhance transparency in our financial presentation. Turning to our Q1 2024 results. I'm sure you all had a moment to read our earnings release, and Jade will go through the quarter in some detail. Having said that, I wanted to highlight a few things that I think are notable. The first is that Caliber continues to see positive year-over-year improvement in asset management revenues, a key focus of the management team. This is an important source of stable recurring revenues. Second, our platform results and net loss attributable to Caliber primarily reflect the increase in our year-over-year expenses that we've previously discussed and the strong performance allocations of $2.5 million that we earned in Q1 of 2023, which did not repeat in Q1 of 2024. As we mentioned in our year-end call three weeks ago, we initiated a review of our cost structure to evaluate potential reductions that would better reflect current market dynamics. The entire Caliber management team is focused on a single objective, consistent profitable growth. We intend to achieve profitability as soon as possible. With this objective in mind, we have identified expense savings of approximately $6 million on an annualized basis, which puts us on a path to return to annual operating costs of approximately $15 million. We have already started to implement these measures, beginning with significant reductions in non-payroll operating costs, where we expect to achieve an annualized savings of approximately $2.5 million compared to 2023. We expect to realize $1.5 million in this fiscal 2024 and the remainder in 2025. In addition, we have reduced payroll expense by $4 million on an annualized basis through a combination of attrition and a reduction in force, which will partially offset that significant increase we experienced in 2023. We expect to achieve $2 million in annualized savings in 2024 with the full $4 million to be realized in 2025. These actions have been difficult, and we don't take these decisions lightly. However, we believe that they are necessary to return Caliber to profitability and ensure that our business has a strong foundation for future growth and success. We remain confident in Caliber's medium and long-term growth prospects and are acting to ensure that we can achieve our stated goals. I'll now turn the call over to Jade, who will take you through our financials in greater detail.

Thank you, Chris. Good afternoon, everyone. We appreciate you joining us today. As we mentioned on our last call with the culmination of our work on CHT and the contribution of the first third-party hotel to the portfolio, we reassessed our consolidation conclusions and determined that we are no longer required to consolidate Caliber Hospitality LP and the underlying hotels beginning this quarter. We believe this simplifies our financial statements by removing most of the hotel performance that has historically been included in our consolidated results in accordance with GAAP. It will, however, make our comparative financial information less meaningful since the prior year results will still continue to include the historical performance of these hotel assets. So with that background, let's go through our results for the first quarter 2024. First quarter total consolidated revenue was $23 million, a decrease of 22.3% versus the same period a year ago, primarily due to a decrease in consolidated fund revenues, which was primarily due to the deconsolidation of Caliber Hospitality and a decrease in performance allocation revenue, which was earned related to the contribution of the hospitality assets to Caliber hospitality in March 2023. Consolidated expenses for the first quarter declined by 5.9% to $27.3 million due to a decrease in consolidated fund expenses, primarily driven by the deconsolidation of Caliber Hospitality again. Platform revenue decreased 25.6% to $4.7 million due to lower performance allocations. Breaking down our platform revenue a bit further. Fund management fees increased by 11% to $2.6 million and was related to the change in fee structure effective upon the contribution of the hospitality assets to Caliber Hospitality LP in March 2023. Fund management fees were based on 1% to 1.5% of the unreturned capital contributions in each hospitality fund. During the three months ended March 31, 2024, the company earned a fund management fee of 0.7% of the Caliber Hospitality Trust's enterprise value. Financing fees decreased from $30,000 to $100,000 due to loan placement fees earned for executing two loans on behalf of our funds during the first quarter of 2023, whereas we did not earn such fees this quarter. Development and construction fees increased by 73% and is primarily due to fees earned from completing predevelopment work for three projects during the quarter. Performance allocations of $200,000 were related to the sale of land located in Johnstown, Colorado. In the same period last year, performance allocations were $2.4 million, which represented the carried interest earned related to the contribution of the hospitality assets to Caliber Hospitality. Total expenses in Q1 were $7.7 million, an increase of 19.7% compared to Q1 last year, primarily due to an increase in operating costs from additional payroll associated with increased headcount and caused a human capital, driven by our growth initiatives as we've spoken about earlier. We also recorded an increase in depreciation and amortization expenses, primarily due to the acquisition of our headquarters and our office building during the quarter. Total managed capital increased from $438 million to $454 million from December 31, 2023 to March 31, 2024. And as a reminder, managed capital is defined as the total capital raised from investors in our company or our funds at any point in time, excluding common stock in CWD. We use this information to monitor among other things, the amount of preferred return that would be paid at the time of a distribution and the potential to earn a performance fee over and above the preferred return at the time of the distribution. Our fund management fees are based on a percentage of managed capital or a percentage of assets under management and monitoring the change in composition of managed capital provides relevant data points for caliber management to further calculate and predict future earnings. For the first quarter of 2024, net loss attributed to Caliber, which excludes net loss attributable to non-controlling interest was $3.8 million or $0.18 per diluted share. This compares to a net loss attributed to Caliber of $1.2 million or $0.07 per diluted share in the same period a year ago. Caliber adjusted EBITDA loss for the first quarter was $1.7 million compared to adjusted EBITDA of $1 million during the same period a year ago, primarily due to the decrease in total revenue of $1.6 million and an increase in operating costs of $1 million, which was related to the increase in payroll. Interest expense in the first quarter was $1.3 million compared to $800,000 in the year ago period. The increase was primarily due to the increase in corporate notes outstanding during the three months ended March 31, 2024, as compared to the same period in 2023. Before turning the call back to Chris for his closing comments, I wanted to reiterate our three-year growth objectives. First, we expect to expand our fundraising activity, bringing in $750 million from 2024 through 2026. We expect the investments we made in our private client and wholesale distribution platforms to be the primary contributors to achieving our fundraising target, which will enable Caliber to accelerate growth in our AUM. Second, we expect to grow AUM to $3 billion, driven primarily by expanding our product offerings and growing the number of assets in the Caliber Hospitality Trust, which we anticipate reaching $1 billion in AUM. Third, we are committed to driving profitable growth by achieving $50 million in annualized total platform revenues by the end of 2026. Caliber's unique business model provides opportunities across different markets and resiliency in challenging times. Our proprietary middle-market real estate funds enable us to generate multiple revenue streams from various investments, and we are well positioned for future growth as we continue to seize new opportunities and investments, particularly those that arise in market dislocation and disruption. I'll now turn it back to Chris for his final remarks before we take your questions. Chris?

Thank you, Jade. Thank you all as well to the call participants. I appreciate you joining these calls and continue to engage with Caliber. A lot of you have given me some good feedback and giving the team good feedback, and we appreciate it. I've had a chance to reflect on our first year as a public company, which is coming up here in a few days. And I decided to distribute a shareholder letter that you can expect to see twice per year. Personally, I'd love to write and my goal in producing this letter is to help you follow our story and go a few layers deeper on some of the key topics that may not necessarily come up in an earnings call or in a short form presentation on Caliber. I realize that many of you lead busy lives, and I intend to structure this letter to help you stay with in touch with Caliber in an efficient manner. You can expect my first letter before the end of June and, of course, what we published, and I hope that you find the information impactful. In closing, I'd like to thank our employees for their dedication and commitment to the changes we have recently implemented, and our investors and partners for your continued interest and investment with Caliber. Thank you all, again, for your time today. We look forward to speaking and meeting with many of you in the near future. If you have any questions, we encourage you to reach out to our Investor Relations team at financial profiles. And with that, I think we can turn to questions.

Thank you. The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Brendan McCarthy of Sidoti. Your line is open.

Hey. Good afternoon, guys. Thanks for taking my questions today. I just kind of wanted to start at the wholesale, the broker-dealer distribution agreements. I think you mentioned 26 selling agreements with broker-dealers that's up substantially from -- I think there was one at the end of the last -- the fourth quarter of 2023. I guess what kind of pace can investors expect with additional agreements in the future?

It's hard to – Hi Brendan, how are you? It's hard to …

Hey.

…predict pace a little bit. We're actually -- if you think about it as what we're doing in that space. We spent the better part of the first quarter, picking up these selling agreements. And now actually, our team is directing time and attention towards each of those firms that's agreed to distribute or feature our products to spend time with their actual reps. So as an example, if we pick up a selling agreement with a firm that has 40 reps, the next step is going to be going through training with all those reps and actually spending time on a one-by-one basis or, in some cases, small groups to make sure that they understand the offerings and the funds and the opportunities. And then they spend time with their clients, we get questions back and forth, and that starts to kind of build the actual pipeline of capital. So landing, selling agreements was a primary focus. As you said, we only had one back in December with the increase that we've had, we've been spending a lot of time with those groups and with those companies to get their reps ready to actually distribute the product and ultimately bring in capital. I anticipate -- I didn't anticipate, we were going to get as many selling agreements as quickly as we did. So our -- based on where we're at today, we're above what we expected in our pace. But I anticipate, we should be able to see those selling agreements continue to grow throughout the year.

Got it. Thanks Chris. That's helpful. As a follow-up question, I know historically, our fundraising has been weighted towards Q4. I think Q4 is typically the best quarter for fundraising. Considering new selling agreements as well as the growth of the wholesale channel, do you think that seasonality will shift at all or change?

Yeah. I think we've been focused a lot on fundraising seasonality, because the opportunities to invest the capital are available throughout the year. And so making sure that we can have relatively stable and growing fundraising results is very important to caliber. I think that what we will see is some of the seasonality in our retail channel will continue, because individual investors tend to make decisions after-tax time and then again for some reason after Thanksgiving. But on the wholesale side, these advisers are engaged with their clients consistently. They're consistently looking to do portfolio allocations, and we're expecting to see more normalized fundraising throughout the year. And then, of course, on the Institutional and the family office side, that's going to be a lumpier style of fundraising where we might get larger checks in a single shot like we got the $10 million commitment that we just announced. But as we build our name and reputation in the channel, hopefully, we'll see that build on itself as well.

Got it. And I appreciate the insight on the cost reduction initiatives. Just to clarify and apologies if I missed this, were those figures regarding the unconsolidated cost structure or the consolidated expense structure?

Yeah, that would have all been related to -- we call the platform cost structure or the unconsolidated cost structure to use the accounting term.

Got you. And then turning to the acquisition environment, I know last earnings call, you've talked in detail about distressed opportunities coming more into light. Are you still seeing a similar environment? Or has anything changed from the last discussion?

Yeah, it's only been a couple of weeks, so not much has changed.

Yeah, we're still seeing the same thing. We're still seeing real opportunities that we're underwriting at this point in time. Jade and I have recently had some interesting meetings with banks and financial institutions starting to see that they're seeing it and trying to work through their issues as well. And so at this point in time, I don't see the volume going down. I see it going up, and our primary focus is to be to make sure that the funds that we have recently opened half capital available for the opportunities.

Got it. And then last question for me. Just looking at the balance sheet, Caliber's balance sheet. Wondering if you could speak to the debt maturity profile and maybe how you plan to address upcoming maturities?

Sure. Sure. Jade, do you want to go through that, and I'll add anything if I can.

Sure. So we're in a constant state of monitoring of our debt. Obviously, we monitor both the debt of the – debt sitting on the platform as well as the debt that's sitting at our various assets. And I'll speak to them individually. So the debt at our -- in our platforms, we start working on those six to nine months out and really start to try to identify whether there's a path to renew and extend or whether we're looking to completely refinance and maybe even try to look at a possible cash out refinance. So those are ongoing constantly. And we work to really make sure that those decisions are aligned with how the asset strategy is. On the corporate side, we take a similar approach, but a lot of those programs are with individual investors. And so those tend to be more discussions that had one-on-one versus how they're done with the assets.

Yes. I'll just add on the corporate side. The debt for the corporate company or the unconsolidated business is roughly $50 million, $55 million, about $20 million of that it relates to debt related to the acquisition of our corporate headquarters, which is a combination of some unsecured notes and a CMBS loan we assumed when we acquired the headquarters building. The building was acquired in a relatively distressed purchase, because we had a right of first refusal to acquire the building if the seller decided to sell, and he'd accepted an offer to buy the building at what we thought was a favorable price that would actually reduce our overall cost structure over time. So in doing that, if you kind of tranche out that debt, the remaining $30 million in debt that we have is, as Jade mentioned, primarily unsecured debt, primarily from a bunch of individual investors who are also happen to be customers of caliber in many ways that have lent the company money, the company takes that capital and actually has used it to acquire or invest into the underlying funds and assets that we manage. And so the $30 million in unsecured debt can be traced to the roughly $46 million or so in a combination of investments that we've made into the assets and the funds that we own, intercompany receivables and other forms of receivables that are owed back to Caliber. And so we're using the capital to almost like a warehouse line to grow our funds and facilitate our business. To the extent that those individual investors indicate to us that they want to redeem their notes, we go through sort of a redemption process. And one of the first lines of defense is there is collecting receivables that were owed or selling off assets we're replacing the capital in an underlying fund with permanent capital. And so the company's goal or objective for that debt has been to reduce it over time. And then we, of course, see an opportunity to refinance with more of an institutional debt provider or credit provider, which does two things for us. One is it refinances the debt and extends the maturity out and two, is it recycles that capital back to our investors, and we hope that they would invest with us and other things. So there's kind of a double benefit there.

Got it. That's very helpful. Thanks, Chris. Thanks, Jade. That's all for me.

Sure.

With no further questions, that concludes our Q&A session. I'll now turn the conference back over to CEO, Chris Loeffler, for closing remarks.

Yes. I just wanted to reiterate the fact that pleased to keep an eye out for the shareholder letter that will come out, and stay engaged with us. We've had quite a few people that when they come to Scottsdale, they give us a heads up and it gives us an opportunity to meet in person. So please let us know, if you find yourself in town. And thank you very much.

This concludes today's conference call. You may now disconnect.