Company Quick10K Filing
Quick10K
City Office REIT
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$11.83 40 $469
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
8-K 2019-08-01 Earnings, Exhibits
8-K 2019-05-03 Earnings, Exhibits
8-K 2019-05-02 Shareholder Vote, Exhibits
8-K 2019-03-07 Officers, Exhibits
8-K 2019-02-27 Earnings, Exhibits
8-K 2018-11-01 Enter Agreement, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-03-15 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-03-02 Officers, Exhibits
8-K 2018-02-01 Officers, Exhibits
TAP Molson Coors Brewing 12,620
FNF Fidelity National Financial 10,720
AES AES 10,700
NLSN Nielsen Holdings 8,630
UPLD Upland Software 999
GME GameStop 871
ITCI Intra-Cellular Therapies 726
CPSI Computer Programs & Systems 405
LAWS Lawson Products 300
SNSS Sunesis Pharmaceuticals 95
CIO 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.2 d767617dex102.htm
EX-10.3 d767617dex103.htm
EX-10.4 d767617dex104.htm
EX-10.5 d767617dex105.htm
EX-31.1 d767617dex311.htm
EX-31.2 d767617dex312.htm
EX-32.1 d767617dex321.htm
EX-32.2 d767617dex322.htm

City Office REIT Earnings 2019-06-30

CIO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d767617d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2019

OR

 

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

For the transition period from                      to                     

Commission File Number: 001-36409

 

 

CITY OFFICE REIT, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   98-1141883

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

666 Burrard Street

Suite 3210

Vancouver, BC

V6C 2X8

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (604) 806-3366

Former name, former address and former fiscal year, if changed since last report: N/A

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading

Symbol(s)

 

Name of each Exchange

on Which Registered

Common Stock, $0.01 par value   “CIO”   New York Stock Exchange
6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share   “CIO.PrA”   New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☒

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

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at July 29, 2019 was 39,647,063.

 

 

 


Table of Contents

City Office REIT, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2019

Table of Contents

 

PART I. FINANCIAL INFORMATION

    3  

Item 1.

 

Financial Statements

    3  
 

Condensed Consolidated Balance Sheets as of June  30, 2019 and December 31, 2018

    3  
 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018

    4  
 

Condensed Consolidated Statements of Changes in Equity for the Three and Six Months Ended June 30, 2019 and 2018

    5  
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018

    6  
 

Notes to Condensed Consolidated Financial Statements

    7  

Item 2.

 

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

    16  

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

    24  

Item 4.

 

Controls and Procedures

    25  

PART II. OTHER INFORMATION

    26  

Item 1.

 

Legal Proceedings

    26  

Item 1A.

 

Risk Factors

    26  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    26  

Item 3.

 

Defaults Upon Senior Securities

    26  

Item 4.

 

Mine Safety Disclosures

    26  

Item 5.

 

Other Information

    26  

Item 6.

 

Exhibits

    27  

Signatures

    29  

 

2


Table of Contents

PART I.    FINANCIAL INFORMATION

 

Item 1.

Financial Statements

City Office REIT, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except par value and share data)

 

     June 30,     December 31,  
     2019     2018  

Assets

    

Real estate properties

    

Land

   $ 224,837     $ 223,789  

Building and improvement

     762,537       704,113  

Tenant improvement

     86,374       77,426  

Furniture, fixtures and equipment

     285       319  
  

 

 

   

 

 

 
     1,074,033       1,005,647  

Accumulated depreciation

     (86,475     (70,484
  

 

 

   

 

 

 
     987,558       935,163  
  

 

 

   

 

 

 

Cash and cash equivalents

     11,581       16,138  

Restricted cash

     19,295       17,007  

Rents receivable, net

     31,008       26,095  

Deferred leasing costs, net

     11,039       10,402  

Acquired lease intangible assets, net

     71,972       75,501  

Other assets

     17,141       2,755  

Assets held for sale

     —         17,370  
  

 

 

   

 

 

 

Total Assets

   $ 1,149,594     $ 1,100,431  
  

 

 

   

 

 

 

Liabilities and Equity

    

Liabilities:

    

Debt

   $ 709,670     $ 645,354  

Accounts payable and accrued liabilities

     22,960       25,892  

Deferred rent

     5,625       5,331  

Tenant rent deposits

     5,780       4,564  

Acquired lease intangible liabilities, net

     9,249       8,887  

Other liabilities

     19,512       11,148  

Liabilities related to assets held for sale

     —         878  
  

 

 

   

 

 

 

Total Liabilities

     772,796       702,054  
  

 

 

   

 

 

 

Commitments and Contingencies (Note 9)

    

Equity:

    

6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares authorized, 4,480,000 issued and outstanding

     112,000       112,000  

Common stock, $0.01 par value, 100,000,000 shares authorized, 39,647,063 and 39,544,073 shares issued and outstanding

     396       395  

Additional paid-in capital

     377,937       377,126  

Accumulated deficit

     (114,565     (92,108
  

 

 

   

 

 

 

Total Stockholders’ Equity

     375,768       397,413  

Non-controlling interests in properties

     1,030       964  
  

 

 

   

 

 

 

Total Equity

     376,798       398,377  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 1,149,594     $ 1,100,431  
  

 

 

   

 

 

 

Subsequent Events (Note 11)

    

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

 

3


Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2019     2018     2019     2018  
                          

Rental and other revenues

   $ 41,171     $ 30,236       78,291       61,770  

Operating expenses:

        

Property operating expenses

     14,526       11,748       28,370       23,374  

General and administrative

     3,362       1,966       5,660       3,943  

Depreciation and amortization

     14,604       11,771       29,022       23,665  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,492       25,485       63,052       50,982  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     8,679       4,751       15,239       10,788  

Interest expense:

        

Contractual interest expense

     (7,502     (5,081     (14,645     (10,269

Amortization of deferred financing costs and debt fair value

     (334     (354     (671     (986
  

 

 

   

 

 

   

 

 

   

 

 

 
     (7,836     (5,435     (15,316     (11,255

Net gain on sale of real estate property

     478       —         478       46,980  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

     1,321       (684     401       46,513  

Less:

        

Net income attributable to non-controlling interests in properties

     (165     (114     (334     (249
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss) attributable to the Company

     1,156       (798     67       46,264  

Preferred stock distributions

     (1,855     (1,855     (3,710     (3,710
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to common stockholders

   $ (699   $ (2,653   $ (3,643   $ 42,554  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income per common share:

        

Basic

   $ (0.02   $ (0.07   $ (0.09   $ 1.18  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.02   $ (0.07   $ (0.09   $ 1.17  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     39,640       36,132       39,603       36,103  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     39,640       36,132       39,603       36,452  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividend distributions declared per common share

   $ 0.235     $ 0.235     $ 0.470     $ 0.470  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Changes in Equity

(Unaudited)

(In thousands)

 

     Number of
shares of
preferred
stock
     Preferred
stock
     Number of
shares of
common stock
     Common
stock
     Additional
paid-in capital
     Accumulated
deficit
    Total
stockholders’
equity
    Non-
controlling
interests in
properties
    Total equity  

Balance - December 31, 2018

     4,480      $ 112,000        39,544      $ 395      $ 377,126      $ (92,108   $ 397,413     $ 964     $ 398,377  

Restricted stock award grants and vesting

     —          —          92        1        302        (83     220       —         220  

Common stock dividend distributions declared

     —          —          —          —          —          (9,314     (9,314     —         (9,314

Preferred stock dividend distributions declared

     —          —          —          —          —          (1,855     (1,855     —         (1,855

Contributions

     —          —          —          —          —          —         —         12       12  

Distributions

     —          —          —          —          —          —         —         (134     (134

Net income

     —          —          —          —          —          (1,089     (1,089     169       (920
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2019

     4,480      $ 112,000        39,636      $ 396      $ 377,428      $ (104,449   $ 385,375     $ 1,011     $ 386,386  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Restricted stock award grants and vesting

     —          —          11        —          509        (99     410       —         410  

Common stock dividend distributions declared

     —          —          —          —          —          (9,318     (9,318     —         (9,318

Preferred stock dividend distributions declared

     —          —          —          —          —          (1,855     (1,855     —         (1,855

Contributions

     —          —          —          —          —          —         —         10       10  

Distributions

     —          —          —          —          —          —         —         (156     (156

Net income

     —          —          —          —          —          1,156       1,156       165       1,321  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2019

     4,480      $ 112,000        39,647      $ 396      $ 377,937      $ (114,565   $ 375,768     $ 1,030     $ 376,798  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     Number of
shares of
preferred
stock
     Preferred
stock
     Number of
shares of
common stock
     Common
stock
     Additional
paid-in capital
     Accumulated
deficit
    Total
stockholders’
equity
    Non-
controlling
interests in
properties
    Total equity  

Balance – December 31, 2017

     4,480      $ 112,000        36,012      $ 360      $ 334,241      $ (86,977   $ 359,624     $ 208     $ 359,832  

Restricted stock award grants and vesting

     —          —          120        1        356        (72     285       —         285  

Common stock dividend distributions declared

     —          —          —          —          —          (8,491     (8,491     —         (8,491

Preferred stock dividend distributions declared

     —          —          —          —          —          (1,855     (1,855     —         (1,855

Distributions

     —          —          —          —          —          —         —         (29     (29

Net income

     —          —          —          —          —          47,063       47,063       135       47,198  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2018

     4,480      $ 112,000        36,132      $ 361      $ 334,597      $ (50,332   $ 396,626     $ 314     $ 396,940  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Restricted stock award grants and vesting

     —          —          1        —          412        (80     332       —         332  

Common stock dividend distributions declared

     —          —          —          —          —          (8,491     (8,491     —         (8,491

Preferred stock dividend distributions declared

     —          —          —          —          —          (1,855     (1,855     —         (1,855

Contributions

     —          —          —          —          —          —         —         43       43  

Distributions

     —          —          —          —          —          —         —         (135     (135

Net income

     —          —          —          —          —          (798     (798     114       (684
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2018

     4,480      $ 112,000        36,133      $ 361      $ 335,009      $ (61,556   $ 385,814     $ 336     $ 386,150  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

     Six Months Ended June 30,  
     2019     2018  

Cash Flows from Operating Activities:

    

Net income

   $ 401     $ 46,513  

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

    

Depreciation and amortization

     29,022       23,665  

Amortization of deferred financing costs and debt fair value

     671       986  

Amortization of above/below market leases

     (92     (140

Increase in straight-line rent/expense

     (3,424     (1,842

Non-cash stock compensation

     879       705  

Net gain on sale of real estate property

     (478     (46,980

Changes in non-cash working capital:

    

Rents receivable, net

     (1,677     (93

Other assets

     (1,082     (3,034

Accounts payable and accrued liabilities

     (5,241     (6,467

Deferred rent

     53       (2,042

Tenant rent deposits

     (394     89  
  

 

 

   

 

 

 

Net Cash Provided By Operating Activities

     18,638       11,360  
  

 

 

   

 

 

 

Cash Flows (to)/from Investing Activities:

    

Additions to real estate properties

     (9,881     (9,156

Acquisition of real estate

     (61,012     (55,453

Net proceeds from sale of real estate

     33,941       84,839  

Deferred leasing costs

     (1,598     (2,057
  

 

 

   

 

 

 

Net Cash (Used In)/Provided By Investing Activities

     (38,550     18,173  
  

 

 

   

 

 

 

Cash Flows from/(to) Financing Activities:

    

Debt issuance and extinguishment costs

     (648     (1,942

Proceeds from mortgage loans payable

     40,950       —    

Repayment of mortgage loans payable

     (2,327     (34,121

Proceeds from credit facility

     55,000       82,000  

Repayment of credit facility

     (52,500     (57,000

Shares withheld for payment of taxes on restricted stock unit vesting

     (246     (86

Contributions from non-controlling interests in properties

     22       43  

Distributions to non-controlling interests in properties

     (290     (165

Dividend distributions paid to stockholders and Operating Partnership unitholders

     (22,318     (20,664
  

 

 

   

 

 

 

Net Cash Provided By/(Used In) Financing Activities

     17,643       (31,935
  

 

 

   

 

 

 

Net Decrease in Cash, Cash Equivalents and Restricted Cash

     (2,269     (2,402

Cash, Cash Equivalents and Restricted Cash, Beginning of Period

     33,145       35,014  
  

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash, End of Period

   $ 30,876     $ 32,612  
  

 

 

   

 

 

 

Reconciliation of Cash, Cash Equivalents and Restricted Cash:

    

Cash and Cash Equivalents, End of Period

   $ 11,581     $ 14,655  

Restricted Cash, End of Period

     19,295       17,957  
  

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash, End of Period

   $ 30,876     $ 32,612  
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Cash paid for interest

   $ 14,696     $ 9,962  

Purchases of additions in real estate properties included in accounts payable

   $ 1,411     $ 3,380  

Purchases of deferred leasing costs included in accounts payable

   $ 160     $ 158  

Debt assumed on acquisition of real estate

   $ 22,473     $ —    

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

 

6


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City Office REIT, Inc.

Notes to the Condensed Consolidated Financial Statements

1. Organization and Description of Business

City Office REIT, Inc. (the “Company”) was organized in the state of Maryland on November 26, 2013. On April 21, 2014, the Company completed its initial public offering (“IPO”) of shares of the Company’s common stock. The Company contributed the net proceeds of the IPO to City Office REIT Operating Partnership, L.P., a Maryland limited partnership (the “Operating Partnership”), in exchange for common units of limited partnership interest in the Operating Partnership (“common units”).

The Company’s interest in the Operating Partnership entitles the Company to share in distributions from, and allocations of profits and losses of, the Operating Partnership in proportion to the Company’s percentage ownership of common units. As the sole general partner of the Operating Partnership, the Company has the exclusive power under the Operating Partnership’s partnership agreement to manage and conduct the Operating Partnership’s business, subject to limited approval and voting rights of the limited partners.

The Company has elected to be taxed, and will continue to operate in a manner that will allow it to continue to qualify, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Subject to qualification as a REIT, the Company will be permitted to deduct dividend distributions paid to its stockholders, eliminating the U.S. federal taxation of income represented by such distributions at the Company level. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and, for tax years beginning before 2018, any applicable alternative minimum tax.

2. Summary of Significant Accounting Policies

Basis of Preparation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with Securities and Exchange Commission rules and regulations and generally accepted accounting principles in the United States of America (“US GAAP”) and in the opinion of management contain all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

New Accounting Pronouncements

Adopted in the Current Year

In February 2016, the Financial Accounting Standards Board, or FASB, established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02, which requires lessors to classify leases as a sales-type, direct financing, or operating lease and requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.

The Company adopted the new standard effective January 1, 2019 and elected the effective date method for the transition. The Company elected the following practical expedients:

 

   

Transition method practical expedient – permits the Company to use the effective date as the date of initial application. Upon adoption, the Company did not have a cumulative-effect adjustment to the opening balance of retained earnings. Financial information and disclosures for periods before January 1, 2019 were not updated.

 

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Package of practical expedients – permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. This allowed the Company to continue classifying its leases at transition in substantially the same manner.

 

   

Single component practical expedient – permits the Company to not separate lease and non-lease components of leases. Upon transition, rental income, expense reimbursement, and other were aggregated into a single line within rental and other revenues on the condensed consolidated statement of operations.

 

   

Land easement practical expedient – permits the Company not to reassess under the new standard its prior conclusions about land easements.

 

   

Short-term lease practical expedient – permits the Company not to recognize leases with a term equal to or less than 12 months.

Lessor Accounting

The accounting for lessors under the new standard remained relatively unchanged with a few targeted updates impacting the Company, which included: (i) narrower definition of initial direct costs that requires certain costs to be expensed rather than capitalized, and (ii) provisions for uncollectible rents to be recorded as a reduction in revenue rather than as bad debt expense.

Lessee Accounting

The new standard requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating at inception, with classification affecting the pattern and recording of expenses in the statement of operations. Upon transition the Company recognized right-of use assets and lease liabilities principally for its ground and office leases.

3. Real Estate Investments

Acquisitions

During the six months ended June 30, 2019 and 2018 the Company acquired the following properties:

 

Property

   Date Acquired      Percentage Owned  

Cascade Station

     June 2019        100

Canyon Park

     February 2019        100

Pima Center

     April 2018        100

Each of the foregoing acquisitions were accounted for as asset acquisitions.

The following table summarizes the Company’s allocation of the purchase price of assets acquired and liabilities assumed during the six months ended June 30, 2019 (in thousands):

 

     Canyon Park          Cascade    
Station
     Total
June 30, 2019
 

Land

   $ 7,098      $ —        $ 7,098  

Buildings and improvements

     36,619        25,141        61,760  

Tenant improvements

     1,797        2,080        3,877  

Acquired intangible assets

     8,109        3,134        11,243  

Other assets

     10        3,164        3,174  

Debt

     —          (697      (697

Accounts payable and other liabilities

     (1,266      (186      (1,452

Lease intangible liabilities

     (1,297      (220      (1,517
  

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 51,070      $ 32,416      $ 83,486  
  

 

 

    

 

 

    

 

 

 

 

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The acquisition of the Cascade Station property was partially funded through an assumption of debt in the amount of $22.5 million.

The following table summarizes the Company’s allocation of the purchase price of assets acquired and liabilities assumed during the six months ended June 30, 2018 (in thousands):

 

     Pima Center  

Buildings and improvements

   $ 42,235  

Tenant improvements

     2,898  

Acquired intangible assets

     10,691  

Other assets

     95  

Accounts payable and other liabilities

     (337

Lease intangible liabilities

     (129
  

 

 

 

Net assets acquired

   $ 55,453  
  

 

 

 

Sale of Real Estate Property

On May 7, 2019, the Company sold the 10455 Pacific Center building of the Sorrento Mesa property in San Diego, California for $16.5 million, resulting in an aggregate gain of $0.5 million net of disposal-related costs, which has been classified as net gain on sale of real estate property in the condensed consolidated statements of operations.

On February 7, 2019, the Company sold the Plaza 25 property in Denver, Colorado for $17.9 million. No gain or loss was recognized on the sale as the property was carried at fair value less cost to sell on the date of disposition.

On March 8, 2018, the Company sold the Washington Group Plaza property in Boise, Idaho for $86.5 million, resulting in an aggregate net gain of $47.0 million, net of $1.7 million in costs, which has been classified as net gain on sale of real estate property in the condensed consolidated statements of operations. In connection with the sale of the property, certain debt repayments were made.

4. Lease Intangibles

Lease intangibles and the value of assumed lease obligations as of June 30, 2019 and December 31, 2018 were comprised as follows (in thousands):

 

     Lease Intangible Assets     Lease Intangible Liabilities  

June 30, 2019

   Above
Market
Leases
    Below Market
Ground
Lease
(1)
    In Place
Leases
    Leasing
Commissions
    Total     Below
Market
Leases
    Below Market
Ground
Lease
(1)
    Total  

Cost

   $ 11,924     $ —       $ 86,640     $ 35,126     $ 133,690     $ (14,359   $ (138   $ (14,497

Accumulated amortization

     (5,784     —         (41,672     (14,262     (61,718     5,210       38       5,248  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,140     $ —       $ 44,968     $ 20,864     $ 71,972     $ (9,149   $ (100   $ (9,249
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Lease Intangible Assets     Lease Intangible Liabilities  

December 31, 2018

   Above
Market
Leases
    Below Market
Ground
Lease
(1)
    In Place
Leases
    Leasing
Commissions
    Total     Below
Market
Leases
    Below Market
Ground
Lease
(1)
    Total  

Cost

   $ 10,595     $ 1,855     $ 82,474     $ 31,706     $ 126,630     $ (12,925   $ (138   $ (13,063

Accumulated amortization

     (4,800     (19     (34,273     (12,037     (51,129     4,140       36       4,176  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 5,795     $ 1,836     $ 48,201     $ 19,669     $ 75,501     $ (8,785   $ (102   $ (8,887
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For the below market ground lease asset, the Company is the lessee, whereas, for the below market ground lease liability, the Company is the lessor. Upon the adoption of Topic 842 on January 1, 2019, the Company derecognized the below market ground lease intangible asset related to one of its lessee ground leases and included the net carrying value of the intangible asset within the right-of-use asset recognized upon transition to the new standard.

 

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The estimated aggregate amortization expense for lease intangibles for the next five years and in the aggregate are as follows (in thousands):

 

2019

   $ 10,192  

2020

     18,332  

2021

     15,022  

2022

     7,255  

2023

     4,393  

Thereafter

     7,529  
  

 

 

 
   $ 62,723  
  

 

 

 

5. Debt

The following table summarizes the indebtedness as of June 30, 2019 and December 31, 2018 (dollars in thousands):

 

Property

   June 30,
2019
     December 31,
2018
     Interest Rate as
of June 30,
2019 (1)
    Maturity

Unsecured Credit Facility (2)

   $ 150,000      $ 147,500        LIBOR +1.60 %(3)    March 2022

Midland Life Insurance (4)

     86,142        86,973        4.34     May 2021

Mission City

     47,000        47,000        3.78     November 2027

190 Office Center

     41,152        41,250        4.79     October 2025

Canyon Park (5)

     40,950        —          4.30     March 2027

Circle Point

     39,650        39,650        4.49     September 2028

SanTan

     34,347        34,682        4.56     March 2027

Intellicenter

     33,227        33,481        4.65     October 2025

The Quad

     30,600        30,600        4.20     September 2028

FRP Collection

     29,288        29,589        3.85     September 2023

2525 McKinnon

     27,000        27,000        4.24     April 2027

Cascade Station

     22,474        —          4.55     May 2024

Greenwood Blvd

     22,425        22,425        4.60     December 2025

5090 N 40th St

     22,000        22,000        3.92     January 2027

AmberGlen

     20,000        20,000        3.69     May 2027

Lake Vista Pointe

     17,882        18,044        4.28     August 2024

Central Fairwinds

     17,712        17,882        4.00     June 2024

FRP Ingenuity Drive

     17,000        17,000        4.44     December 2024

Carillon Point

     16,154        16,330        3.50     October 2023
  

 

 

    

 

 

      

Total Principal

     715,003        651,406       

Deferred financing costs, net

     (6,030      (6,052     

Unamortized fair value adjustments

     697        —         
  

 

 

    

 

 

      

Total

   $ 709,670      $ 645,354       
  

 

 

    

 

 

      

 

(1)

All interest rates are fixed interest rates with the exception of the unsecured credit facility (“Unsecured Credit Facility”) as explained in footnote 2 below.

(2)

As of June 30, 2019, the Unsecured Credit Facility had $250 million authorized with $150 million drawn and a $5.3 million letter of credit to satisfy escrow requirements for a mortgage lender. On March 15, 2018, the Company entered into a $250 million Unsecured Credit Facility, which includes an accordion feature that will permit the Company to borrow up to $500 million, subject to customary terms and conditions. The Unsecured Credit Facility matures in March 2022, which may be extended to March 2023 at the Company’s option upon meeting certain conditions. Borrowings under the Unsecured Credit Facility will bear interest at a rate equal to the LIBOR rate plus a margin of between 140 to 225 basis points depending upon the Company’s consolidated leverage ratio. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.

(3)

As of June 30, 2019, the one month LIBOR rate was 2.40%.

(4)

The mortgage loan is cross-collateralized by DTC Crossroads, Cherry Creek and City Center.

(5)

The mortgage loan anticipated repayment date (“ARD”) is March 1, 2027. The final scheduled maturity date can be extended up to 5 years beyond the ARD. If the loan is not paid off at ARD, loan’s interest rate shall be adjusted to the greater of (i) the initial interest rate plus 200 basis points or (ii) the yield on the five year “on the run” treasury reported by Bloomberg market data service plus 450 basis points.

 

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The scheduled principal repayments of debt as of June 30, 2019 are as follows (in thousands):

 

2019

   $ 2,692  

2020

     6,186  

2021

     89,125  

2022

     156,165  

2023

     47,822  

Thereafter

     413,013  
  

 

 

 
   $ 715,003  
  

 

 

 

6. Fair Value of Financial Instruments

Fair value measurements are based on assumptions that market participants would use in pricing an asset or a liability. 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

As of each of June 30, 2019 and December 31, 2018, the Company did not have any hedges or derivatives.

Cash, Cash Equivalents, Restricted Cash, Rents Receivable, Accounts Payable and Accrued Liabilities

The Company estimates that the fair value approximates carrying value due to the relatively short-term nature of these instruments.

Fair Value of Financial Instruments Not Carried at Fair Value

With the exception of fixed rate mortgage loans payable, the carrying amounts of the Company’s financial instruments approximate their fair value. The Company determines the fair value of its fixed rate mortgage loan payable based on a discounted cash flow analysis using a discount rate that approximates the current borrowing rates for instruments of similar maturities. Based on this, the Company has determined that the fair value of these instruments was $580.7 million and $503.3 million as of June 30, 2019 and December 31, 2018, respectively. Accordingly, the fair value of mortgage loans payable have been classified as Level 3 fair value measurements.

7. Related Party Transactions

Administrative Services Agreement

For the six months ended June 30, 2019 and 2018, the Company earned $0.3 million and $0.4 million, respectively, in administrative services performed for Second City Real Estate II Corporation and its affiliates (collectively, “Second City”). Also during the six months ended June 30, 2019, the Company was assigned a purchase contract which had been entered into by an entity affiliated with principals of Second City, which principals are also officers of the Company. The Company subsequently assigned the purchase contract to a third party during the six months ended June 30, 2019. The Company paid no consideration to the related party for the contract other than return of deposits which the Company subsequently recovered from a third party in addition to an assignment fee. The Company recognized income of $2.6 million on the assignment of the purchase contract to the third party, which was recorded in rental and other revenues on the condensed consolidated statement of operations.

 

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8. Leases

Lessor Accounting

The Company is focused on acquiring, owning and operating high-quality office properties for lease to a stable and diverse tenant base. Our properties have both full-service gross and net leases which are generally classified as operating leases. Rental income related to such leases is recognized on a straight-line basis over the remaining lease term. The Company’s total revenue includes fixed base rental payments provided under the lease and variable payments which principally consist of tenant expense reimbursements for certain property operating expenses. The Company elected the practical expedient to account for its lease and non-lease components as a single combined operating lease component under the new leasing standard. As a result, rental income, expense reimbursement, and other were aggregated into a single line within rental and other revenues on the condensed consolidated statement of operations.

For the three and six months ended June 30, 2019, the Company recognized $38.5 million and $75.6 million, respectively, of rental and other revenue related to its operating leases (in thousands):

 

 

Three months ended

    June 30, 2019    

Six months ended

    June 30, 2019    

Fixed payments

$     32,861 $     65,060

Variable payments

  5,646   10,526

 

 

 

 

 

 
$     38,507 $     75,586

 

 

 

 

 

 

Future minimum lease payments to be received by the Company as of June 30, 2019 under non-cancellable operating leases for the next five years and thereafter are as follows (in thousands):

 

2019

   $  60,208  

2020

     113,808  

2021

     102,819  

2022

     85,402  

2023

     67,284  

Thereafter

     143,674  
  

 

 

 
   $ 573,195  
  

 

 

 

The Company’s leases may include various provisions such as scheduled rent increases, renewal options and termination options. The majority of the Company’s leases include defined rent increase rather than variable payments based on an index or unknown rate. Seven state government tenants currently have the exercisable right to terminate their leases if the applicable state legislature does not appropriate rent in its annual budget. The Company has determined that the occurrence of any government tenant not being appropriated the rent in the applicable annual budget is a remote contingency and accordingly recognizes lease revenue on a straight-line basis over the respective lease term. These tenants represent approximately 8.2% of the Company’s total future minimum lease payments as of June 30, 2019.

Lessee Accounting

As a lessee, the Company has ground and office leases classified as operating leases and one office lease classified as a financing lease. Upon adoption of Topic 842, on January 1, 2019, the Company recognized right-of-use assets of $9.2 million and lease liabilities of $7.2 million. The difference between the recorded right-of-use assets and lease liabilities is mainly due to the reclassification of the below market ground lease intangible asset, which was included within the right-of-use assets recognized upon transition. As of June 30, 2019, these leases had remaining terms of 2 to 70 years and a weighted average remaining lease term of 56 years. Operating and financing

 

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right-of-use assets and lease liabilities have been included within other assets and other liabilities on the Company’s condensed consolidated balance sheet as follows (in thousands):

 

     As of
June 30, 2019
 

Right-of-use asset – operating leases

   $ 13,215  

Lease liability – operating leases

   $ 8,250  

Right-of-use asset – financing leases

   $ 91  

Lease liability – financing leases

   $ 90  

Lease liabilities are measured at the commencement date based on the present value of future lease payments. One of the Company’s operating ground leases includes rental payment increases over the lease term based on increases in the Consumer Price Index (“CPI”). Changes in the CPI were not estimated as part of the measurement of the operating lease liability. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The Company used a weighted average discount rate of 6.31% in determining its lease liabilities. The discount rates were derived from the Company’s assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments.

Right-of-use assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.

Operating lease expense for the three and six months ended June 30, 2019 was $0.2 million and $0.4 million, respectively. Financing lease expense for the three and six months ended June 30, 2019 was nominal.

Future minimum lease payments to be paid by the Company as a lessee as of June 30, 2019 for the next five years and thereafter are as follows (in thousands):

 

     Operating
Leases
     Financing
Leases
 

2019

   $ 303      $ 13  

2020

     782        27  

2021

     781        27  

2022

     741        27  

2023

     659        4  

Thereafter

     27,277        —    
  

 

 

    

 

 

 

Total future minimum lease payments

     30,543        98  

Discount

     (22,293      (8
  

 

 

    

 

 

 

Total

   $ 8,250      $ 90  
  

 

 

    

 

 

 

9. Commitments and Contingencies

The Company is obligated under certain tenant leases to fund tenant improvements and the expansion of the underlying leased properties.

Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. As such, the Company may be potentially liable for costs associated with any potential environmental remediation at any of its formerly or currently owned properties.

 

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The Company believes that it is in compliance in all material respects with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. Management is not aware of any environmental liability that it believes would have a material adverse impact on the Company’s financial position or results of operations. Management is unaware of any instances in which the Company would incur significant environmental costs if any or all properties were sold, disposed of or abandoned. However, there can be no assurance that any such non-compliance, liability, claim or expenditure will not arise in the future.

The Company is involved from time to time in lawsuits and other disputes which arise in the ordinary course of business. As of June 30, 2019, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Company’s financial position or results of operations.

10. Stockholders’ Equity

Common Stock and Common Unit Distributions

On June 14, 2019, the Company’s Board of Directors approved and the Company declared a cash dividend distribution of $0.235 per common share for the quarterly period ended June 30, 2019. The dividend was paid subsequent to quarter end on July 25, 2019 to common stockholders and common unitholders of record as of the close of business on July 11, 2019, resulting in an aggregate payment of $9.3 million.

Preferred Stock Distributions

On June 14, 2019, the Company’s Board of Directors approved and the Company declared a cash dividend of $0.4140625 per preferred share for the quarterly period ended June 30, 2019. The dividend was paid subsequent to quarter end on July 25, 2019 to preferred stockholders of record as of the close of business on July 11, 2019, resulting in an aggregate payment of $1.9 million.

Restricted Stock Units

The Company has an equity incentive plan (“Equity Incentive Plan”) for executive officers, directors and certain non-executive employees, and with approval of the Board of Directors, for subsidiaries and their respective affiliates. The Equity Incentive Plan provides for grants of restricted common stock, restricted stock units, phantom shares, stock options, dividend equivalent rights and other equity-based awards (including LTIP Units), subject to the total number of shares available for issuance under the plan. The Equity Incentive Plan is administered by the compensation committee of the Board of Directors (the “Plan Administrator”).

On May 2, 2019, the Company’s stockholders approved an amendment to the Equity Incentive Plan increasing the maximum number of shares of common stock that may be issued under the Equity Incentive Plan from 1,263,580 shares to 2,263,580 shares. To the extent an award granted under the Equity Incentive Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards.

During the six months ended June 30, 2019, 162,500 restricted stock units (“RSUs”) were granted to executive officers, directors and certain non-executive employees with a fair value of $1.8 million. The awards will vest in three equal, annual installments on each of the first three anniversaries of the date of grant. For the three and six months ended June 30, 2019, the Company recognized net compensation expense of $0.5 million and $0.9 million, respectively, related to the RSUs. For the three and six months ended June 30, 2018 the Company recognized net compensation expense of $0.3 million and $0.7 million, respectively, related to the RSUs.

A RSU award represents the right to receive shares of the Company’s common stock in the future, after the applicable vesting criteria, determined by the Plan Administrator, has been satisfied. The holder of an award of RSU has no rights as a stockholder until shares of common stock are issued in settlement of vested RSUs. The Plan Administrator may provide for a grant of dividend equivalent rights in connection with the grant of RSU; provided, however, that if the RSUs do not vest solely upon satisfaction of continued employment or service, any payment in respect to the related dividend equivalent rights will be held by the Company and paid when, and only to the extent that, the related RSU vests.

 

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11. Subsequent Events

On July 31, 2019, an indirect, wholly-owned subsidiary of the Company entered into an Administrative Services Agreement (the “Administrative Services Agreement”) with Clarity Real Estate III GP, Limited Partnership and Clarity Real Estate Ventures GP, Limited Partnership (together, “Clarity”), entities affiliated with principals of Second City and officers of the Company. Pursuant to the Administrative Services Agreement, the Company will provide various administrative services and support to the related entities managing the Clarity funds.

 

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Item 2.

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

The following discussion and analysis is based on, and should be read in conjunction with, the condensed, consolidated financial statements and the related notes thereto of the City Office REIT, Inc. contained in this Quarterly Report on Form 10-Q.

As used in this section, unless the context otherwise requires, references to “we,” “our,” “us,” and “our company” refer to City Office REIT, Inc., a Maryland corporation, together with our consolidated subsidiaries, including City Office REIT Operating Partnership L.P., a Maryland limited partnership, of which we are the sole general partner and which we refer to in this section as our Operating Partnership, except where it is clear from the context that the term only means City Office REIT, Inc.

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report on Form 10-Q, including “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition,” contains both historical and forward-looking statements. All statements, other than statements of historical fact are, or may be deemed to be, forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements are not based on historical facts, but rather reflect our current expectations and projections about our future results, performance, prospects and opportunities. These forward looking statements may be identified by the use of words including “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar terms and phrases. These forward looking statements are subject to a number of known and unknown risks, uncertainties and other factors that are difficult to predict and which could cause our actual future results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward looking statements. These risks, uncertainties and other factors include, among others:

 

   

adverse economic or real estate developments in the office sector or the markets in which we operate;

 

   

changes in local, regional, national and international economic conditions;

 

   

our inability to compete effectively;

 

   

our inability to collect rent from tenants or renew tenants’ leases on attractive terms if at all;

 

   

demand for and market acceptance of our properties for rental purposes;

 

   

defaults on or non-renewal of leases by tenants;

 

   

increased interest rates and any resulting increase in financing or operating costs;

 

   

decreased rental rates or increased vacancy rates;

 

   

our failure to obtain necessary financing or access the capital markets on favorable terms or at all;

 

   

changes in the availability of acquisition opportunities;

 

   

availability of qualified personnel;

 

   

our inability to successfully complete real estate acquisitions or dispositions on the terms and timing we expect, or at all;

 

   

our failure to successfully operate acquired properties and operations;

 

   

changes in our business, financing or investment strategy or the markets in which we operate;

 

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our failure to generate sufficient cash flows to service our outstanding indebtedness;

 

   

environmental uncertainties and risks related to adverse weather conditions and natural disasters;

 

   

our failure to qualify and maintain our status as a real estate investment trust (“REIT”);

 

   

government approvals, actions and initiatives, including the need for compliance with environmental requirements;

 

   

outcome of claims and litigation involving or affecting us;

 

   

financial market fluctuations;

 

   

changes in real estate, taxation and zoning laws and other legislation and government activity and changes to real property tax rates and the taxation of REITs in general;

 

   

uncertaintly regarding the Company’s obligations under its floating rate debt instruments upon discontinuation of LIBOR;

 

   

a material increase in institutional ownership of real estate in secondary markets that could result in, among others, compression of cap rates and fewer acquisition opportunities being available to the Company; and

 

   

other factors described in our news releases and filings with the United States Securities and Exchange Commission (the “SEC”), including but not limited to those described in our Annual Report on Form 10-K for the year ended December 31, 2018 under the heading “Risk Factors” and in our subsequent reports filed with the SEC.

The forward looking statements included in this report are made only as of the date of this report, and except as otherwise required by federal securities law, we do not have any obligation to publicly update or revise any forward looking statements to reflect subsequent events or circumstances.

Overview

Company

We were formed as a Maryland corporation on November 26, 2013. On April 21, 2014, we completed our initial public offering (“IPO”) of shares of common stock. We contributed the net proceeds of the IPO to our Operating Partnership in exchange for common units in our Operating Partnership. Both we and our Operating Partnership commenced operations upon completion of the IPO and certain related formation transactions.

Revenue Base

As of June 30, 2019, we owned 27 properties comprised of 65 office buildings with a total of approximately 5.7 million square feet of net rentable area (“NRA”). As of June 30, 2019, our properties were approximately 93.4% leased.

Office Leases

Historically, most leases for our properties were on a full-service gross or net lease basis, and we expect to continue to use such leases in the future. A full-service gross lease generally has a base year expense “stop”, whereby we pay a stated amount of expenses as part of the rent payment while future increases (above the base year stop) in property operating expenses are billed to the tenant based on such tenant’s proportionate square footage in the property. The property operating expenses are reflected in operating expenses; however, only the increased property operating expenses above the base year stop recovered from tenants are reflected as tenant recoveries in our statements of operations. In a triple net lease, the tenant is typically responsible for all property taxes and operating expenses. As such, the base rent payment does not include any operating expenses, but rather all such expenses are

 

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billed to or paid by the tenant. The full amount of the expenses for this lease type is reflected in operating expenses, and the reimbursement is reflected in tenant recoveries. All tenants in our Lake Vista Pointe, FRP Ingenuity Drive, Sorrento Mesa, and Canyon Park properties have triple net leases. Certain tenants at AmberGlen, Superior Pointe, FRP Collection, 2525 McKinnon, Circle Point, The Quad and Cascade Station have leases on a triple net basis. We are also a lessor for a fee simple ground lease at the AmberGlen property. All of our remaining leases are full-service gross leases.

Factors That May Influence Our Operating Results and Financial Condition

Business and Strategy

We focus on owning and acquiring office properties in our target markets. Our target markets generally possess what we believe are favorable economic growth trends, growing populations with above-average employment growth forecasts, a large number of government offices, large international, national and regional employers across diversified industries, are generally low-cost centers for business operations, and exhibit favorable occupancy trends. We utilize our management’s market-specific knowledge and relationships as well as the expertise of local real estate operators and our investment partners to identify acquisition opportunities that we believe will offer cash flow stability and long-term value appreciation. Our target markets are attractive, among other reasons, because we believe that ownership is often concentrated among local real estate operators that typically do not benefit from the same access to capital as public REITs and there is a relatively low level of participation of large institutional investors. We believe that these factors result in attractive pricing levels and risk-adjusted returns.

Rental Revenue and Tenant Recoveries

The amount of net rental revenue generated by our properties will depend principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space that becomes available from lease terminations. The amount of rental revenue generated also depends on our ability to maintain or increase rental rates at our properties. We believe that the average rental rates for our portfolio of properties are generally in-line or slightly below the current average quoted market rates. Negative trends in one or more of these factors could adversely affect our rental revenue in future periods. Future economic downturns or regional downturns affecting our markets or submarkets or downturns in our tenants’ industries that impair our ability to renew or re-let space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. In addition, growth in rental revenue will also partially depend on our ability to acquire additional properties that meet our investment criteria.

 

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Our Properties

As of June 30, 2019, we owned 27 office complexes comprised of 65 office buildings with a total of approximately 5.7 million square feet of NRA in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, San Diego, Seattle and Tampa. The following table presents an overview of our portfolio as of June 30, 2019 (properties listed by descending NRA by market).

 

Metropolitan

Area

   Property   Economic
Interest
    NRA
(000s Square
Feet)
     In Place
Occupancy
    Annualized Base
Rent per Square
Foot
     Annualized
Gross Rent per
Square Foot(1)
     Annualized Base
Rent(2)
($000s)
 

Phoenix, AZ

(21.3% of NRA)

   Pima Center     100.0     272        96.5   $ 27.15      $ 27.15      $ 7,122  
   SanTan     100.0     267        98.6   $ 27.67      $ 27.67      $ 7,272  
   5090 N 40th St     100.0     175        95.8   $ 28.96      $ 28.96      $ 4,848  
   Camelback Square     100.0     173        80.8   $ 29.24      $ 29.24      $ 4,092  
   The Quad     100.0     163        100.0   $ 28.14      $ 28.39      $ 4,587  
   Papago Tech     100.0     163        100.0   $ 21.85      $ 21.85      $ 3,556  

Denver, CO

(18.3%)

   Cherry Creek     100.0     356        100.0   $ 18.53      $ 18.53      $ 6,591  
   Circle Point     100.0     272        98.8   $ 17.46      $ 30.36      $ 4,692  
   DTC Crossroads     100.0     189        53.7   $ 26.24      $ 26.24      $ 2,665  
   Superior Pointe     100.0     151        96.5   $ 17.66      $ 29.17      $ 2,579  
   Logan Tower     100.0     72        73.3   $ 21.62      $ 21.62      $ 1,139  

Tampa, FL

(18.2%)

   Park Tower     94.8     471        93.5   $ 24.45      $ 24.45      $ 10,761  
   City Center     95.0     241        94.7   $ 25.40      $ 25.40      $ 5,807  
   Intellicenter     100.0     204        100.0   $ 23.99      $ 23.99      $ 4,881  
   Carillon Point     100.0     124        100.0   $ 28.06      $ 28.06      $ 3,485  

Orlando, FL

(12.6%)

   FRP Collection     95.0     272        84.5   $ 24.29      $ 26.17      $ 5,575  
   Central Fairwinds     97.0     168        89.5   $ 24.49      $ 24.49      $ 3,685  
   Greenwood Blvd     100.0     155        100.0   $ 22.75      $ 22.75      $ 3,527  
   FRP Ingenuity Drive     100.0     125        100.0   $ 21.50      $ 29.50      $ 2,677  

San Diego, CA

(10.2%)

   Sorrento Mesa     100.0     296        85.3   $ 25.19      $ 31.19      $ 6,360  
   Mission City     100.0     286        95.6   $ 35.14      $ 35.14      $ 9,603  

Dallas, TX

(10.1%)

   190 Office Center     100.0     303        89.5   $ 25.64      $ 25.64      $ 6,960  
   Lake Vista Pointe     100.0     163        100.0   $ 16.00      $ 24.00      $ 2,613  
   2525 McKinnon     100.0     111        90.4   $ 28.04      $ 45.04      $ 2,822  

Portland, OR

(5.8%)

   AmberGlen     76.0     201        96.9   $ 21.30      $ 23.89      $ 4,151  
   Cascade Station     100.0     128        100.0   $ 26.37      $ 32.38      $ 3,363  

Seattle, WA

(3.5%)

   Canyon Park     100.0     207        100.0   $ 21.20      $ 29.20      $ 4,384  
      

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total / Weighted Average – June 30, 2019 (3)

      5,708        93.4   $ 24.36      $ 27.00      $ 129,797  
      

 

 

            

 

 

 

 

(1)

For FRP Ingenuity Drive, Lake Vista Pointe, 2525 McKinnon, Sorrento Mesa, and Canyon Park the annualized base rent per square foot on a triple net basis was increased by $8, $8, $17, $6, and $8 respectively, to estimate a gross equivalent base rent. AmberGlen has a net lease for one tenant which has been grossed up by $7 on a pro rata basis. Superior Pointe has net leases for eight tenants which have been grossed up by $12 on a pro-rata basis. FRP Collection has net leases for five tenants which have been grossed up by $9 on a pro-rata basis. Circle Point has net leases for fourteen tenants which have been grossed up by $13 on a pro-rata basis. The Quad has one tenant with a net lease, which has been grossed up by $8 on a pro-rata basis. Cascade Station has net leases for six tenants which have been grossed up by $7 on a pro-rata basis.

(2)

Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month ended June 30, 2019 by (ii) 12.

(3)

Averages weighted based on the property’s NRA, adjusted for occupancy

 

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Operating Expenses

Our operating expenses generally consist of utilities, property and ad valorem taxes, insurance and site maintenance costs. Increases in these expenses over tenants’ base years (until the base year is reset at expiration) are generally passed along to tenants in our full-service gross leased properties and are generally paid in full by tenants in our net leased properties.

Conditions in Our Markets

Positive or negative changes in economic or other conditions in the markets we operate in, including state budgetary shortfalls, employment rates, natural hazards and other factors, may impact our overall performance.

Summary of Significant Accounting Policies

The interim condensed consolidated financial statements follow the same policies and procedures as outlined in the audited consolidated financial statements for the year ended December 31, 2018 included in our Annual Report on Form 10-K for the year ended December 31, 2018 except for the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) as outlined in Note 2 of the condensed consolidated financial statements.

Results of Operations

Comparison of Three Months Ended June 30, 2019 to Three Months Ended June 30, 2018

Rental and Other Revenues. Revenue includes net rental income, including parking, signage and other income, as well as the recovery of operating costs and property taxes from tenants. Rental and other revenues increased $11.0 million, or 36%, to $41.2 million for the three months ended June 30, 2019 compared to $30.2 million for the three months ended June 30, 2018. Of this increase, $2.1 million was from the acquisition of Circle Point in July 2018, $1.4 million was from the acquisition of The Quad in July 2018, $1.2 million was from the acquisition of Greenwood Blvd in December 2018, $1.2 million was from the acquisition of Camelback Square in December 2018, $1.4 million was from the acquisition of Canyon Park in February 2019 and $0.2 million was from the acquisition of Cascade Station in June 2019. Revenue from Central Fairwinds, Park Tower, Mission City and FRP Collection also increased by $0.1 million, $0.3 million, $0.3 million and $0.2 million, respectively, as a result of increased average occupancy over the prior-year period. Partially offsetting these increases, Plaza 25 decreased by $0.7 million due to the sale of the property in February 2019. The remaining properties’ revenues were modestly higher in comparison to the prior-year period primarily as a result of modest mark-to-market increases in rents upon renewal. Other revenues benefited from a one-time payment of $2.6 million received as consideration for the assignment of a purchase contract. The assignment fee originated through our administrative services relationship. Upon adoption of Topic 842, prior year amounts disclosed in rental income, expense reimbursement, and other have been combined into a single line to conform to current period presentation.

Operating Expenses

Total Operating Expenses. Total operating expenses consist of property operating expenses, general and administrative expenses and depreciation and amortization. Total operating expenses increased by $7.0 million, or 27%, to $32.5 million for the three months ended June 30, 2019, from $25.5 million for the three months ended June 30, 2018, primarily due to the acquisitions described above. Total operating expenses increased by $1.9 million, $0.9 million, $0.8 million, $1.1 million, $0.7 million and $0.2 million, respectively, from the acquisitions of Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park and Cascade Station properties. Park Tower operating expenses also increased by $0.3 million due to the higher occupancy at that property. Plaza 25 operating expenses decreased by $0.8 million due to its sale in February 2019. General and Administrative Expenses increased by approximately $1.4 million, of which $1.1 million was the result of one-time expenses and accruals incurred as a result of the assignment fee income earned during the quarter and the balance related to higher payroll costs. The remaining operating expenses were modestly higher in comparison to the prior year primarily due to higher occupancy at the properties.

 

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Property Operating Expenses. Property operating expenses are comprised mainly of building common area and maintenance expenses, insurance, property taxes, property management fees, as well as certain expenses that are not recoverable from tenants, the majority of which are related to costs necessary to maintain the appearance and marketability of vacant space. In the normal course of business, property expenses fluctuate and are impacted by various factors including, but not limited to, occupancy levels, weather, utility costs, repairs, maintenance and re-leasing costs. Property operating expenses increased $2.8 million, or 24%, to $14.5 million for the three months ended June 30, 2019 from $11.7 million for the three months ended June 30, 2018. The increase in property operating expenses was primarily due to the acquisitions described above. The acquisition of the Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park and Cascade Station contributed an additional $0.9 million, $0.3 million, $0.4 million, $0.4 million, $0.2 million and $0.1 million, respectively, in additional property operating expenses. Park Tower operating expenses also increased by $0.2 million due to the higher occupancy at that property. Plaza 25 decreased by $0.4 million due to the sale of that property in February 2019. The remaining property operating expenses aggregate to a net $0.7 million increase in comparison to the prior-year period.

General and Administrative. General and administrative expenses are comprised of public company reporting costs and the compensation of our management team and board of directors as well as non-cash stock-based compensation expenses. General and administrative expenses increased $1.4 million, or 71%, to $3.4 million for the three months ended June 30, 2019 compared to $2.0 million for the three months ended June 30, 2018. Of this increase, $1.1 million can be attributed to the one-time expenses and accruals incurred as a result of the assignment fee income earned during the quarter as described above and the balance of the increase is primarily attributable to higher payroll costs.

Depreciation and Amortization. Depreciation and amortization increased $2.8 million, or 24%, to $14.6 million for the three months ended June 30, 2019 compared to $11.8 million for the three months ended June 30, 2018, primarily due to the addition of the Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park and Cascade Station properties partially offset by a decrease at Plaza 25 due to the sale of the property.

Other Expense (Income)

Interest Expense. Interest expense increased $2.4 million, or 44%, to $7.8 million for the three months ended June 30, 2019, compared to $5.4 million for the three months ended June 30, 2018. The increase was primarily due to interest expense related to acquisitions. Interest expense for the Circle Point, The Quad, Greenwood Blvd, Canyon Park and Cascade Station property level debt increased by $0.5 million, $0.3 million, $0.3 million, $0.4 million and $0.1 million, respectively, and the interest on the line of credit increased by $1.1 million as a result of acquisitions funded by our $250 million Unsecured Credit Facility. These increases were partially offset by a $0.2 million decrease in the Plaza 25 debt as a result of its sale and the extinguishment of its property level debt.

Comparison of Six Months Ended June 30, 2019 to Six Months Ended June 30, 2018

Rental and Other Revenues. Revenue includes net rental income, including parking, signage and other income, as well as the recovery of operating costs and property taxes from tenants. Rental and other revenues increased $16.5 million, or 27%, to $78.3 million for the six months ended June 30, 2019 compared to $61.8 million for the six months ended June 30, 2018. Of this increase, $1.8 million was attributable to the acquisition of Pima Center in April 2018, $4.1 million from the acquisition of Circle Point in July 2018, $2.8 million from the acquisition of The Quad in July 2018, $2.3 million from the acquisition of Greenwood Blvd in December 2018, $2.4 million from the acquisition of Camelback Square in December 2018, $2.0 million from the acquisition of Canyon Park in February 2019 and $0.2 million from the acquisition of Cascade Station in June 2019. Revenue from Central Fairwinds, Park Tower, Mission City and FRP Collection also increased by $0.4 million, $0.7 million, $0.4 million and $0.3 million, respectively, as a result of increased average occupancy over the prior year. Partially offsetting these increases, Washington Group Plaza decreased by $1.7 million due to the sale of the property in March 2018 and Plaza 25 decreased by $1.0 million due to the sale of the property in February 2019. Revenue from DTC Crossroads decreased $0.4 million as a result of decreased occupancy over the prior year and Sorrento Mesa also decreased by $1.2 million as a result of the termination fee payment received in the prior year. The remaining properties’ revenues were modestly higher in comparison to the prior year primarily as a result of modest mark-to-market increases in rents upon renewal. Other Revenues benefited from a one-time payment of $2.6 million received as consideration for the assignment of a purchase contract. The assignment fee originated through our administrative services relationship. Upon adoption of Topic 842, prior year amounts disclosed in rental income, expense reimbursement, and other have been combined into a single line to conform to current period presentation.

 

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Operating Expenses

Total Operating Expenses. Total operating expenses consist of property operating expenses, general and administrative expenses and depreciation and amortization. Total operating expenses increased by $12.1 million, or 24%, to $63.1 million for the six months ended June 30, 2019, from $51.0 million for the six months ended June 30, 2018, primarily due to the acquisitions described above. Total operating expenses increased by $1.8 million, $4.0 million, $1.9 million, $1.5 million, $2.1 million, $1.0 million and $0.2 million, respectively, from the acquisitions of Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park and Cascade Station properties. Park Tower operating expenses also increased by $0.5 million due to the higher occupancy at that property. Washington Group Plaza operating expenses decreased by $0.8 million due to its sale in March 2018 and Plaza 25 operating expenses decreased by $1.3 million due to its sale in February 2019. The remaining operating expenses were modestly higher in comparison to the prior-year period primarily due to higher occupancy at the properties.

Property Operating Expenses. Property operating expenses are comprised mainly of building common area and maintenance expenses, insurance, property taxes, property management fees, as well as certain expenses that are not recoverable from tenants, the majority of which are related to costs necessary to maintain the appearance and marketability of vacant space. In the normal course of business, property expenses fluctuate and are impacted by various factors including, but not limited to, occupancy levels, weather, utility costs, repairs, maintenance and re-leasing costs. Property operating expenses increased $5.0 million, or 21%, to $28.4 million for the six months ended June 30, 2019 from $23.4 million for the six months ended June 30, 2018. The increase in property operating expenses was primarily due to the acquisitions described above. The acquisition of the Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park and Cascade Station contributed an additional $0.6 million, $2.0 million, $0.7 million, $0.8 million, $0.7 million, $0.3 million and $0.1 million, respectively, in additional property operating expenses. Park Tower operating expenses also increased by $0.2 million due to the higher occupancy at that property. Washington Group Plaza decreased by $0.8 million due to the sale of that property in March 2018 and Plaza 25 decreased by $0.7 million due to the sale of that property in February 2019. The remaining property operating expenses aggregate to an overall $1.1 million increase in comparison to the prior-year period.

General and Administrative. General and administrative expenses are comprised of public company reporting costs and the compensation of our management team and board of directors as well as non-cash stock-based compensation expenses. General and administrative expenses increased $1.8 million, or 44%, to $5.7 million for the six months ended June 30, 2019 compared to $3.9 million for the six months ended June 30, 2018. Of this increase, $1.1 million can be attributed to the one-time expenses and accruals incurred as a result of the assignment fee income earned during the six months ended June 30, 2019 as described above and the balance of the increase was primarily attributable to higher payroll costs.

Depreciation and Amortization. Depreciation and amortization increased $5.3 million, or 23%, to $29.0 million for the six months ended June 30, 2019 compared to $23.7 million for the six months ended June 30, 2018, primarily due to the addition of the Papago Tech, Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park and Cascade Station properties and partially offset by a decrease at Washington Group Plaza and Plaza 25 due to the sale of those properties.

Other Expense (Income)

Interest Expense. Interest expense increased $4.0 million, or 36%, to $15.3 million for the six months ended June 30, 2019, compared to $11.3 million for the six months ended June 30, 2018. The increase was primarily due to interest expense related to acquisitions. Interest expense for the Circle Point, The Quad, Greenwood Blvd, Canyon Park and Cascade Station property level debt increased by $0.9 million, $0.6 million, $0.5 million, $0.6 million and $0.1 million, respectively, and the interest on the line of credit increased by $2.0 million as a result of acquisitions funded by our $250 million Unsecured Credit Facility. These increases were partially offset by a $0.2 million and $0.4 million, respective decrease in the Washington Group Plaza and Plaza 25 debt as a result of the sale of those properties and the extinguishment of its property level debt.

 

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Cash Flows

Comparison of Six Months Ended June 30, 2019 to Six Months Ended June 30, 2018

Cash, cash equivalents and restricted cash were $30.9 million and $32.6 million as of June 30, 2019 and June 30, 2018, respectively.

Cash flow from operating activities. Net cash provided by operating activities increased by $7.2 million to $18.6 million for the six months ended June 30, 2019 compared to $11.4 million for the six months ended June 30, 2018. The increase was primarily attributable to increased operating cash flows from acquired properties.

Cash flow to investing activities. Net cash used in investing activities increased by $56.8 million to $38.6 million for the six months ended June 30, 2019 compared to $18.2 million provided by investing activities for the six months ended June 30, 2018. The increase in cash used in investing activities was primarily due to the acquisition of Canyon Park and Cascade Station in 2019. Additionally, we realized lower proceeds from the sale of real estate in 2019 compared to 2018, which included proceeds from the sale of Washington Group Plaza in 2018.

Cash flow from financing activities. Net cash provided by financing activities increased by $49.5 million to $17.6 million for the six months ended June 30, 2019 compared to $31.9 million used in financing activities in the six months ended June 30, 2018. Cash flow provided by financing activities increased primarily due to higher proceeds from mortgage loans payable compared to 2018 and lower repayments of mortgage loans payable compared to 2018. The increase was partially offset by lower proceeds from credit facility in 2019 compared to 2018.

Liquidity and Capital Resources

Analysis of Liquidity and Capital Resources

We had approximately $11.6 million of cash and cash equivalents and $19.3 million of restricted cash as of June 30, 2019.

On March 15, 2018 the Company entered into a $250 million Unsecured Credit Facility, which includes an accordion feature that allows the Company to borrow up to $500 million, subject to customary terms and conditions. The Company’s previous secured credit facility was replaced and repaid in full from the proceeds of our Unsecured Credit Facility. Our Unsecured Credit Facility matures in March 2022, and may be extended to March 2023 at the Company’s option upon meeting certain conditions. Borrowings under our Unsecured Credit Facility bear an interest at a rate equal to the LIBOR rate plus a margin of between 140 to 225 basis points depending upon the Company’s consolidated leverage ratio. As of June 30, 2019, we had approximately $150.0 million outstanding under our Unsecured Credit Facility and a $5.3 million letter of credit to satisfy escrow requirements for a mortgage lender.

The Company and the Operating Partnership previously entered into the amended equity distribution agreements (collectively, the “EDAs”) with the sales agents named therein (collectively, the “Sales Agents”), pursuant to which the Company may issue and sell from time to time up to 8,000,000 shares of common stock and up to 1,000,000 shares of Series A Preferred Stock through the Sales Agents, acting as agents or principals. Pursuant to the EDAs, the shares may be offered and sold through the Sales Agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the New York Stock Exchange or sales made to or through a market maker other than on an exchange or, with the prior consent of the Company, in privately negotiated transactions. The Sales Agents will be entitled to compensation of up to 2.0% of the gross proceeds of shares sold through the Sales Agents from time to time under the EDAs. The Company has no obligation to sell any of the shares under the EDAs and may at any time suspend solicitations and offers under, or terminate, the EDAs. The Company did not make any sales of securities under the EDAs during the six months ended June 30, 2019.

Our short-term liquidity requirements primarily consist of operating expenses and other expenditures associated with our properties, distributions to our limited partners and distributions to our stockholders required to qualify for REIT status, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash, proceeds from our public offerings, including under our at the market issuance program, and borrowings under our mortgage loans and our Unsecured Credit Facility.

 

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Our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at maturity, property acquisitions and non-recurring capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness and the issuance of equity and debt securities. We also may fund property acquisitions and non-recurring capital improvements using our Unsecured Credit Facility pending longer term financing.

We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity securities. However, we cannot assure you that this is or will continue to be the case. Our ability to incur additional debt is dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets is dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us.

Contractual Obligations and Other Long-Term Liabilities

The following table provides information with respect to our commitments as of June 30, 2019, including any guaranteed or minimum commitments under contractual obligations. The table does not reflect available debt extension options.

 

     Payments Due by Period (in thousands)  

Contractual Obligations

   Total      2019      2020-2021      2022-2023      More than
5 years
 

Principal payments on mortgage loans

   $ 715,003      $ 2,692      $ 95,311      $ 203,987      $ 413,013  

Interest payments (1)

     162,109        15,110        57,650        40,589        48,760  

Tenant-related commitments

     10,907        5,890        4,418        599        —    

Operating and financing lease obligations

     30,641        316        1,617        1,431        27,277  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  918,660      $  24,008      $  158,996      $  246,606      $  489,050  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Contracted interest on the floating rate debt was calculated based on our Unsecured Credit Facility balance and interest rate at June 30, 2019.

Off-Balance Sheet Arrangements

As of June 30, 2019, we had a $5.3 million letter of credit outstanding under our Unsecured Credit Facility to satisfy escrow requirements for a mortgage lender.

Inflation

Substantially all of our office leases provide for real estate tax and operating expense escalations. In addition, most of the leases provide for fixed annual rent increases. We believe that inflationary increases may be at least partially offset by these contractual rent increases and expense escalations.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We have used, and will use, derivative financial instruments to manage or hedge interest rate risks related to borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based upon their credit rating and other factors. We have entered, and we will only enter into, contracts with major financial institutions based on their credit rating and other factors. As of June 30, 2019, our Company did not have any outstanding derivatives.

The primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure is LIBOR. We primarily use fixed interest rate financing to manage our exposure to fluctuations in interest rates. We consider our interest rate exposure to be minimal because as of June 30, 2019, approximately $565.0 million, or 79.0%, of our debt had fixed interest rates and approximately $150.0 million, or 21.0%, had variable interest rates. A

 

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10% increase in LIBOR would increase our annual interest costs by approximately $0.4 million on debt outstanding as of June 30, 2019, and would decrease the fair value of our outstanding debt, as well as increase interest costs associated with future debt issuances or borrowings under our Unsecured Credit Facility. A 10% decrease in LIBOR would decrease our annual interest costs by approximately $0.4 million on debt outstanding as of June 30, 2019, and would increase the fair value of our outstanding debt, as well as decrease interest costs associated with future debt issuances or borrowings under our Unsecured Credit Facility.

Interest rate risk amounts are our management’s estimates based on our Company’s capital structure and were determined by considering the effect of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. We may take actions to further mitigate our exposure to changes in interest rates. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our Company’s financial structure.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on the most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer determined that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) were effective as of June 30, 2019.

Management’s Report on Internal Control Over Financial Reporting

There have been no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of business. As of June 30, 2019, management does not believe that any such litigation will have a material adverse effect, individually or in the aggregate, on our financial position or results of operations.

 

Item 1A.

Risk Factors

The following risk factor replaces the risk factor disclosed under a similar heading in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018. Except as presented below, there have been no material changes from the risk factors set forth in such Annual Report.

Our commitments to Second City Real Estate II Corporation (“Second City”), Clarity Real Estate III GP, Limited Partnership (“Clarity RE”), Clarity Real Estate Ventures GP, Limited Partnership (together with Clarity RE, “Clarity”), and their respective affiliates may give rise to various conflicts of interest.

We are subject to conflicts of interest arising out of our relationship with Second City and Clarity. As a result of the internalization of our former external advisor on February 1, 2016, we agreed to allow our management to continue to provide services to Second City under the terms of an administrative services agreement. In addition, the terms of the administrative services agreement and the employment agreements we entered into with each of our executive officers permit, under certain circumstances and subject to the oversight of our Board of Directors, our executive officers to advise or oversee new or additional funds in the future. On July 31, 2019, we, through an indirect, wholly-owned subsidiary, entered into a separate administrative services agreement with Clarity to provide administrative services to Clarity similar to those provided to Second City. These arrangements with Second City and Clarity may create potential conflicts of interests, including competition for the time and services of personnel that work for us and our affiliates

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

On July 31, 2019, CIO Administrative Services, LLC (the “Service Provider”), an indirect, wholly-owned subsidiary of the Company, entered into an Administrative Services Agreement (the “Administrative Services Agreement”) with Clarity Real Estate III GP, Limited Partnership and Clarity Real Estate Ventures GP, Limited Partnership (collectively with their affiliates, “Clarity”), entities affiliated with the Company. James Farrar, the Company’s Chief Executive Officer, and Gregory Tylee, the Company’s President and Chief Operating Officer, are officers of the general partners of the Clarity funds and own equity interests in the Clarity funds. Pursuant to the Administrative Services Agreement, the Service Provider will provide various administrative services and support to Clarity as set forth in the Administrative Services Agreement. The annual payments made by Clarity to the Service Provider for these services under the Administrative Services Agreement will be a percentage of the management fees received by Clarity from Clarity’s managed funds and affiliates under Clarity’s governance documents according to a formula set forth in the Administrative Services Agreement.

In conjunction with the Company’s entry into the Administrative Services Agreement, on July 31, 2019, the Company, through a wholly-owned subsidiary, entered into an amendment to the Company’s employment agreements (collectively, the “Employment Agreement Amendments”) with each of James Farrar, the Company’s

 

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Chief Executive Officer, Greg Tylee, the Company’s President and Chief Operating Officer, and Anthony Maretic, the Company’s Chief Financial Officer, Secretary and Treasurer. The Employment Agreement Amendments clarify that the Company’s executive officers may participate in the organization and administration of Clarity.

A committee consisting solely of the independent members of the Company’s Board of Directors approved the Company’s entry into the Administrative Services Agreement and the Employment Agreement Amendments. The foregoing descriptions of the Administrative Services Agreement and the Employment Agreement Amendments are not complete. Reference is made to the full text of the Administrative Services Agreement and each of the Employment Agreement Amendments filed as Exhibit 10.2, Exhibit 10.3, Exhibit 10.4, and Exhibit 10.5, respectively, to this Quarterly Report on Form 10-Q.

 

Item 6.

Exhibits

 

Exhibit

Number

  

Description

    3.1    Articles of Amendment and Restatement of City Office REIT, Inc., as amended and supplemented (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on March 1, 2018).
    3.2    Second Amended and Restated Bylaws of City Office REIT, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 14, 2017).
    4.1    Certificate of Common Stock of City Office REIT, Inc. (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-11/A filed with the Commission on February 18, 2014).
    4.2    Form of certificate representing the 6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Commission on September 30, 2016).
  10.1    Amendment No.  1 to the City Officer REIT, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 6, 2019).
  10.2    Administrative Services Agreement, dated July  31, 2019, by and among CIO Administrative Services, LLC, Clarity Real Estate III GP, Limited Partnership and Clarity Real Estate Ventures GP, Limited Partnership. †
  10.3    Amendment No. 1 to Executive Employment Agreement, dated as of July 31, 2019, by and between City Office Management Ltd. and James Farrar.* †
  10.4    Amendment No. 1 to Executive Employment Agreement, dated as of July 31, 2019, by and between City Office Management Ltd. and Gregory Tylee.* †
  10.5    Amendment No. 1 to Executive Employment Agreement, dated as of July 31, 2019, by and between City Office Management Ltd. and Anthony Maretic.* †
  31.1    Certification by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †
  31.2    Certification by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †
  32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
  32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
101.INS    INSTANCE DOCUMENT**
101.SCH    SCHEMA DOCUMENT**
101.CAL    CALCULATION LINKBASE DOCUMENT**
101.LAB    LABELS LINKBASE DOCUMENT**
101.PRE    PRESENTATION LINKBASE DOCUMENT**
101.DEF    DEFINITION LINKBASE DOCUMENT**

 

Filed herewith.

*

Compensatory Plan or arrangement

**

Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CITY OFFICE REIT, INC.

 

Date: August 1, 2019      
    By:  

/s/ James Farrar

           James Farrar
     

 

Chief Executive Officer and Director

      (Principal Executive Officer)
Date: August 1, 2019      
    By:  

/s/ Anthony Maretic

      Anthony Maretic
     

 

Chief Financial Officer, Secretary and Treasurer

      (Principal Financial Officer and Principal Accounting Officer)

 

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