Company Quick10K Filing
Quick10K
City Office REIT
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$11.83 40 $469
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 2019-05-03 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
FMX Mexican Economic Development 173,470
CLX Clorox 18,720
FSLR First Solar 6,210
BKU Bankunited 3,520
IRBT Irobot 2,710
CODI Compass Diversified Holdings 1,010
STK Storage Technology 343
SGOC SGOCO Group 79
TGPL Transcontinental Gas Pipe Line Company 0
DWSF Morgan Stanley Smith Barney Spectrum Select 0
CIO 2019-03-31
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-31.1 d696692dex311.htm
EX-31.2 d696692dex312.htm
EX-32.1 d696692dex321.htm
EX-32.2 d696692dex322.htm

City Office REIT Earnings 2019-03-31

CIO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d696692d10q.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 March 31, 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)

 

(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

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

 

Title of Each Class

 

Name of each Exchange

on Which Registered

 

Trading

Symbol(s)

Common Stock, $0.01 par value

6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share

 

New York Stock Exchange

New York Stock Exchange

 

“CIO”

“CIO.PrA”

 

 

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 April 30, 2019 was 39,635,793.

 

 

 


Table of Contents

City Office REIT, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2019

Table of Contents

 

PART I. FINANCIAL INFORMATION

   3

Item 1.

 

Financial Statements

   3
 

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

   3
 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

   4
 

Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2019 and 2018

   5
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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

   15

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

   22

Item 4.

 

Controls and Procedures

   22

PART II. OTHER INFORMATION

   24

Item 1.

 

Legal Proceedings

   24

Item 1A.

 

Risk Factors

   24

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   24

Item 3.

 

Defaults Upon Senior Securities

   24

Item 4.

 

Mine Safety Disclosures

   24

Item 5.

 

Other Information

   24

Item 6.

 

Exhibits

   24

Signatures

     25

 

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)

 

     March 31,     December 31,  
     2019     2018  

Assets

    

Real estate properties

    

Land

   $ 224,837     $ 223,789  

Building and improvement

     735,403       704,113  

Tenant improvement

     81,960       77,426  

Furniture, fixtures and equipment

     270       319  
  

 

 

   

 

 

 
     1,042,470       1,005,647  

Accumulated depreciation

     (78,263     (70,484
  

 

 

   

 

 

 
     964,207       935,163  
  

 

 

   

 

 

 

Cash and cash equivalents

     15,314       16,138  

Restricted cash

     21,713       17,007  

Rents receivable, net

     27,524       26,095  

Deferred leasing costs, net

     10,865       10,402  

Acquired lease intangible assets, net

     74,651       75,501  

Other assets

     14,419       2,755  

Assets held for sale

     15,932       17,370  
  

 

 

   

 

 

 

Total Assets

   $ 1,144,625     $ 1,100,431  
  

 

 

   

 

 

 

Liabilities and Equity

    

Liabilities:

    

Debt

   $ 694,989     $ 645,354  

Accounts payable and accrued liabilities

     23,408       25,892  

Deferred rent

     5,079       5,331  

Tenant rent deposits

     5,531       4,564  

Acquired lease intangible liabilities, net

     9,610       8,887  

Other liabilities

     19,352       11,148  

Liabilities related to assets held for sale

     270       878  
  

 

 

   

 

 

 

Total Liabilities

     758,239       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, 39,635,793 and 39,544,073 shares issued and outstanding

     396       395  

Additional paid-in capital

     377,428       377,126  

Accumulated deficit

     (104,449     (92,108
  

 

 

   

 

 

 

Total Stockholders’ Equity

     385,375       397,413  

Non-controlling interests in properties

     1,011       964  
  

 

 

   

 

 

 

Total Equity

     386,386       398,377  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 1,144,625     $ 1,100,431  
  

 

 

   

 

 

 

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  
     March 31,  
     2019     2018  

Rental and other revenues

   $ 37,120     $ 31,534  

Operating expenses:

    

Property operating expenses

     13,844       11,625  

General and administrative

     2,299       1,978  

Depreciation and amortization

     14,417       11,893  
  

 

 

   

 

 

 

Total operating expenses

     30,560       25,496  
  

 

 

   

 

 

 

Operating income

     6,560       6,038  

Interest expense:

    

Contractual interest expense

     (7,143     (5,188

Amortization of deferred financing costs

     (337     (632
  

 

 

   

 

 

 
     (7,480     (5,820

Net gain on sale of real estate property

     —         46,980  
  

 

 

   

 

 

 

Net (loss)/income

     (920     47,198  

Less:

    

Net income attributable to non-controlling interests in properties

     (169     (135
  

 

 

   

 

 

 

Net (loss)/income attributable to the Company

     (1,089     47,063  

Preferred stock distributions

     (1,855     (1,855
  

 

 

   

 

 

 

Net (loss)/income attributable to common stockholders

   $ (2,944   $ 45,208  
  

 

 

   

 

 

 

Net (loss)/income per common share:

    

Basic

   $ (0.07)     $ 1.25  
  

 

 

   

 

 

 

Diluted

   $ (0.07)     $ 1.24  
  

 

 

   

 

 

 

Weighted average common shares outstanding:

    

Basic

     39,565       36,073  
  

 

 

   

 

 

 

Diluted

     39,565       36,432  
  

 

 

   

 

 

 

Dividend distributions declared per common share

   $ 0.235     $ 0.235  
  

 

 

   

 

 

 

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  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Three Months Ended March 31,  
     2019     2018  

Cash Flows from Operating Activities:

    

Net (loss)/income

   $ (920   $ 47,198  

Adjustments to reconcile net (loss)/income to net cash provided by operating activities:

    

Depreciation and amortization

     14,417       11,893  

Amortization of deferred financing costs

     337       632  

Amortization of above/below market leases

     (27     (200

Increase in straight-line rent/expense

     (1,454     (844

Non-cash stock compensation

     444       350  

Net gain on sale of real estate property

     —         (46,980

Changes in non-cash working capital:

    

Rents receivable, net

     (225     322  

Other assets

     (1,710     (1,741

Accounts payable and accrued liabilities

     (7,506     (6,890

Deferred rent

     (485     (2,124

Tenant rent deposits

     (45     189  
  

 

 

   

 

 

 

Net Cash Provided By Operating Activities

     2,826       1,805  
  

 

 

   

 

 

 

Cash Flows (to)/from Investing Activities:

    

Additions to real estate properties

     (2,292     (2,753

Acquisition of real estate

     (51,070     —    

Net proceeds from sale of real estate

     17,426       84,839  

Deferred leasing costs

     (811     (1,071
  

 

 

   

 

 

 

Net Cash (Used In)/Provided By Investing Activities

     (36,747     81,015  
  

 

 

   

 

 

 

Cash Flows from/(to) Financing Activities:

    

Debt issuance and extinguishment costs

     (516     (1,896

Proceeds from mortgage loans payable

     40,950       —    

Repayment of mortgage loans payable

     (1,137     (33,134

Proceeds from credit facility

     35,000       18,500  

Repayment of credit facility

     (25,000     (52,000

Shares withheld for payment of taxes on restricted stock unit vesting

     (224     (64

Contributions from non-controlling interests in properties

     12       —    

Distributions to non-controlling interests in properties

     (134     (29

Dividend distributions paid to stockholders and Operating Partnership unitholders

     (11,148     (10,318
  

 

 

   

 

 

 

Net Cash Provided By/(Used In) Financing Activities

     37,803       (78,941
  

 

 

   

 

 

 

Net Increase in Cash, Cash Equivalents and Restricted Cash

     3,882       3,879  

Cash, Cash Equivalents and Restricted Cash, Beginning of Period

     33,145       35,014  
  

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash, End of Period

   $ 37,027     $ 38,893  
  

 

 

   

 

 

 

Reconciliation of Cash, Cash Equivalents and Restricted Cash:

    

Cash and Cash Equivalents, End of Period

     15,314       18,509  

Restricted Cash, End of Period

     21,713       20,384  
  

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash, End of Period

   $ 37,027     $ 38,893  
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Cash paid for interest

   $ 6,679     $ 5,607  

Purchases of additions in real estate properties included in accounts payable

   $ 4,161     $ 3,503  

Purchases of deferred leasing costs included in accounts payable

   $ 192     $ 147  

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

 

6


Table of Contents

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.

 

7


Table of Contents
   

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

The following table summarizes the Company’s allocation of the purchase price of assets acquired and liabilities assumed during the three months ended March 31, 2019 (in thousands):

 

     Canyon Park  

Land

   $ 7,098  

Buildings and improvements

     36,619  

Tenant improvements

     1,797  

Acquired intangible assets

     8,109  

Prepaid expenses and other assets

     10  

Accounts payable and other liabilities

     (1,266

Lease intangible liabilities

     (1,297
  

 

 

 

Total consideration

   $ 51,070  
  

 

 

 

Sale of Real Estate Property

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.

 

8


Table of Contents

Assets Held for Sale

On February 27, 2019, the Company entered into a Purchase and Sale agreement to sell the 10455 Pacific Center Court building of the Sorrento Mesa property for $16.5 million. The Company determined that the property met the criteria for classification as held for sale as of March 31, 2019. The transaction is anticipated to close in the second quarter of 2019, subject to customary closing conditions. As of March 31, 2019, a $1.0 million non-refundable deposit has been received.

The property has been classified as held for sale as of March 31, 2019 (in thousands):

 

March 31, 2019

   10455 Pacific
Center Court
 

Real estate properties, net

   $ 14,231  

Acquired lease intangible assets, net

     1,350  

Rents receivable, prepaid expenses and other assets

     351  
  

 

 

 

Assets held for sale

   $ 15,932  
  

 

 

 

Accounts payable, accrued expenses, deferred rent and tenant rent deposits

     (270
  

 

 

 

Liabilities related to assets held for sale

   $ (270
  

 

 

 

4. Lease Intangibles

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

 

    Lease Intangible Assets     Lease Intangible Liabilities  

March 31, 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

  $ 11,319     $ —       $ 85,219     $ 34,526     $ 131,064     $ (14,222   $ (138   $ (14,360

Accumulated amortization

    (5,292     —         (37,903     (13,218     (56,413     4,713       37       4,750  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 6,027     $ —       $ 47,316     $ 21,308     $ 74,651     $ (9,509   $ (101   $ (9,610
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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

   $ 14,962  

2020

     17,692  

2021

     14,416  

2022

     6,652  

2023

     3,789  

Thereafter

     7,530  
  

 

 

 
   $ 65,041  
  

 

 

 

5. Debt

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

 

Property

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

Unsecured Credit Facility (2)

   $ 157,500      $ 147,500        LIBOR +1.60 %(3)      March 2022  

Midland Life Insurance (4)

     86,560        86,973        4.34       May 2021  

Mission City

     47,000        47,000        3.78       November 2027  

190 Office Center

     41,250        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

     34,492        34,682        4.56       March 2027  

Intellicenter

     33,350        33,481        4.65       October 2025  

The Quad

     30,600        30,600        4.20       September 2028  

FRP Collection

     29,439        29,589        3.85       September 2023  

2525 McKinnon

     27,000        27,000        4.24       April 2027  

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

     17,963        18,044        4.28       August 2024  

Central Fairwinds

     17,798        17,882        4.00       June 2024  

FRP Ingenuity Drive

     17,000        17,000        4.44       December 2024  

Carillon Point

     16,242        16,330        3.50       October 2023  
  

 

 

    

 

 

      

Total Principal

     701,219        651,406       

Deferred financing costs, net

     (6,230      (6,052     
  

 

 

    

 

 

      

Total

   $ 694,989      $ 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 March 31, 2019, the Unsecured Credit Facility had $250 million authorized with $157.5 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 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. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.

(3)

As of March 31, 2019, the one month LIBOR rate was 2.49%.

(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 date, 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 March 31, 2019 are as follows (in thousands):

 

2019

   $ 3,712  

2020

     5,834  

2021

     88,754  

2022

     163,277  

2023

     47,415  

Thereafter

     392,227  
  

 

 

 
   $ 701,219  
  

 

 

 

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 March 31, 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 $548.0 million and $503.3 million as of March 31, 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 three months ended March 31, 2019 and 2018, the Company earned $0.1 million and $0.2 million, respectively, in administrative services performed for Second City Real Estate II Corporation and its affiliates (“Second City”).

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.

 

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For the three months ended March 31, 2019, the Company recognized $37.1 million of rental and other revenue related to its operating leases (in thousands):

 

Fixed payments

   $  32,199  

Variable payments

     4,880  
  

 

 

 
   $ 37,079  
  

 

 

 

Future minimum lease payments to be received by the Company as of March 31, 2019 under non-cancellable operating leases for the next five years and thereafter are as follows (in thousands):

 

2019

   $ 86,919  

2020

     108,063  

2021

     97,491  

2022

     79,821  

2023

     61,816  

Thereafter

     136,400  
  

 

 

 
   $ 570,510  
  

 

 

 

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. Nine 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 8.1% of the Company’s total future minimum lease payments as of March 31, 2019.

Lessee Accounting

As a lessee, the Company has ground and office leases which were classified as operating leases. 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 March 31, 2019, these leases had remaining terms of 2 to 70 years and a weighted average remaining lease term of 57 years. Operating 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):

 

     March 31,
2019
 

Right-of-use asset – operating leases

   $ 10,256  

Lease liability – operating leases

   $ 8,183  

Operating lease liabilities are measured at the commencement date based on the present value of future lease payments. One of the Company’s operating ground lease 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

 

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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.

Operating lease 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 months ended March 31, 2019 was $0.2 million.

Future minimum lease payments to be paid by the Company as a lessee for operating leases as of March 31, 2019 for the next five years and thereafter are as follows (in thousands):

 

2019

   $ 360  

2020

     782  

2021

     781  

2022

     741  

2023

     659  

Thereafter

     27,277  
  

 

 

 

Total future minimum lease payments

     30,600  

Discount

     (22,417
  

 

 

 

Total

   $ 8,183  
  

 

 

 

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.

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 March 31, 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.

 

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10. Stockholders’ Equity

Common Stock and Common Unit Distributions

On March 15, 2019, the Company’s Board of Directors approved and the Company declared a cash dividend distribution of $0.235 per share for the quarterly period ended March 31, 2019. The dividend was paid subsequent to quarter end on April 25, 2019 to common stockholders and common unitholders of record as of the close of business on April 11, 2019, resulting in an aggregate payment of $9.3 million.

Preferred Stock Distributions

On March 15, 2019 the Company’s Board of Directors approved and the Company declared a cash dividend of $0.4140625 per share for an aggregate amount of $1.9 million for the quarterly period ended March 31, 2019. The dividend was paid subsequent to quarter end on April 25, 2019 to preferred stockholders of record as of the close of business on April 11, 2019.

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 three months ended March 31, 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 months ended March 31, 2019 the Company recognized net compensation expense of $0.4 million 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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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; and

 

   

other factors described in our news releases and filings with the 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 March 31, 2019, we owned 26 properties comprised of 64 office buildings with a total of approximately 5.7 million square feet of net rentable area (“NRA”). As of March 31, 2019, our properties were approximately 92.6% 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 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, Superior Pointe, and Canyon Park properties have triple net leases. Certain tenants at AmberGlen, FRP Collection, 2525 McKinnon, Circle Point and The Quad 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.

 

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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 March 31, 2019, we owned 26 office complexes comprised of 64 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 March 31, 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

(21.4% of NRA)

  Pima Center     100.0     272       96.5   $ 27.14     $ 27.14     $ 7,119  
 

SanTan

    100.0     267       98.6   $ 27.35     $ 27.35     $ 7,187  
 

5090 N 40th St

    100.0     175       95.8   $ 28.89     $ 28.89     $ 4,837  
 

Camelback Square

    100.0     173       81.1   $ 29.17     $ 29.17     $ 4,097  
 

The Quad

    100.0     163       100.0   $ 27.98     $ 28.23     $ 4,561  
 

Papago Tech

    100.0     163       100.0   $ 21.33     $ 21.33     $ 3,471  

Denver, CO

(18.4%)

  Cherry Creek     100.0     356       100.0   $ 18.53     $ 18.53     $ 6,591  
 

Circle Point

    100.0     272       98.8   $ 17.43     $ 30.33     $ 4,684  
 

DTC Crossroads

    100.0     189       53.7   $ 26.24     $ 26.24     $ 2,665  
 

Superior Pointe

    100.0     151       92.8   $ 17.27     $ 29.27     $ 2,420  
  Logan Tower     100.0     71       80.1   $ 20.88     $ 20.88     $ 1,192  

Tampa, FL

(18.4%)

  Park Tower     94.8     471       91.9   $ 24.34     $ 24.34     $ 10,521  
 

City Center

    95.0     241       94.9   $ 25.47     $ 25.47     $ 5,833  
 

Intellicenter

    100.0     204       100.0   $ 23.44     $ 23.44     $ 4,771  
 

Carillon Point

    100.0     124       100.0   $ 27.65     $ 27.65     $ 3,434  

Orlando, FL

(12.7%)

  FRP Collection     95.0     272       87.9   $ 24.30     $ 26.53     $ 5,802  
  Central Fairwinds     97.0     168       91.1   $ 24.77     $ 24.77     $ 3,795  
  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

(10.3%)

  Sorrento Mesa     100.0     296       85.3   $ 25.02     $ 31.02     $ 6,318  
 

Mission City

    100.0     286       94.4   $ 34.90     $ 34.90     $ 9,416  

Dallas, TX

(10.2%)

  190 Office Center     100.0     303       89.5   $ 25.05     $ 25.05     $ 6,801  
 

Lake Vista Pointe

    100.0     163       100.0   $ 15.50     $ 23.50     $ 2,532  
 

2525 McKinnon

    100.0     111       96.5   $ 27.47     $ 43.76     $ 2,952  

Seattle, WA

(3.6%)

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

Portland, OR

(3.5%)

  AmberGlen     76.0     201       96.9   $ 21.09     $ 23.68     $ 4,110  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total / Weighted Average – Excluding Assets Held for Sale (3)

 

    5,579       93.4   $ 24.13     $ 26.71     $ 125,697  
     

 

 

         

 

 

 

San Diego, CA

(1.5%)

  Sorrento Mesa – 10455     100.0     89       45.8   $ 22.11     $ 28.11     $ 897  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total / Weighted Average – March 31, 2019 (3)

 

    5,668       92.6   $ 24.12     $ 26.72     $ 126,594  
     

 

 

         

 

 

 

 

(1)

For Superior Pointe, FRP Ingenuity Drive, Lake Vista Pointe, Sorrento Mesa, and Canyon Park the annualized base rent per square foot on a triple net basis was increased by $12, $8, $8, $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. FRP Collection has net leases for five tenants which have been grossed up by $9 on a pro-rata basis. 2525 McKinnon has net leases for nine tenants which have been grossed up by $17 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.

(2)

Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month ended March 31, 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 March 31, 2019 to Three Months Ended March 31, 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 $5.6 million, or 18%, to $37.1 million for the three months ended March 31, 2019 compared to $31.5 million for the three months ended March 31, 2018. Of this increase, $1.8 million was attributable to the acquisition of Pima Center in April 2018, $2.0 million from the acquisition of Circle Point in July 2018, $1.4 million from the acquisition of The Quad in July 2018, $1.2 million from the acquisition of Greenwood Blvd in December 2018, $1.2 million from the acquisition of Camelback Square in December 2018 and $0.6 million from the acquisition of Canyon Park in February 2019. Revenue from Central Fairwinds, Park Tower and FRP Collection also increased by $0.3 million, $0.3 million and $0.1 million, respectively, as a result of increased average occupancy over the prior year. 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 $0.4 million due to the sale of the property in February 2019. Revenue from DTC Crossroads decreased $0.3 million as a result of decreased occupancy over the prior year and Sorrento Mesa also decreased by $1.1 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. 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 $5.1 million, or 20%, to $30.6 million for the three months ended March 31, 2019, from $25.5 million for the same period in 2018, primarily due to acquisitions described above. Total operating expenses increased by $1.8 million, $2.0 million, $0.9 million, $0.7 million, $1.0 million and $0.3 million, respectively, from the acquisitions of Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square and Canyon Park properties. Washington Group Plaza operating expenses decreased by $0.8 million due to its sale in March 2018 and Plaza 25 operating expenses decreased by $0.6 million due to its sale in February 2019. The remaining operating expenses were relatively unchanged in comparison to the prior year.

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

 

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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 $2.2 million, or 19%, to $13.8 million for the three months ended March 31, 2019 from $11.6 million for the same period in 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 and Canyon Park contributed an additional $0.6 million, $1.0 million, $0.4 million, $0.4 million, $0.3 million and $0.1 million in additional property operating expenses, respectively. Washington Group Plaza decreased by $0.8 million due to the sale of that property in March 2018 and Plaza 25 decreased by $0.2 million due to the sale of that property in February 2019. The remaining property operating expenses aggregate to an overall $0.4 million increase in comparison to the prior year.

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 $0.3 million, or 16%, to $2.3 million for the three months ended March 31, 2019 compared to $2.0 million for the same period in 2018. The increase was primarily attributable to higher payroll costs.

Depreciation and Amortization. Depreciation and amortization increased $2.5 million, or 21%, to $14.4 million for the year ended March 31, 2019 compared to $11.9 million for the same period in 2018, primarily due to the addition of the Papago Tech, Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square and Canyon Park properties 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 $1.7 million, or 29%, to $7.5 million for the three months ended March 31, 2019, compared to $5.8 million for the corresponding period in 2018. The increase was primarily due to interest expense related to acquisitions. Interest expense for the Circle Point, The Quad, Greenwood Blvd and Canyon Park property level debt increased by $0.5 million, $0.3 million, $0.3 million and $0.1 million, respectively, and the interest on the line of credit increased by $0.9 million as a result of acquisitions funded by our $250 million Unsecured Credit Facility (“Unsecured Credit Facility”). These increases were offset by a $0.2 million and $0.2 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.

Cash Flows

Comparison of Three Months Ended March 31, 2019 to Three Months Ended March 31, 2018

Cash, cash equivalents and restricted cash were $37.0 million and $38.9 million as of March 31, 2019 and March 31, 2018, respectively.

Cash flow from operating activities. Net cash provided by operating activities increased by $1.0 million to $2.8 million for the three months ended March 31, 2019 compared to $1.8 million for the same period in 2018. The increase was primarily attributable to increased operating cash flows from acquisitions.

Cash flow to investing activities. Net cash used in investing activities increased by $117.7 million to $36.7 million for the three months ended March 31, 2019 compared to $81.0 million provided by investing activities for the same period in 2018. The increase in cash used in investing activities was primarily due to the acquisition of Canyon Park in the first quarter 2019. Additionally, we realized lower proceeds from the sale of real estate in the first quarter 2019 compared to the first quarter 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 $116.7 million to $37.8 million for the three months ended March 31, 2019 compared to $78.9 million used in financing activities in the same period in 2018. Cash flow provided by financing activities increased primarily due to higher net proceeds from mortgage loans and credit facility borrowings in 2019 compared to 2018.

 

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Liquidity and Capital Resources

Analysis of Liquidity and Capital Resources

We had approximately $15.3 million of cash and cash equivalents and $21.7 million of restricted cash as of March 31, 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, which 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 March 31, 2019, we had approximately $157.5 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 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 6,000,000 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.

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.

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 March 31, 2019, including any guaranteed or minimum commitments under contractual obligations. The table does not reflect available debt extension options.

 

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     Payments Due by Period (in thousands)  

Contractual Obligations

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

Principal payments on mortgage loans

   $ 701,219      $ 3,712      $ 94,588      $ 210,692      $ 392,227  

Interest payments (1)

     165,881        22,255        56,519        38,745        48,362  

Tenant-related commitments

     13,583        12,468        516        599        —    

Operating lease obligations

     30,600        360        1,563        1,400        27,277  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 911,283      $ 38,795      $ 153,186      $ 251,436      $ 467,866  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Contracted interest on the floating rate debt was calculated based on our Unsecured Credit Facility balance and interest rate at March 31, 2019.

Off-Balance Sheet Arrangements

As of March 31, 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 March 31, 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 March 31, 2019, approximately $543.7 million, or 77.5%, of our debt had fixed interest rates and approximately $157.5 million, or 22.5%, had variable interest rates. A 10% increase in LIBOR would increase our interest costs by approximately $0.4 million on debt outstanding as of March 31, 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 interest costs by approximately $0.4 million on debt outstanding as of March 31, 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 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 March 31, 2019.

 

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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 March 31, 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

There have been no material changes from the risk factors disclosed in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

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

None.

 

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).
  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.

*

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: May 3, 2019      
    By:  

/s/ James Farrar

      James Farrar
      Chief Executive Officer and Director
      (Principal Executive Officer)
Date: May 3, 2019      
    By:  

/s/ Anthony Maretic

      Anthony Maretic
      Chief Financial Officer, Secretary and Treasurer
      (Principal Financial Officer and Principal Accounting Officer)

 

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