10-Q 1 d380064d10q.htm 10-Q 10-Q
2025-11-162026-11-160.000450.00020.0002250.0001250.0002150.000125falseQ3--12-310001593222BCAs of September 30, 2022, the Debt Service Coverage Ratio (“DSCR”) covenant for FRP Ingenuity Drive was not met, which triggered a ‘cash-sweep’ event that will begin in Q4 2022 where excess funds will be held in escrow to fund future tenant improvement expenses of current vacant space.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, the 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.In September 2019, the Company entered into a five-year $50 million Term Loan (the “Term Loan”) increasing its authorized borrowings under the Unsecured Credit Facility from $250 million to $300 million. Borrowings under the Term Loan bear interest at a rate equal to the LIBOR rate plus a margin between 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the Company also entered into a five-year interest rate swap for a notional amount of $50 million (the “Interest Rate Swap”). Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate 30-day LIBOR payments.In March 2018, the Company entered into the Credit Agreement for the Unsecured Credit Facility that provides for commitments of up to $250 million, which included an accordion feature that allowed the Company to borrow up to $500 million, subject to customary terms and conditions. On November 16, 2021, the Company entered into an Amended and Restated Credit Agreement for the Unsecured Credit Facility that provides for commitments of up to $300 million. Combined with the Company’s existing five-year Term Loan, the total authorized borrowings increased from $300 million to $350 million. The Unsecured Credit Facility matures in November 2025 and may be extended 12 months at the Company’s option upon meeting certain conditions. Borrowings under the Unsecured Credit Facility bear interest at a rate equal to the LIBOR rate plus a margin of between 125 to 225 basis points depending upon the Company’s consolidated leverage ratio. As of September 30, 2022, the Unsecured Credit Facility had $185.0 million drawn and a $4.2 million letter of credit to satisfy escrow requirements for a mortgage lender. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.All interest rates are fixed interest rates with the exception of the Unsecured Credit Facility (the “Unsecured Credit Facility”) and the Term Loan (as defined herein), as explained in footnotes 3 and 4 below.As of September 30, 2022, the one-month LIBOR rate was 3.14%.In June 2022, the loan balance of $16.8 million was repaid in full. 0001593222 2021-01-01 2021-12-31 0001593222 2022-01-01 2022-09-30 0001593222 2021-01-01 2021-09-30 0001593222 2021-07-01 2021-09-30 0001593222 2022-07-01 2022-09-30 0001593222 2021-12-31 0001593222 2022-09-30 0001593222 2021-04-01 2021-06-30 0001593222 2021-01-01 2021-03-31 0001593222 2022-04-01 2022-06-30 0001593222 2022-01-01 2022-03-31 0001593222 2022-05-04 0001593222 2019-05-02 0001593222 2022-11-02 0001593222 2020-08-05 0001593222 2020-03-09 0001593222 2020-12-31 0001593222 2021-09-30 0001593222 2022-03-31 0001593222 2022-06-30 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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 September 30, 2022
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
 
(I.R.S. Employer
of incorporation or organization)
 
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
 
Trading Symbol(s)
 
Name of each Exchange on Which Registered
Common Stock, $0.01 par value
6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share
 
CIO
CIO.PrA
 
New York Stock Exchange
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 November 2, 2022
was 39,718,767.
 
 
 

City Office REIT, Inc.
Quarterly Report on Form
10-Q
For the Quarter Ended September 30, 2022
Table of Contents
 
  
 
1
 
  
 
1
 
  
 
1
 
  
 
2
 
  
 
3
 
  
 
4
 
  
 
6
 
  
 
7
 
  
 
17
 
  
 
27
 
  
 
27
 
  
 
28
 
  
 
28
 
  
 
28
 
  
 
28
 
  
 
29
 
  
 
29
 
  
 
29
 
  
 
29
 
  
 
31
 

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)
 
 
  
September 30,

2022
 
 
December 31,
2021
 
Assets
  
 
Real estate properties
  
 
Land
   $ 200,686     $ 204,801  
Building and improvement
     1,233,713       1,244,177  
Tenant improvement
     134,785       119,011  
Furniture, fixtures and equipment
     673       664  
    
 
 
   
 
 
 
       1,569,857       1,568,653  
Accumulated depreciation
     (178,237     (157,356
    
 
 
   
 
 
 
       1,391,620       1,411,297  
    
 
 
   
 
 
 
Cash and cash equivalents
     22,012       21,321  
Restricted cash
     19,669       20,945  
Rents receivable, net
     39,700       30,415  
Deferred leasing costs, net
     22,060       20,327  
Acquired lease intangible assets, net
     58,580       68,925  
Other assets
     30,638       28,283  
    
 
 
   
 
 
 
Total Assets
   $ 1,584,279     $ 1,601,513  
    
 
 
   
 
 
 
Liabilities and Equity
                
Liabilities:
                
Debt
   $ 676,116     $ 653,648  
Accounts payable and accrued liabilities
     38,091       27,101  
Deferred rent
     8,921       11,600  
Tenant rent deposits
     7,014       6,165  
Acquired lease intangible liabilities, net
     9,602       10,872  
Other liabilities
     20,199       21,532  
    
 
 
   
 
 
 
Total Liabilities
     759,943       730,918  
    
 
 
   
 
 
 
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 as of September 30, 2022 and December 31, 2021
     112,000       112,000  
Common stock, $0.01 par value, 100,000,000 shares authorized, 39,718,767 and 43,554,375 shares issued and outstanding as of September 30, 2022 and December 31, 2021
     397       435  
Additional
paid-in
capital
     435,086       482,061  
Retained earnings
     273,843       275,502  
Accumulated other comprehensive income/(loss)
     2,819       (382
    
 
 
   
 
 
 
Total Stockholders’ Equity
     824,145       869,616  
Non-controlling
interests in properties
     191       979  
    
 
 
   
 
 
 
Total Equity
     824,336       870,595  
    
 
 
   
 
 
 
Total Liabilities and Equity
   $ 1,584,279     $ 1,601,513  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
1

City Office REIT, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
 
 
  
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
  
2022
 
 
2021
 
 
2022
 
 
2021
 
Rental and other revenues
   $ 45,522     $ 44,889     $ 135,871     $ 124,369  
Operating expenses:
                                
Property operating expenses
     17,412       15,180       50,736       43,477  
General and administrative
     3,506       7,900       10,575       13,768  
Depreciation and amortization
     15,555       14,648       47,072       44,017  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     36,473       37,728       108,383       101,262  
    
 
 
   
 
 
   
 
 
   
 
 
 
Operating income
     9,049       7,161       27,488       23,107  
Interest expense:
                                
Contractual interest expense
     (6,582     (5,650     (18,311     (17,533
Amortization of deferred financing costs and debt fair value
     (303     (267     (917     (869
    
 
 
   
 
 
   
 
 
   
 
 
 
       (6,885     (5,917     (19,228     (18,402
Net gain on sale of real estate property
                       21,658       47,400  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income
     2,164       1,244       29,918       52,105  
Less:
                                
Net income attributable to
non-controlling
interests in properties
     (175     (378     (510     (760
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income attributable to the Company
     1,989       866       29,408       51,345  
Preferred stock distributions
     (1,855     (1,855     (5,565     (5,565
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) attributable to common stockholders
   $ 134     $ (989   $ 23,843     $ 45,780  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) per common share:
                                
Basic
   $ 0.00     $ (0.02   $ 0.56     $ 1.05  
    
 
 
   
 
 
   
 
 
   
 
 
 
Diluted
   $ 0.00     $ (0.02   $ 0.55     $ 1.04  
    
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average common shares outstanding:
                                
Basic
     41,351       43,554       42,838       43,478  
    
 
 
   
 
 
   
 
 
   
 
 
 
Diluted
     42,125       43,554       43,663       44,091  
    
 
 
   
 
 
   
 
 
   
 
 
 
Dividend distributions declared per common share
   $ 0.20     $ 0.15     $ 0.60     $ 0.45  
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
2

City Office REIT, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
 
 
  
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
  
2022
 
 
2021
 
 
2022
 
 
2021
 
Net income
   $ 2,164     $ 1,244     $ 29,918     $ 52,105  
Other comprehensive income:
                                
Unrealized cash flow hedge gain/(loss)
     1,055       (22     3,119       458  
Amounts reclassified to interest expense
     (121 )     150       82       439  
    
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income
     934       128       3,201       897  
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income
     3,098       1,372       33,119       53,002  
Less:
                                
Comprehensive income attributable to
non-controlling
interests in properties
     (175     (378     (510     (760
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income attributable to the Company
   $ 2,923     $ 994     $ 32,609     $ 52,242  
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
3

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
 
 
  Retained  
earnings
 
 
Accumulated
other
comprehensive
(loss)/income
 
 
Total
stockholders’
equity
 
 
Non-controlling

interests in
properties
 
 
Total
equity
 
Balance—December 31, 2021
    4,480     $ 112,000       43,554     $ 435     $ 482,061     $ 275,502     $ (382   $ 869,616     $ 979     $ 870,595  
Restricted stock award grants and vesting
    —         —         —         —         972       (68     —         904       —         904  
Common stock dividend distribution declared
    —         —         —         —         —         (8,711     —         (8,711     —         (8,711
Preferred stock dividend distribution declared
    —         —         —         —         —         (1,855     —         (1,855     —         (1,855
Contributions
    —         —         —         —         —         —         —         —         3       3  
Distributions
    —         —         —         —         —         —         —         —         (254     (254
Net income
    —         —         —         —         —         24,520       —         24,520       171       24,691  
Other comprehensive income
    —         —         —         —         —         —         1,754       1,754       —         1,754  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance—March 31, 2022
    4,480     $ 112,000       43,554     $ 435     $ 483,033     $ 289,388     $ 1,372     $ 886,228     $ 899     $ 887,127  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Restricted stock award grants and vesting
    —         —         171       2       1,020       (117     —         905       —         905  
Common stock repurchased
    —         —         (395     (4     (4,996     —         —         (5,000     —         (5,000
Common stock dividend distribution declared
    —         —         —         —         —         (8,580     —         (8,580     —         (8,580
Preferred stock dividend distribution declared
    —         —         —         —         —         (1,855     —         (1,855     —         (1,855
Distributions
    —         —         —         —         —         —         —         —         (180     (180
Net income
    —         —         —         —         —         2,899       —         2,899       164       3,063  
Other comprehensive income
    —         —         —         —         —         —         513       513       —         513  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance—June 30, 2022
    4,480     $ 112,000       43,330     $ 433     $ 479,057     $ 281,735     $ 1,885     $ 875,110     $ 883     $ 875,993  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Restricted stock award grants and vesting
    —         —         —         —         1,075       (83     —         992       —         992  
Common stock repurchased
    —         —         (3,612     (36     (45,046     —         —         (45,082     —         (45,082
Common stock dividend distribution declared
    —         —         —         —         —         (7,943     —         (7,943     —         (7,943
Preferred stock dividend distribution declared
    —         —         —         —         —         (1,855     —         (1,855     —         (1,855
Contributions
    —         —         —         —         —         —         —         —         27       27  
Distributions
    —         —         —         —         —         —         —         —         (894     (894
Net income
    —         —         —         —         —         1,989       —         1,989       175       2,164  
Other comprehensive income
    —         —         —         —         —         —         934       934       —         934  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance—September 30, 2022
    4,480     $ 112,000       39,718     $ 397     $ 435,086     $ 273,843      $ 2,819     $ 824,145     $ 191     $ 824,336  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
4

 
 
Number
of shares
of
preferred
stock
 
 
Preferred
stock
 
 
Number
of
shares of
common
stock
 
 
Common
stock
 
 
Additional
paid-in

capital
 
 
Accumulated
deficit
 
 
Accumulated
other
comprehensive
loss
 
 
Total
stockholders’
equity
 
 
Non-controlling

interests in
properties
 
 
Total
equity
 
Balance—December 31, 2020
    4,480     $ 112,000       43,397     $ 433     $ 479,411     $ (172,958   $ (1,960   $ 416,926     $ 949     $ 417,875  
Restricted stock award grants and vesting
    —         —         —         —         695       (50     —         645       —         645  
Common stock dividend distribution declared
    —         —         —         —         —         (6,510     —         (6,510     —         (6,510
Preferred stock dividend distribution declared
    —         —         —         —         —         (1,855     —         (1,855     —         (1,855
Distributions
    —         —         —         —         —         —         —         —         (220     (220
Net income
    —         —         —         —         —         48,817       —         48,817       192       49,009  
Other comprehensive income
    —         —         —         —         —         —         669       669       —         669  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance—March 31, 2021
    4,480     $ 112,000       43,397     $ 433     $ 480,106     $ (132,556   $ (1,291   $ 458,692     $ 921     $ 459,613  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Restricted stock award grants and vesting
    —         —         157       2       523       (76     —         449       —         449  
Common stock dividend distribution declared
    —         —         —         —         —         (6,533     —         (6,533     —         (6,533
Preferred stock dividend distribution declared
    —         —         —         —         —         (1,855     —         (1,855     —         (1,855
Contributions
    —         —         —         —         —         —         —         —         2       2  
Distributions
    —         —         —         —         —         —         —         —         (204     (204
Net income
    —         —         —         —         —         1,662       —         1,662       190       1,852  
Other comprehensive income
    —         —         —         —         —         —         100       100       —         100  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance—June 30, 2021
    4,480     $ 112,000       43,554     $ 435     $ 480,629     $ (139,358   $ (1,191   $ 452,515     $ 909     $ 453,424  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Restricted stock award grants and vesting
    —         —         —         —         716       (50     —         666       —         666  
Common stock dividend distribution declared
    —         —         —         —         —         (6,533     —         (6,533     —         (6,533
Preferred stock dividend distribution declared
    —         —         —         —         —         (1,855     —         (1,855     —         (1,855
Contributions
    —         —         —         —         —         —         —         —         10       10  
Distributions
    —         —         —         —         —         —         —         —         (536     (536
Net income
    —         —         —         —         —         866       —         866       378       1,244  
Other comprehensive income
    —         —         —         —         —         —         128       128       —         128  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance—September 30, 2021
    4,480     $ 112,000       43,554     $ 435     $ 481,345     $ (146,930   $ (1,063   $ 445,787     $ 761     $ 446,548  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
5


City Office REIT, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
 
  
Nine Months Ended

September 30,
 
 
  
2022
 
 
2021
 
Cash Flows from Operating Activities:
  
 
Net income
   $ 29,918     $ 52,105  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
     47,072       44,017  
Amortization of deferred financing costs and debt fair value
     917       869  
Amortization of above and below market leases
     70       281  
Straight-line rent/expense
     (6,697     428  
Non-cash
stock compensation
     2,887       1,976  
Receipts from sales-type lease
     43,549           
Net gain on sale of real estate property
     (21,658     (47,400
Changes in
non-cash
working capital:
                
Rents receivable, net
     (3,895     635  
Other assets
     (158     (560
Accounts payable and accrued liabilities
     6,977       8,558  
Deferred rent
     (2,679     3,468  
Tenant rent deposits
     849       1,354  
    
 
 
   
 
 
 
Net Cash Provided By Operating Activities
     97,152       65,731  
    
 
 
   
 
 
 
Cash Flows (to)/from Investing Activities:
                
Additions to real estate properties
     (28,533     (12,431
Acquisition of real estate
              (43,256
Net proceeds from sale of real estate
              122,103  
Deferred leasing costs
     (7,698     (6,830
    
 
 
   
 
 
 
Net Cash (Used In)/Provided By Investing Activities
     (36,231     59,586  
    
 
 
   
 
 
 
Cash Flows to Financing Activities:
                
Proceeds from borrowings
     82,000       106,000  
Repayment of borrowings
     (60,472     (180,806
Dividend distributions paid to stockholders
     (31,567     (25,117
Repurchases of common stock
     (50,082         
Distributions to
non-controlling
interests in properties
     (1,328     (960
Shares withheld for payment of taxes on restricted stock unit vesting
     (87     (216
Contributions from
non-controlling
interests in properties
     30       12  
    
 
 
   
 
 
 
Net Cash Used In Financing Activities
     (61,506     (101,087
    
 
 
   
 
 
 
Net (Decrease)/ Increase in Cash, Cash Equivalents and Restricted Cash
     (585     24,230  
Cash, Cash Equivalents and Restricted Cash, Beginning of Period
     42,266       45,951  
    
 
 
   
 
 
 
Cash, Cash Equivalents and Restricted Cash, End of Period
   $ 41,681     $ 70,181  
    
 
 
   
 
 
 
Reconciliation of Cash, Cash Equivalents and Restricted Cash:
                
Cash and Cash Equivalents, End of Period
     22,012       17,697  
Restricted Cash, End of Period
     19,669       52,484  
    
 
 
   
 
 
 
Cash, Cash Equivalents and Restricted Cash, End of Period
   $ 41,681     $ 70,181  
    
 
 
   
 
 
 
Supplemental Disclosures of Cash Flow Information:
                
Cash paid for interest
   $ 16,660     $ 17,568  
Purchase of additions in real estate properties included in accounts payable
   $ 10,568     $ 4,804  
Purchase of deferred leasing costs included in accounts payable
   $ 1,904     $ 1,351  
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
6


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 (“SEC”) 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, 2021.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (the “FASB”) established Topic 848, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, by issuing Accounting Standards Update (“ASU”)
No. 2020-04
(“ASU
2020-04”).
ASU
2020-04
provides companies with optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. For contracts affected by reference rate reform, if certain criteria are met, companies can elect to not remeasure contracts at the modification date or reassess a previous accounting conclusion. Companies can also elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met. Further, in January 2021, the FASB issued ASU
No. 2021-01,
Reference Rate Reform (Topic 848) (“ASU
2021-01”).
ASU
2021-01
clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848.
ASU
2020-04
and ASU
2021-01
can be applied as of the beginning of the interim period that includes March 12, 2020, however, the guidance will only be available for optional use through December 31, 2022. In October 2022, the FASB issued a tentative decision which would amend the date the guidance will be available to December 31, 2024. The new standard applies prospectively to contract modifications and hedging relationships and may be elected over time as reference rate reform activities occur. The Company has not yet adopted the standard and continues to evaluate the impact of ASU
2020-04
and ASU
2021-01
on its consolidated financial statements and may elect optional expedients in future periods as reference rate reform activities occur.
 
 
7

In July 2021, the FASB issued ASU
No. 2021-05
(“ASU
2021-05”),
Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. ASU
2021-05
requires lessors to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease if the lease would have been classified as a sales-type lease or a direct financing lease under the
pre-ASU
classification criteria, and sales-type or direct financing classification would result in a Day 1 loss. The ASU is effective for fiscal years beginning after December 15, 2021. The ASU may be early adopted and can be applied either retrospectively to leases that commenced or were modified on or after the adoption of ASU
No. 2016-02
or prospectively to leases that commence or are modified on or after the date that an entity first applies the amendments. The Company adopted ASU
2021-05
prospectively on January 1, 2022. The adoption of ASU
2021-05
did not have a material impact on the Company’s consolidated financial statements.
3. Real Estate Investments
Acquisitions
During the nine months ended September 30, 2022 and 2021 the Company acquired the following properties:
 
Property
  
Date Acquired
    
Percentage Owned
 
5910 Pacific Center and 9985 Pacific Heights
     May 2021        100
The foregoing acquisition was accounted for as an asset acquisition.
The following table summarizes the Company’s allocation of the purchase price of assets acquired and liabilities assumed during the nine months ended September 30, 2021 (in thousands):
 

 
  
5910 Pacific
Center and 9985
Pacific Heights
 
Land
   $ 37,294  
Building and improvement
     2,979  
Tenant improvement
     917  
Lease intangible assets
     2,469  
Other assets
     19  
Accounts payable and other liabilities
     (319
Lease intangible liabilities
     (103
    
 
 
 
Net assets acquired
   $ 43,256  
    
 
 
 
Sale of Real Estate Property
During the first quarter of 2022, the sole tenant at the Lake Vista Pointe property exercised its lease option to purchase the building and the Company signed a purchase and sale agreement with the tenant. At the time the tenant exercised the option, the Company reassessed the lease classification of the lease, in accordance with ASC 842 – Leases, and determined that the lease should be reclassified from an operating lease to a sales-type lease. This reclassification resulted in a gain on sale of $21.7 million net of disposal related costs. On June 15, 2022, the Company sold the Lake Vista Pointe property in Dallas, Texas for a gross sales price of $43.8 million.
On
 
February 10, 2021, the Company sold the Cherry Creek property in Denver, Colorado for a gross sales price of $
95.0
 million, resulting in an aggregate gain of $
47.4
 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.
 
8

4. Lease Intangibles
Lease intangibles and the value of assumed lease obligations as of September 30, 2022 and December 31, 2021 were comprised of the following (in thousands):
 

 
  
Lease Intangible Assets
 
 
Lease Intangible Liabilities
 
September 30, 2022
  
Above

Market
Leases
 
 
In Place

Leases
 
 
Leasing
Commissions
 
 
Total
 
 
Below
Market
Leases
 
 
Below
Market
Ground
Lease
 
 
Total
 
Cost
   $ 19,478     $ 80,788     $ 35,710     $ 135,976     $ (16,531   $ (138   $ (16,669
Accumulated amortization
     (9,298     (50,044     (18,054     (77,396     7,016       51       7,067  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
     $ 10,180     $ 30,744     $ 17,656     $ 58,580     $ (9,515   $ (87   $ (9,602
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
  
Lease Intangible Assets
 
 
Lease Intangible Liabilities
 
December 31, 2021
  
Above

Market
Leases
 
 
In Place

Leases
 
 
Leasing
Commissions
 
 
Total
 
 
Below
Market
Leases
 
 
Below
Market
Ground
Lease
 
 
Total
 
Cost
   $ 21,147     $ 93,761     $ 39,345     $ 154,253     $ (16,743   $ (138   $ (16,881
Accumulated amortization
     (9,627     (56,987     (18,714     (85,328     5,961       48       6,009  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
     $ 11,520     $ 36,774     $ 20,631     $ 68,925     $ (10,782   $ (90   $ (10,872
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The estimated aggregate amortization expense for lease intangibles for the next five years and in the aggregate are as follows (in thousands):
 
2022
   $ 2,542  
2023
     9,027  
2024
     6,695  
2025
     6,507  
2026
     6,461  
Thereafter
     17,746  
    
 
 
 
     $ 48,978  
    
 
 
 
5. Debt
The following table summarizes the indebtedness as of September 30, 2022 and December 31, 2021 (dollars in thousands):
 
Property
  
September 30,

2022
 
  
December 31,
2021
 
  
Interest Rate as
of September 30,

2022
(1)
 
 
Maturity
 
Unsecured Credit Facility
 (3)(4)
  $ 185,000     $ 142,000       LIBOR +1.30 %
(2)
 
 
 
November 2025
 
Term Loan
 (3)
    50,000       50,000       LIBOR +1.25 %
(2)
 
 
 
September 2024
 
Mission City
    47,000       47,000       3.78  
 
November 2027
 
Canyon Park
(5)
    39,853       40,381       4.30  
 
March 2027
 
Circle Point
    39,598       39,650       4.49  
 
September 2028
 
190 Office Center
    39,071       39,581       4.79  
 
October 2025
 
SanTan
    32,309       32,807       4.56  
 
March 2027
 
Intellicenter
    31,447       31,883       4.65  
 
October 2025
 
The Quad
    30,600       30,600       4.20  
 
September 2028
 
FRP Collection
    26,974       27,535       3.10  
 
September 2023
 
 
9

     
                            
     
                            
     
                            
   
                            
Property
 
September 30,

2022
 
 
December 31,

2021
 
 
Interest Rate as

of September 30,

2022
(1)
 
 
Maturity
2525 McKinnon
 
 
27,000
 
 
 
27,000
 
 
 
4.24
 
April 2027
Greenwood Blvd
    21,529       21,920       3.15   December 2025
Cascade Station
    21,291       21,581       4.55   May 2024
5090 N. 40
th
St
    20,917       21,233       3.92   January 2027
AmberGlen
    20,000       20,000       3.69   May 2027
Central Fairwinds
    16,383       16,707       3.15   June 2024
FRP Ingenuity Drive
 
(6)
    16,240       16,457       4.44   December 2024
Carillon Point
    14,877       15,185       3.10   October 2023
Lake Vista Pointe
(
7
)
             17,018       —       —  
   
 
 
   
 
 
             
Total Principal
    680,089       658,538              
Deferred financing costs, net
    (4,198     (5,223            
Unamortized fair value adjustments
    225       333              
   
 
 
   
 
 
             
Total
  $ 676,116     $ 653,648              
   
 
 
   
 
 
             
 
(1)
All interest rates are fixed interest rates with the exception of the Unsecured Credit Facility (the “Unsecured Credit Facility”) and the Term Loan (as defined herein), as explained in footnotes 3 and 4 below.
(2)
As of September 30, 2022, the
one-month
LIBOR rate was 3.14%.
(3)
In September 2019, the Company entered into a five-year $50 million Term Loan (the “Term Loan”) increasing its authorized borrowings under the Unsecured Credit Facility from $250 million to $300 million. Borrowings under the Term Loan bear interest at a rate equal to the LIBOR rate plus a margin between 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the Company also entered into a five-year interest rate swap for a notional amount of $50 million (the “Interest Rate Swap”). Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate
30-day
LIBOR payments.
(4)
In March 2018, the Company entered into the Credit Agreement for the Unsecured Credit Facility that provides for commitments of up to $250 million, which included an accordion feature that allowed the Company to borrow up to $500 million, subject to customary terms and conditions. On November 16, 2021, the Company entered into an Amended and Restated Credit Agreement for the Unsecured Credit Facility that provides for commitments of up to $300 million. Combined with the Company’s existing five-year Term Loan, the total authorized borrowings increased from $300 million to $350 million. The Unsecured Credit Facility matures in November 2025 and may be extended 12 months at the Company’s option upon meeting certain conditions. Borrowings under the Unsecured Credit Facility bear interest at a rate equal to the LIBOR rate plus a margin of between 125 to 225 basis points depending upon the Company’s consolidated leverage ratio. As of September 30, 2022, the Unsecured Credit Facility had $185.0 million drawn and a $4.2 million letter of credit to satisfy escrow requirements for a mortgage lender. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.
(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, the 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.
(6)
As of September 30, 2022, the Debt Service Coverage Ratio (“DSCR”) covenant for FRP Ingenuity Drive was not met, which triggered a ‘cash-sweep’ event that will begin in Q4 2022 where excess funds will be held in escrow to fund future tenant improvement expenses of current vacant space.
(7)
In June 2022, the loan balance of $16.8 million was repaid in full.
The scheduled principal repayments of debt as of September 30, 2022 are as follows (in thousands):
 
2022
   $ 1,623  
2023
     48,150  
2024
     108,480  
2025
     276,997  
2026
     4,536  
Thereafter
     240,303  
    
 
 
 
     $ 680,089  
    
 
 
 
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

10

Level 3 Inputs – unobservable inputs
In September 2019, the Company entered into the Interest Rate Swap for a notional amount of $
50
 million. Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately
1.27
% of the notional amount annually, payable monthly, and receive floating rate
30-day
LIBOR payments. Accordingly, the fair value of the Interest Rate Swap has been classified as a Level 2 fair value measurement.
The Interest Rate Swap has been designated and qualifies as a cash flow hedge and has been recognized on the condensed consolidated balance sheets at fair value. Gains and losses resulting from changes in the fair value of derivatives that have been designated and qualify as cash flow hedges are reported as a component of other comprehensive income/(loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.
As of September 30, 2022, the Interest Rate Swap was reported as an asset at its fair value of approximately $2.8 million, which is included in other assets on the Company’s condensed consolidated balance sheet. For the nine months ended September 30, 2022, approximately $0.1 million of realized losses were reclassified to interest expense due to payments made to
or received from 
the swap counterparty. For the nine months ended September 30, 2021, approximately $0.4 million of realized losses were reclassified to interest expense due to payments made to the swap counterparty.
As of December 31, 2021, the Interest Rate Swap was reported as a liability at its fair value of approximately $0.4 million, which is included in other liabilities on the Company’s condensed consolidated balance sheet.
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 $420.4 million and $478.1 million (compared to a carrying value of $445.1 million and $466.5 million) as of September 30, 2022, and December 31, 2021, 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 nine months ended September 30, 2022 and 2021, the Company earned $0.4 million and $0.5 million, respectively, in administrative services performed for Second City Real Estate II Corporation (“Second City”), Clarity Real Estate Ventures GP, Limited Partnership (“Clarity”) and their affiliates.
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.
 
1
1

The Company recognized fixed and variable lease payments for operating leases for the three and nine months ended September 30, 2022 and the three and nine months ended September 30, 2021 as follows (in thousands):
 
 
  
Three Months Ended

September 30,
 
  
Nine Months Ended

September 30,
 
 
  
2022
 
  
2021
 
  
2022
 
  
2021
 
Fixed payments
   $ 39,117      $ 38,963      $ 115,746      $ 106,825  
Variable payments
     6,067        5,868        18,687        17,404  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 45,184      $ 44,831      $ 134,433      $ 124,229  
    
 
 
    
 
 
    
 
 
    
 
 
 
The Company recognized interest income of $0.6 million and variable lease payments of $0.2 million for the sales-type lease at the Lake Vista Pointe property for
 
the
 nine months ended September 30, 2022.
Future minimum lease payments to be received by the Company as of September 30, 2022 under
non-cancellable
operating leases for the next five years and thereafter are as follows (in thousands):