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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, 2024
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
   
to
   
Commission File Number:
001-36409
 
 
 
CITY OFFICE REIT, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Maryland
  
98-1141883
(State or other jurisdiction
of incorporation or organization)
  
(I.R.S. Employer
Identification No.)
666 Burrard Street
Suite 3210
Vancouver,
BC

V6C 2X8
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (604)
806-3366
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
  
Trading Symbol(s)
  
Name of each Exchange on Which Registered
Common Stock, $0.01 par value
  
“CIO”
  
New York Stock Exchange
6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share
  
“CIO.PrA”
  
New York Stock Exchange
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
 ☒ ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 ☒ 
Yes
 No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer   ☐    Accelerated filer  
☒
Non-accelerated
filer		   ☐    Smaller reporting company   ☐
     Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange
Act). Yes
 ☐ 
☒
 No
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at October 28, 2024 was 40,154,055.
 
 
 
City Office REIT, Inc.
Quarterly Report on Form
10-Q
For the Quarter Ended September 30, 2024
Table of Contents
 
PART I. FINANCIAL INFORMATION     1  
  Item 1.       1  
        1  
        2  
        3  
        4  
        6  
        7  
  Item 2.       17  
  Item 3.       27  
  Item 4.       27  
PART II. OTHER INFORMATION     28  
  Item 1.   Legal Proceedings     28  
  Item 1A.       28  
  Item 2.       28  
  Item 3.       28  
  Item 4.       28  
  Item 5.       28  
  Item 6.       29  
  Signatures     30  
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,

2024
    
December 31,
2023
  
Assets
     
Real estate properties
     
Land
    $ 193,524     $ 193,524  
Building and improvement
      1,185,756       1,194,819  
Tenant improvement
      163,013       152,540  
Furniture, fixtures and equipment
      1,377       820  
  
 
 
    
 
 
  
     1,543,670       1,541,703  
Accumulated depreciation
      (248,420 )      (218,628 ) 
  
 
 
    
 
 
  
     1,295,250       1,323,075  
  
 
 
    
 
 
  
Cash and cash equivalents
      25,911       30,082  
Restricted cash
      17,118       13,310  
Rents receivable, net
      52,908       53,454  
Deferred leasing costs, net
      23,997       21,046  
Acquired lease intangible assets, net
      36,520       42,434  
Other assets
      23,580       27,975  
  
 
 
    
 
 
  
Total Assets
    $ 1,475,284     $ 1,511,376  
  
 
 
    
 
 
  
Liabilities and Equity
     
Liabilities:
     
Debt
    $ 648,173     $ 669,510  
Accounts payable and accrued liabilities
      39,597       29,070  
Deferred rent
      7,091       7,672  
Tenant rent deposits
      7,319       7,198  
Acquired lease intangible liabilities, net
      6,629       7,736  
Other liabilities
      18,906       17,557  
  
 
 
    
 
 
  
Total Liabilities
      727,715       738,743  
  
 
 
    
 
 
  
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, 2024 and December 31, 2023
      112,000       112,000  
Common stock, $0.01 par value, 100,000,000 shares authorized, 40,154,055 and 39,938,451 shares issued and outstanding as of September 30, 2024 and December 31, 2023
      401       399  
Additional
paid-in
capital
      441,188       438,867  
Retained earnings
      196,466       221,213  
Accumulated other comprehensive loss
      (2,997 )      (248 ) 
  
 
 
    
 
 
  
Total Stockholders’ Equity
      747,058       772,231  
Non-controlling
interests in properties
      511       402  
  
 
 
    
 
 
  
Total Equity
      747,569       772,633  
  
 
 
    
 
 
  
Total Liabilities and Equity
    $ 1,475,284     $ 1,511,376  
  
 
 
    
 
 
  
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,
  
    
2024
    
2023
    
2024
    
2023
  
Rental and other revenues
    $ 42,371     $ 44,214     $ 129,207     $ 134,775  
Operating expenses:
         
Property operating expenses
      17,783       17,644       53,020       52,610  
General and administrative
      3,790       3,531       11,321       10,963  
Depreciation and amortization
      14,642       14,723       44,440       45,795  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total operating expenses
      36,215       35,898       108,781       109,368  
  
 
 
    
 
 
    
 
 
    
 
 
  
Operating income
      6,156       8,316       20,426       25,407  
Interest expense:
         
Contractual interest expense
      (8,274 )      (7,853 )      (24,502 )      (23,807 ) 
Amortization of deferred financing costs and debt fair value
      (369 )      (333 )      (1,030 )      (979 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
     (8,643 )      (8,186 )      (25,532 )      (24,786 ) 
Net loss on disposition of real estate property
      —        —        (1,462 )      (134 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Net (loss)/income
      (2,487 )     130       (6,568 )     487  
Less:
         
Net income attributable to
non-controlling
interests in properties
      (152 )      (173 )      (412 )      (506 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Net loss attributable to the Company
      (2,639 )     (43 )      (6,980 )     (19 ) 
Preferred stock distributions
      (1,855 )      (1,855 )      (5,565 )      (5,565 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Net loss attributable to common stockholders
    $ (4,494 )   $ (1,898 )    $ (12,545 )   $ (5,584 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Net loss per common share:
         
Basic
    $ (0.11 )    $ (0.05 )    $ (0.31 )    $ (0.14 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Diluted
    $ (0.11 )    $ (0.05 )    $ (0.31 )    $ (0.14 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Weighted average common shares outstanding:
         
Basic
      40,154       39,938       40,135       39,917  
  
 
 
    
 
 
    
 
 
    
 
 
  
Diluted
      40,154       39,938       40,135       39,917  
  
 
 
    
 
 
    
 
 
    
 
 
  
Dividend distributions declared per common share
    $ 0.10     $ 0.10     $ 0.30     $ 0.40  
  
 
 
    
 
 
    
 
 
    
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
2

City Office REIT, Inc.
Condensed Consolidated Statements of Comprehensive (Loss)/Income
(Unaudited)
(In thousands)
 
 
  
Three Months Ended

September 30,
 
 
Nine Months Ended

September 30,
 
 
  
2024
 
 
2023
 
 
2024
 
 
2023
 
Net (loss)/income
    $ (2,487 )   $ 130     $ (6,568 )   $ 487  
Other comprehensive (loss)/income:
         
Unrealized cash flow hedge (loss)/gain
      (3,087 )      1,447       470       3,732  
Amounts reclassified to interest expense
      (1,000 )      (1,019 )      (3,249 )      (2,309 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Other comprehensive (loss)/income
      (4,087 )      428       (2,779 )      1,423  
  
 
 
    
 
 
    
 
 
    
 
 
  
Comprehensive (loss)/income
      (6,574 )     558       (9,347 )     1,910  
Less:
         
Comprehensive income attributable to
non-controlling
interests in properties
      (99 )      (174 )      (382 )      (507 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Comprehensive (loss)/income attributable to the Company
    $ (6,673 )   $ 384     $ (9,729 )   $ 1,403  
  
 
 
    
 
 
    
 
 
    
 
 
  
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, 2023
     4,480     $ 112,000       39,938     $ 399     $ 438,867     $ 221,213     $ (248 )    $ 772,231     $ 402     $ 772,633  
Restricted stock award grants and vesting
     —        —        216       2       42       (45 )      —        (1 )      —        (1 ) 
Common stock dividend distribution declared
     —        —        —        —        —        (4,015 )      —        (4,015 )      —        (4,015 ) 
Preferred stock dividend distribution declared
     —        —        —        —        —        (1,855 )      —        (1,855 )      —        (1,855 ) 
Distributions
     —        —        —        —        —        —        —        —        (444 )      (444 ) 
Net (loss)/income
     —        —        —        —        —        (589 )      —        (589 )      135       (454 ) 
Other comprehensive income
     —        —        —        —        —        —        1,763       1,763       26       1,789  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance—March 31, 2024
     4,480     $ 112,000       40,154     $ 401     $ 438,909     $ 214,709     $ 1,515     $ 767,534     $ 119     $ 767,653  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Restricted stock award grants and vesting
     —        —        —        —        1,139       (56 )      —        1,083       —        1,083  
Common stock dividend distribution declared
     —        —        —        —        —        (4,015 )      —        (4,015 )      —        (4,015 ) 
Preferred stock dividend distribution declared
     —        —        —        —        —        (1,855 )      —        (1,855 )      —        (1,855 ) 
Contributions
     —        —        —        —        —        —        —        —        442       442  
Distributions
     —        —        —        —        —        —        —        —        (104 )      (104 ) 
Net (loss)/income
     —        —        —        —        —        (3,752 )      —        (3,752 )      125       (3,627 ) 
Other comprehensive loss
     —        —        —        —        —        —        (478 )      (478 )      (3 )      (481 ) 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance—June 30, 2024
     4,480     $ 112,000       40,154     $ 401     $ 440,048     $ 205,031     $ 1,037     $ 758,517     $ 579     $ 759,096  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Restricted stock award grants and vesting
     —        —        —        —        1,140       (56 )      —        1,084       —        1,084  
Common stock dividend distribution declared
     —        —        —        —        —        (4,015 )      —        (4,015 )      —        (4,015 ) 
Preferred stock dividend distribution declared
     —        —        —        —        —        (1,855 )      —        (1,855 )      —        (1,855 ) 
Contributions
     —        —        —        —        —        —        —        —        80       80  
Distributions
     —        —        —        —        —        —        —        —        (247 )      (247 ) 
Net (loss)/income
     —        —        —        —        —        (2,639 )     —        (2,639 )     152       (2,487 )
Other comprehensive loss
     —        —        —        —        —        —        (4,034 )      (4,034 )      (53 )      (4,087 ) 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance—September 30, 2024
     4,480     $ 112,000       40,154     $ 401     $ 441,188     $ 196,466     $ (2,997 )   $ 747,058     $ 511     $ 747,569  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
4
 
 
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
income/(loss)
 
 
Total

stockholders’

equity
 
 
Non-

controlling

interests in

properties
 
 
Total

equity
 
Balance—December 31, 2022
     4,480     $ 112,000       39,718     $ 397     $ 436,161     $ 251,542     $ 2,731     $ 802,831     $ 343     $ 803,174  
Restricted stock award grants and vesting
     —        —        220       2       (535 )      (85 )      —        (618 )      —        (618 ) 
Common stock dividend distribution declared
     —        —        —        —        —        (7,988 )      —        (7,988 )      —        (7,988 ) 
Preferred stock dividend distribution declared
     —        —        —        —        —        (1,855 )      —        (1,855 )      —        (1,855 ) 
Contributions
     —        —        —        —        —        —        —        —        110       110  
Distributions
     —        —        —        —        —        —        —        —        (235 )      (235 ) 
Net income
     —        —        —        —        —        704       —        704       169       873  
Other comprehensive loss
     —        —        —        —        —        —        (1,942 )      (1,942 )      —        (1,942 ) 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance—March 31, 2023
     4,480     $ 112,000       39,938     $ 399     $ 435,626     $ 242,318     $ 789     $ 791,132     $ 387     $ 791,519  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Restricted stock award grants and vesting
     —        —        —        —        1,107       (84 )      —        1,023       —        1,023  
Common stock dividend distribution declared
     —        —        —        —        —        (3,994 )      —        (3,994 )      —        (3,994 ) 
Preferred stock dividend distribution declared
     —        —        —        —        —        (1,855 )      —        (1,855 )      —        (1,855 ) 
Distributions
     —        —        —        —        —        —        —        —        (226 )      (226 ) 
Net (loss)/income
     —        —        —        —        —        (680 )      —        (680 )      164       (516 ) 
Other comprehensive income
     —        —        —        —        —        —        2,937       2,937       —        2,937  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance—June 30, 2023
     4,480     $ 112,000       39,938     $ 399     $ 436,733     $ 235,705     $ 3,726     $ 788,563     $ 325     $ 788,888  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Restricted stock award grants and vesting
     —        —        —        —        1,067       (43 )      —        1,024       —        1,024  
Common stock dividend distribution declared
     —        —        —        —        —        (3,994 )      —        (3,994 )      —        (3,994 ) 
Preferred stock dividend distribution declared
     —        —        —        —        —        (1,855 )      —        (1,855 )      —        (1,855 ) 
Distributions
     —        —        —        —        —        —        —        —        (167 )      (167 ) 
Net (loss)/income
     —        —        —        —        —        (43 )      —        (43 )      173       130  
Other comprehensive income
     —        —        —        —        —        —        427       427       1       428  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance—September 30, 2023
     4,480     $ 112,000       39,938     $ 399     $ 437,800     $ 229,770     $ 4,153     $ 784,122     $ 332     $ 784,454  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
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,
  
    
2024
    
2023
  
Cash Flows from Operating Activities:
     
Net (loss)/income
    $ (6,568 )   $ 487  
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
     
Depreciation and amortization
      44,440       45,795  
Amortization of deferred financing costs and debt fair value
      1,030       979  
Amortization of above and below market leases
      (97 )      68  
Straight-line rent/expense
      (40 )      (6,402 ) 
Non-cash
stock compensation
      3,238       3,071  
Net loss on disposition of real estate property
      1,462       134  
Changes in
non-cash
working capital:
     
Rents receivable, net
      471       172  
Other assets
      178       (744 ) 
Accounts payable and accrued liabilities
      5,966       5,705  
Deferred rent
      (449 )      (1,304 ) 
Tenant rent deposits
      349       208  
  
 
 
    
 
 
  
Net Cash Provided By Operating Activities
      49,980       48,169  
  
 
 
    
 
 
  
Cash Flows to Investing Activities:
     
Additions to real estate properties
      (21,300 )      (23,338 ) 
Reduction of cash on disposition of real estate property
      (2,477 )      (4,051 ) 
Deferred leasing costs
      (5,980 )      (3,474 ) 
  
 
 
    
 
 
  
Net Cash Used In Investing Activities
      (29,757 )      (30,863 ) 
  
 
 
    
 
 
  
Cash Flows to Financing Activities:
     
Debt issuance and extinguishment costs
      (576 )      (737 ) 
Proceeds from borrowings
      59,000       35,000  
Repayment of borrowings
      (60,075 )     (15,889 ) 
Dividend distributions paid to stockholders
      (17,590 )      (25,490 ) 
Distributions to
non-controlling
interests in properties
      (795 )      (628 ) 
Shares withheld for payment of taxes on restricted stock unit vesting
      (1,072 )      (1,643 ) 
Contributions from
non-controlling
interests in properties
      522       110  
  
 
 
    
 
 
  
Net Cash Used In Financing Activities
      (20,586 )      (9,277 ) 
  
 
 
    
 
 
  
Net (Decrease)/Increase in Cash, Cash Equivalents and Restricted Cash
      (363 )      8,029  
Cash, Cash Equivalents and Restricted Cash, Beginning of Period
      43,392       44,262  
  
 
 
    
 
 
  
Cash, Cash Equivalents and Restricted Cash, End of Period
    $ 43,029     $ 52,291  
  
 
 
    
 
 
  
Reconciliation of Cash, Cash Equivalents and Restricted Cash:
     
Cash and Cash Equivalents, End of Period
      25,911       36,738  
Restricted Cash, End of Period
      17,118       15,553  
  
 
 
    
 
 
  
Cash, Cash Equivalents and Restricted Cash, End of Period
    $ 43,029     $ 52,291  
  
 
 
    
 
 
  
Supplemental Disclosures of Cash Flow Information:
     
Cash paid for interest
    $ 25,642     $ 22,586  
Purchase of additions in real estate properties included in accounts payable
    $ 11,237     $ 10,707  
Purchase of deferred leasing costs included in accounts payable
    $ 1,998     $ 919  
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 years prior to 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, 2023.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2023-07
(“ASU
2023-07”)
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which will enhance segment disclosures. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods beginning after December 15, 2024, with early adoption permitted. This standard must be applied retrospectively to all periods presented in the financial statements. The Company has evaluated the impact of ASU
2023-07
and anticipates adoption will result in incremental disclosure in the notes to the consolidated financial statements for the year ended December 31, 2024.
 
7

3. Real Estate Investments
Disposition of Real Estate Property
Cascade Station
On
June 27, 2024, the Company entered into an assignment in lieu of foreclosure agreement to transfer possession and control of the Cascade Station property to the lender as a result of an event of default as defined in the property’s
non-
recourse
loan agreement. Given the terms of the assignment in lieu of foreclosure agreement, the Company assessed whether the entity holding the property should be reassessed for consolidation as a Variable Interest Entity (“VIE”) in accordance with ASC 810 – Consolidation.
Based on its analysis, the Company concluded that it is not the primary beneficiary of the VIE and therefore deconsolidated the property as of June 27, 2024. The Company deconsolidated the net carrying value of real estate assets of $17.9 million, the mortgage loan of $20.6 million, cash and restricted cash of $2.5 million and net current assets of $1.7 million. For the nine months ended September 30, 2024, the Company recognized a loss on deconsolidation of $1.5 million, which has been included within net loss on disposition of real estate property on the Company’s condensed consolidated statement of operations and statement of cash flows.
190 Office Center
On May 15, 2023, the Company consented to the appointment of a receiver to assume possession and control of the 190 Office Center property as a result of an event of default as defined in the property’s
non-recourse
loan agreement. Given the appointment of the receiver, the Company assessed whether the entity holding the property should be reassessed for consolidation as a VIE in accordance with ASC 810 – Consolidation.
Based on its analysis, the Company concluded that it is not the primary beneficiary of the VIE and therefore deconsolidated the property as of May 15, 2023. The Company deconsolidated the net carrying value of real estate assets of $35.7 million, the mortgage loan of $38.6 million, cash and restricted cash of $4.0 million and net current liabilities of $1.0 million. For the nine months ended September 30, 2023, the Company recognized a loss on deconsolidation of $0.1 million, which has been included within net loss on disposition of real estate property on the Company’s condensed consolidated statement of operations and statement of cash flows.
4. Lease Intangibles
Lease intangibles and the value of assumed lease obligations as of September 30, 2024 and December 31, 2023 were comprised of the following (in thousands):
 
 
  
Lease Intangible Assets
 
 
Lease Intangible Liabilities
 
September 30, 2024
  
Above

Market

Leases
 
 
In Place

Leases
 
 
Leasing

Commissions
 
 
Total
 
 
Below

Market

Leases
 
 
Below Market

Ground Lease
 
 
Total
 
Cost
    $ 16,647     $ 72,184     $ 31,481     $ 120,312     $ (14,510 )    $ (138 )    $ (14,648 ) 
Accumulated amortization
      (10,333 )      (53,340 )      (20,119 )      (83,792 )      7,960       59       8,019  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
   $ 6,314     $ 18,844     $ 11,362     $ 36,520     $ (6,550 )    $ (79 )    $ (6,629 ) 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
 
  
Lease Intangible Assets
 
 
Lease Intangible Liabilities
 
December 31, 2023
  
Above

Market

Leases
 
 
In Place

Leases
 
 
Leasing

Commissions
 
 
Total
 
 
Below

Market

Leases
 
 
Below Market

Ground Lease
 
 
Total
 
Cost
    $ 17,463     $ 73,128     $ 32,541     $ 123,132     $ (14,968 )    $ (138 )    $ (15,106 ) 
Accumulated amortization
      (10,222 )      (51,290 )      (19,186 )      (80,698 )      7,314       56       7,370  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
   $ 7,241     $ 21,838     $ 13,355     $ 42,434     $ (7,654 )    $ (82 )    $ (7,736 ) 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
8
The estimated aggregate amortization expense for lease intangibles for the next five years and in the aggregate are as follows (in thousands):
 
2024
    $ 1,561  
2025
      6,197  
2026
      5,889  
2027
      4,903  
2028
      4,209  
Thereafter
      7,132  
  
 
 
  
   $ 29,891  
  
 
 
  
5. Debt
The following table summarizes the indebtedness as of September 30, 2024 and December 31, 2023 (dollars in thousands), including the impact of the effective interest rate swaps described in Note 6:

Property
  
September 30,

2024
 
  
December 31,

2023
 
  
Interest Rate as

of September 30,

2024
(1)
 
 
Maturity
 
Unsecured Credit Facility
 (2)(3)
    $   255,000     $   200,000    
 
 SOFR +1.50%
(1)(2)
 
   
 
 November 2025
 
Term Loan
(3)
      25,000       25,000    
 
 6.00%
(3)
 
   
 
 January 2026
 
Mission City
      45,323       45,994    
 
 3.78%
 
   
 
 November 2027
 
Canyon Park
(4)
      38,356       38,932    
 
 4.30%
 
   
 
 March 2027
 
Circle Point
      38,339       38,789    
 
 4.49%
 
   
 
 September 2028
 
SanTan
(5)
      30,958       31,501    
 
 4.56%
 
   
 
 March 2027
 
The Quad
      30,600       30,600    
 
 4.20%
 
   
 
 September 2028
 
Intellicenter
      30,207       30,682    
 
 4.65%
 
   
 
 October 2025
 
2525 McKinnon
      27,000       27,000    
 
 4.24%
 
   
 
 April 2027
 
FRP Collection
      25,842       26,139    
 
 7.05%
(6)
 
   
 
 August 2028
 
Greenwood Blvd
      20,440       20,856    
 
 3.15%
 
   
 
 December 2025
 
5090 N. 40th St
      20,028       20,370    
 
 3.92%
 
   
 
 January 2027
 
AmberGlen
      20,000       20,000    
 
 3.69%
 
   
 
 May 2027
 
Central Fairwinds
      15,556       15,826    
 
 7.68%
(7)
 
   
 
 June 2029
 
Carillon Point
      14,254       14,419    
 
 7.05%
(6)
 
   
 
 August 2028
 
FRP Ingenuity Drive
(8)
      14,096       15,860    
 
 4.44%
 
   
 
 December 2026
 
Term Loan
 (9)
      —        50,000    
 
 — 
 
   
 
 — 
 
Cascade Station
(10)
      —        20,752    
 
 — 
 
   
 
 — 
 
  
 
 
    
 
 
    
 
 
   
 
 
Total Principal
      650,999       672,720    
 
 
   
 
 
Deferred financing costs, net
      (2,826 )      (3,258 )   
 
 
   
 
 
Unamortized fair value adjustments
      —        48    
 
 
   
 
 
  
 
 
    
 
 
    
 
 
   
 
 
Total
    $ 648,173     $ 669,510    
 
 
   
 
 
  
 
 
    
 
 
    
 
 
   
 
 

(1)
As of September 30, 2024, the daily-simple Secured Overnight Financing Rate (“SOFR”) was 4.96%.
(2)
Borrowings under our unsecured credit facility (the “Unsecured Credit Facility”) bear interest at a rate equal to the daily-simple SOFR rate plus a margin of between 135 to 235 basis points depending upon the Company’s consolidated leverage ratio. On February 9, 2023, the Company entered into a three-year interest rate swap for a notional amount of $140 million, effective March 8, 2023, effectively fixing the SOFR component of the borrowing rate for $140 million of the Unsecured Credit Facility at 4.19%. As of September 30, 2024, the Unsecured Credit Facility had $255.0 million drawn and a $2.5 million letter of credit to satisfy escrow requirements for a mortgage lender. The Unsecured Credit Facility matures in November 2025 and may be extended 12 months at the Company’s option upon meeting certain conditions. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.
(3)
On January 5, 2023, the Company entered into a second amendment to its amended and restated credit agreement, dated
November 16, 2021, for the Unsecured Credit Facility and entered into a three-year $25 million term loan, increasing its total authorized borrowings from $350 million to $375 million. Borrowings under the $25 million term loan bear interest at a rate equal to the daily-simple SOFR rate plus a margin of 210 basis points. In conjunction with the term loan, the Company also entered into a three-year interest rate swap for a notional amount of $25 million, effectively fixing the SOFR component of the borrowing rate of the term loan at 3.90%.
(4)
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.
(5)
In the second quarter of 2023, the Debt Service Coverage Ratio (“DSCR”) and debt yield covenants for SanTan were not met, which triggered a ‘cash-sweep period’ that began in the second quarter of 2023. As of September 30, 2024, the DSCR and debt yield covenants were still not met. As of September 30, 2024, and December 31, 2023, total restricted cash for the property was $2.6 million and $4.1 million, respectively.
(6)
The FRP Collection and Carillon Point loans bear interest at a rate equal to the daily-simple SOFR rate plus a margin of 275 basis points. The SOFR component of the borrowing rate is effectively fixed for the remainder of the five-year term via interest rate swaps at 4.30%.
 
9
(7)
On May 23, 2024, the Company entered into an amended and restated loan agreement for Central Fairwinds, extending the term for an additional five years and amending the interest rate from fixed to floating. The loan bears interest at a rate equal to the daily-simple SOFR rate plus a margin of
 325
basis points. The Company also entered into a five-year interest rate swap agreement, effectively fixing the SOFR component of the borrowing rate of the loan at
4.43%.
(8)
In the third quarter of 2022, the DSCR covenant for FRP Ingenuity Drive was not met, which triggered a ‘cash-sweep period’ that began in the fourth quarter of 2022. As of September 30, 2024, and December 31, 2023, total restricted cash for the property was $3.8 million and $3.2 million, respectively.
 
On June 27, 2024, the Company entered into a loan modification and extension agreement for FRP Ingenuity Drive, which among other things, included a principal repayment of $1.6 million and extended the term for an additional two years to December 2026 with a one-year extension option. Under the terms of the agreement the ‘cash-sweep period’ will continue through the maturity of the loan. 
(9)
On September 27, 2024, the $50 million term loan matured and was
repaid with proceeds
from
the Unsecured Credit Facility
.
(10)
On May 1, 2024, the non-recourse property loan at our Cascade Station property in Portland, Oregon matured, and an event of default was triggered under the terms of the Cascade Station loan, following non-payment of the principal amount outstanding at loan maturity. On June 27,
2024, the
non-recourse
debt associated with the Cascade Station property was deconsolidated as a result of the Company entering into an assignment in lieu of foreclosure agreement to transfer possession and control of the property to the lender. The loan balance as of the date of deconsolidation was $20.6 million.
The scheduled principal repayments of debt as of September 30, 2024 are as follows (in thousands):
 
2024
    $ 1,361  
2025
      309,929  
2026
      43,899  
2027
      176,734  
2028
      104,586  
Thereafter
      14,490  
  
 
 
  
   $ 650,999  
  
 
 
  
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
In September 2019, the Company entered into a London Interbank Offered Rate (“LIBOR”) interest rate swap for a notional amount of $50.0 million. In January 2023, the Company amended the $50.0 million interest rate swap to transition from LIBOR to daily-simple SOFR. The Company applied the practical expedients available for hedging relationships under the reference rate reform guidance, which preserves the presentation of the derivative consistent with past presentation and does not result in dedesignation of the hedging relationship. The interest rate swap effectively fixed the SOFR component of the corresponding loan at approximately 1.17% for the remainder of the five-year term. In September 2024, the $50.0 million interest rate swap matured.
In January 2023, the Company entered into an interest rate swap for a notional amount of $25.0 million. The interest rate swap effectively fixes the SOFR component of the corresponding loan at approximately 3.90% for the three-year term.
In February 2023, the Company entered into an interest rate swap for a notional amount of $140.0 million. The interest rate swap effectively fixes the SOFR component of the corresponding loan at approximately 4.19% for the three-year term.
In August 2023, the Company entered into an interest rate swap at FRP Collection for an initial notional amount of $26.3 million. The interest rate swap effectively fixes the SOFR component of the corresponding loan at approximately 4.30% for the five-year term. The notional amount of the interest rate swap amortizes over the term consistent with the balance of the corresponding
loan.
 
10
In
August 2023, the Company entered into an interest rate swap at Carillon Point for an initial notional amount of $14.5 million. The interest rate swap effectively fixes the SOFR component of the corresponding loan at approximately 4.30% for the five-year term. The notional amount of the interest rate swap amortizes over the term consistent with the balance of the corresponding loan.
In
May 2024, the Company entered into an interest rate swap at Central Fairwinds for an initial notional amount of $15.6 million. The interest rate swap effectively fixes the SOFR component of the corresponding loan at approximately 4.43% for the five-year term. The notional amount of the interest rate swap amortizes over the term consistent with the balance of the corresponding loan.
The fair value of the interest rate swaps have been classified as Level 2 fair value measurements.
The interest rate swaps have been designated and qualify as cash flow hedges and have been recognized on the condensed consolidated balance sheets at fair value, presented within other assets and other liabilities. 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.
The following table summarizes the Company’s derivative financial instruments as of September 30, 2024 and December 31, 2023 (in thousands):
 
 
  
Notional Value
 
  
 
 
  
 
 
  
Fair Value

Assets/(Liabilities)
 
 
  
September 30, 2024
 
  
Effective Date
 
  
Maturity Date
 
  
September 30, 2024
 
 
December 31, 2023
 
Interest Rate Swap
    $ 25,000        January 2023        January 2026     
$

 (75 )   
$

 49  
Interest Rate Swap
      140,000        March 2023        November 2025        (707 )      (295 ) 
Interest Rate Swap
      25,842        August 2023        August 2028        (965 )      (846 ) 
Interest Rate Swap
      14,254        August 2023        August 2028        (533 )     (466 ) 
Interest Rate Swap
      15,556        May 2024        June 2029        (789 )     —   
Interest Rate Swap
      —         September 2019        September 2024        —        1,268  
  
 
 
           
 
 
    
 
 
  
   $ 220,652            $ (3,069 )    $ (290 ) 
  
 
 
           
 
 
    
 
 
  
For the nine months ended September 30, 2024, approximately $3.2 million of realized gains were reclassified to interest expense due to payments made to or received from the swap counterparty. For the nine months ended September 30, 2023, approximately $2.3 million of realized gains were reclassified to interest expense due to payments made to or received from the swap counterparty.
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 $307.3 million and $343.1 million (compared to a carrying value of $315.3 million and $357.2 million) as of September 30, 2024, and December 31, 2023, respectively. Accordingly, the fair value of mortgage loans payable have been classified as Level 3 fair value measurements.
 
11
7. Related Party Transactions
Administrative Services Agreement
For the nine months ended September 30, 2024 and 2023, the Company earned $0.2 million and $0.4 million, respectively, in administrative services performed for Second City Real Estate II
Corporation
, Clarity Real Estate Ventures GP, Limited Partnership and their
affiliates.
8. Leases
Lessor Accounting
The Company is focused on acquiring, owning and operating office properties for lease to a stable and diverse tenant base. The Company’s 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 as provided under the lease.
The Company recognized fixed and variable lease payments for operating leases for the three and nine months ended September 30, 2024 and 2023 as follows (in thousands):
 
 
  
Three Months Ended

September 30,
 
  
Nine Months Ended

September 30,
 
 
  
2024
 
  
2023
 
  
2024
 
  
2023
 
Fixed payments
    $  35,794      $ 37,081      $ 109,428      $ 113,565  
Variable payments
      6,546        6,933        19,561        20,418  
  
 
 
     
 
 
     
 
 
     
 
 
  
   $  42,340      $ 44,014      $ 128,989      $ 133,983  
  
 
 
     
 
 
     
 
 
     
 
 
  
The Company ceased recognizing rental lease income with respect to the Cascade Station property on the deconsolidation of the entity on June 27, 2024. The Company ceased recognizing rental lease income with respect to the 190 Office Center property on the deconsolidation of the entity on May 15, 2023. Refer to Note 3 for further details.
Future minimum lease payments to be received by the Company as of September 30, 2024 under
non-cancellable
operating leases for the next five years and thereafter are as follows (in thousands):
 
2024
    $ 31,715  
2025
      123,574  
2026
      114,741  
2027
      98,053  
2028
      83,633  
Thereafter
      181,083  
  
 
 
  
   $ 632,799  
  
 
 
  
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 increases rather than variable payments based on an index or unknown rate.
 
12
Lessee Accounting
As a lessee, the Company has ground and office
leases
which are classified as operating and financing leases. As of September 30, 2024, these leases had remaining terms of
two
to 64 years and a weighted average remaining lease term of 50 years.
Right-of-use
assets and lease liabilities have been included within other assets and other liabilities on the Company’s condensed consolidated balance sheets as follows (in thousands):

    
September 30, 2024
     
December 31, 2023
  
Right-of-use
asset – operating leases
    $  10,173      $  12,564  
Lease liability – operating leases
    $ 8,352      $ 8,550  
Right-of-use
asset – financing leases
    $ 9,650      $ 9,820  
Lease liability – financing leases
    $ 1,615      $ 1,551  
Lease
liabilities are measured at the commencement date based on the present value of future lease payments. One of the Company’s operating ground leases includes rental payment increases over the lease term based on increases in the Consumer Price Index (“CPI”). Changes in the CPI were not estimated as part of the measurement of the operating lease liability. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The Company used a weighted average discount rate of 6.2% in determining its lease liabilities. The discount rates were derived from the Company’s assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments.
Right-of-use
assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.
Future minimum lease payments to be paid by the Company as a lessee for operating and financing leases as of September 30, 2024 for the next five years and thereafter are as follows (in thousands):

 
  
Operating
Leases
 
  
Financing

Leases
 
2024
    $ 74      $ 2  
2025
      770        8  
2026
      724        8  
2027
      587        8  
2028
      587        8  
Thereafter
      25,976        6,930  
  
 
 
     
 
 
  
Total future minimum lease payments
      28,718        6,964  
Discount
      (20,366 )       (5,349 ) 
  
 
 
     
 
 
  
Total
    $ 8,352      $ 1,615  
  
 
 
     
 
 
  
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, t