City Office REIT Reports Third Quarter 2021 Results

News provided by

Nov 03, 2021, 06:00 ET

VANCOUVER, Nov. 3, 2021 /PRNewswire/ -- City Office REIT, Inc. (NYSE: CIO) (the "Company," "City Office," "we" or "our") today announced its results for the quarter ended September 30, 2021.

Third Quarter Highlights

Rental and other revenues were $44.9 million. GAAP net loss attributable to common stockholders was approximately $1.0 million, or $(0.02) per fully diluted share;
Core FFO was approximately $14.1 million, or $0.32 per fully diluted share;
AFFO was approximately $8.5 million, or $0.19 per fully diluted share;
Entered into agreements to sell the Company's life science portfolio in San Diego, California for an aggregate gross sale price of $576.0 million;
Same Store Cash NOI increased 1.4% as compared to the third quarter of 2020;
In-place occupancy closed the quarter at 88.7%;
Executed approximately 365,000 square feet of new and renewal leases during the quarter;
Declared a third quarter dividend of $0.15 per share of common stock, paid on October 22, 2021; and
Declared a third quarter dividend of $0.4140625 per share of Series A Preferred Stock, paid on October 22, 2021.

"During the third quarter, we entered into agreements to realize the tremendous value created in our San Diego life science portfolio," commented James Farrar, the Company's Chief Executive Officer. "The $576 million sale is transformational for the Company and is anticipated to generate a gain on sale of approximately $430 million."

"The assets being sold are unencumbered by debt, allowing us to redeploy all of the proceeds into premier office properties across some of the best markets in the country. Our team has been advancing our acquisition pipeline, which includes a number of incredible properties in high growth markets. These targets possess highly amenitized locations, new and modern construction and long contractual lease terms with strong tenants. We anticipate that executing on this strategy will enhance our portfolio, significantly increase our earnings per share and generate predictable, long-term cash flow. Based on our confidence in redeploying the sale proceeds, we have accelerated the sale closing date of the entire Sorrento Mesa transaction to December 2021. This is an exciting time of value creation and growth for our Company and we look forward to providing updates in the coming quarters."

A reconciliation of certain non-GAAP financial measures, including FFO, Core FFO, AFFO, NOI, Same Store NOI, Same Store Cash NOI, Adjusted Cash NOI and their equivalent per share measures, to the most directly comparable financial measure under U.S. generally accepted accounting principles ("GAAP") can be found at the end of this release.

Portfolio Operations

The Company reported that its total portfolio as of September 30, 2021 contained 5.6 million net rentable square feet and was 88.7% occupied.

Net Operating Income was approximately $29.7 million and Adjusted Cash NOI (CIO share) was approximately $29.4 million for the third quarter of 2021. Net Operating Income for the quarter benefited from $6.0 million of termination fee income related to termination agreements signed in prior quarters. $5.3 million related to a tenant at the Park Tower property and $0.7 million related to a tenant at the SanTan property.

Same Store Cash NOI increased 1.4% for the three months ended September 30, 2021 as compared to the same period in the prior year. Same Store Cash NOI increased 3.0% for the nine months ended September 30, 2021 as compared to the same period in the prior year.

Investment and Disposition Activity

During the quarter, the Company entered into two definitive agreements to sell all of its combined life science holdings in the Sorrento Mesa submarket of San Diego for $576 million. The transactions are expected to generate aggregate net proceeds, after estimated closing and transaction costs, of approximately $546 million, which equates to $12.38 per common share. The properties to be sold are unencumbered by debt. The northern portion of the portfolio sale is scheduled to close in December 2021 for $395 million. The southern portion of the portfolio sale was initially scheduled to close in February 2023 for $181 million, but the Company has accelerated the closing to December 2021 to correspond with potential acquisition opportunities. Both transactions are proceeding towards the scheduled closings and are subject to customary closing conditions.

Leasing Activity

The Company's total leasing activity during the third quarter of 2021 was approximately 365,000 square feet, which included 69,000 square feet of new leasing and 296,000 square feet of renewals. Approximately 329,000 square feet of leases signed within the quarter will commence subsequent to quarter end.

New Leasing – New leases were signed with a weighted average lease term of 6.6 years at a weighted average annual rent of $31.28 per square foot and at a weighted average cost of $6.32 per square foot per year.

Renewal Leasing – Renewal leases were signed with a weighted average lease term of 5.2 years at a weighted average annual rent of $35.59 per square foot and at a weighted average cost of $4.22 per square foot per year.

Capital Structure

As of September 30, 2021, the Company had total principal outstanding debt of approximately $606.2 million. Approximately $468.2 million, or 77.2%, of the Company's outstanding debt was fixed rate. When factoring in the $50 million term loan as fixed rate debt due to an interest swap, approximately 85.5% of the Company's debt was effectively fixed rate. City Office's total principal outstanding debt had a weighted average maturity of approximately 4.0 years and a weighted average interest rate of 3.6%.

Dividends

On September 16, 2021, the Company's board of directors approved and the Company declared a cash dividend of $0.15 per share of the Company's common stock for the three months ended September 30, 2021. The dividend was paid on October 22, 2021 to common stockholders and unitholders of record as of October 8, 2021.

On September 16, 2021, the Company's board of directors approved and the Company declared a cash dividend of $0.4140625 per share of the Company's 6.625% Series A Preferred Stock for the three months ended September 30, 2021. The dividend was paid on October 22, 2021 to preferred stockholders of record as of October 8, 2021.

Revised 2021 Outlook

The Company is updating its full year 2021 guidance based on year-to-date performance and its expectations for the remainder of the year. The sale transactions for the Sorrento Mesa portfolio are not expected to have a material impact on 2021 guidance, as the closings are not scheduled to occur until December 2021. General and Administrative Expenses and 2021 Core FFO per diluted share expectations were impacted by a one-time, $5.0 million accrual of general and administrative expense. This accrual was made to reflect a one-time employee incentive compensation expense anticipated to be paid at year-end as a result of the pending Sorrento Mesa sale, which is anticipated to generate a $430 million gain on sale.

Full Year 2021 Guidance	Previous		Updated
	Low	High	Low	High
Net Operating Income	$104.5M	$106.0M	$104.5M	$106.0M
General & Administrative Expenses	$11.5M	$12.0M	$16.5M	$17.0M
2021 Core FFO per diluted share	$1.40	$1.43	$1.29	$1.32
Net Recurring Straight-Line Rent Adjustment	$0.5M	$1.5M	$0.5M	$1.5M
Same Store Cash NOI Change	1.5%	2.5%	1.5%	2.5%
December 31, 2021 Occupancy	87.0%	89.0%	87.0%	89.0%

Material Considerations:

The amount and timing of future acquisitions and dispositions, if any, could have an effect on our Net Operating Income and Core FFO results for Full Year 2021.
Termination fee income of $2.0 million related to a tenant at the SanTan property in Phoenix and termination fee income of $5.8 million related to a tenant at the Park Tower property in Tampa have been included in 2021 guidance.
The General and Administrative Expenses guidance includes approximately $2.6 million for stock-based compensation. Our Core FFO definition excludes stock-based compensation. Excluding stock-based compensation, General and Administrative Expenses guidance for Full Year 2021 would have been $13.9 – $14.4 million.
Annual weighted average fully diluted shares of common stock outstanding are assumed to be approximately 44.1 million.

The Company's guidance is based on current plans and assumptions and subject to the risks and uncertainties more fully described in the Company's filings with the United States Securities and Exchange Commission. This outlook reflects management's view of current and future market conditions, including assumptions such as the pace of future acquisitions and dispositions, rental rates, occupancy levels, leasing activity, uncollectible rents, operating and general administrative expenses, weighted average diluted shares outstanding and interest rates. The Company reminds investors that the impacts of the COVID-19 pandemic are uncertain and impossible to predict. See "Forward-looking Statements" below.

Webcast and Conference Call Details

City Office's management will hold a conference call at 11:00 am Eastern Time on November 3, 2021.

The webcast will be available under the "Investor Relations" section of the Company's website at www.cioreit.com. The conference call can be accessed by dialing 1-866-262-0919 for domestic callers and 1-412-902-4106 for international callers.

A replay of the call will be available later in the day on November 3, 2021, continuing through 11:59 pm Eastern Time on February 3, 2022 and can be accessed by dialing 1-877-344-7529 for domestic callers and 1-412-317-0088 for international callers. The passcode for the replay is 10160562. A replay will also be available for twelve months following the call at "Webcasts & Events" in the "Investor Relations" section of the Company's website.

A supplemental financial information package to accompany the discussion of the results will be posted on www.cioreit.com under the "Investor Relations" section.

Non-GAAP Financial Measures

Funds from Operations ("FFO") – The National Association of Real Estate Investment Trusts ("NAREIT") states FFO should represent net income or loss (computed in accordance with GAAP) plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments of unconsolidated partnerships and joint ventures, gains or losses on the sale of property and impairments to real estate.

The Company uses FFO as a supplemental performance measure because the Company believes that FFO is beneficial to investors as a starting point in measuring the Company's operational performance. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare the Company's operating performance with that of other REITs.

However, because FFO excludes depreciation and amortization and captures neither the changes in the value of the Company's properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of the Company's properties, all of which have real economic effects and could materially impact the Company's results from operations, the utility of FFO as a measure of the Company's performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the NAREIT definition as the Company does, and, accordingly, the Company's FFO may not be comparable to such other REITs' FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of the Company's performance.

Core Funds from Operations ("Core FFO") – We calculate Core FFO by using FFO as defined by NAREIT and adjusting for certain other non-core items. We also exclude from our Core FFO calculation acquisition costs, loss on early extinguishment of debt, changes in the fair value of the earn-out, changes in fair value of contingent consideration and the amortization of stock based compensation.

We believe Core FFO provides a useful metric in comparing operations between reporting periods and in assessing the sustainability of our ongoing operating performance. Other equity REITs may calculate Core FFO differently or not at all, and, accordingly, the Company's Core FFO may not be comparable to such other REITs' Core FFO.

Adjusted Funds from Operations ("AFFO") – We compute AFFO by adding to Core FFO the non-cash amortization of deferred financing fees and non-real estate depreciation and then subtracting cash paid for recurring tenant improvements, leasing commissions, and capital expenditures, and eliminating the net effect of straight-line rent / expense, deferred market rent and debt fair value amortization. Recurring capital expenditures exclude development / redevelopment activities, capital expenditures planned at acquisition and costs to reposition a property. We exclude first generation leasing costs within the first two years of our initial public offering or acquisition, which are generally to fill vacant space in properties we acquire or were planned at acquisition. We have further excluded all costs associated with tenant improvements, leasing commissions and capital expenditures which were funded by the entity contributing the properties at closing.

Along with FFO and Core FFO, we believe AFFO provides investors with appropriate supplemental information to evaluate the ongoing operations of the Company. Other equity REITs may calculate AFFO differently, and, accordingly, the Company's AFFO may not be comparable to such other REITs' AFFO.

Net Operating Income ("NOI"), Adjusted Cash NOI (CIO share) – We define NOI as rental and other revenues less property operating expenses. We define Adjusted Cash NOI as NOI less the effect of recurring straight-line rent / expense, deferred market rent, and any amounts which are funded by the selling entities and NCI in properties.

We consider NOI and Adjusted Cash NOI to be appropriate supplemental performance measures to net income because we believe they provide information useful in understanding the core operations and operating performance of our portfolio.

Same Store Net Operating Income ("Same Store NOI") and Same Store Cash Net Operating Income ("Same Store Cash NOI") – Same Store NOI and Same Store Cash NOI is calculated as the NOI attributable to the properties continuously owned and operated for the entirety of the reporting periods presented. The Company's definition of Same Store NOI and Same Store Cash NOI excludes properties that were not stabilized during both of the applicable reporting periods. These exclusions may include, but are not limited to, acquisitions, dispositions and properties undergoing repositioning or significant renovations.

We believe Same Store NOI and Same Store Cash NOI is an important measure of comparison because it allows for comparison of operating results of stabilized properties owned and operated for the entirety of both applicable periods and therefore eliminates variations caused by acquisitions, dispositions or repositionings during such periods. Other REITs may calculate Same Store NOI and Same Store Cash NOI differently and our calculation should not be compared to that of other REITs.

Forward-looking Statements

This press release contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in this press release, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of the federal securities laws and as such are based upon the Company's current beliefs as to the outcome and timing of future events. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "approximately," "anticipate," "assume," "believe," "budget," "contemplate," "continue," "could," "estimate," "expect," "future," "hypothetical," "intend," "may," "outlook," "plan," "potential," "predict," "project," "seek," "should," "target," "will" or other similar words or expressions. There can be no assurance that actual forward-looking statements, including projected capital resources, projected profitability and portfolio performance, estimates or developments affecting the Company will be those anticipated by the Company. Examples of forward-looking statements include those pertaining to expectations regarding our financial performance, including under metrics such as NOI and FFO, market rental rates, national or local economic growth, estimated replacement costs of our properties, the Company's expectations regarding tenant occupancy, re-leasing periods, projected capital improvements, expected sources of financing, expectations as to the likelihood and timing of closing of acquisitions, dispositions, or other transactions, the expected operating performance of the Company's current properties, anticipated near-term acquisitions and descriptions relating to these expectations, including, without limitation, the anticipated net operating income yield and cap rates, and changes in local, regional, national and international economic conditions, including as a result of the ongoing COVID-19 pandemic. Forward-looking statements presented in this press release are based on management's beliefs and assumptions made by, and information currently available to, management.

The forward-looking statements contained in this press release are based on historical performance and management's current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to the factors, risks and uncertainties described above, changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors described in our news releases and filings with the SEC, including but not limited to those described in our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading "Risk Factors" and in our subsequent reports filed with the SEC, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this press release speaks only as of the date of this press release. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. The Company does not guarantee that the assumptions underlying such forward-looking statements contained in this press release are free from errors. Unless otherwise stated, historical financial information and per share and other data are as of September 30, 2021 or relate to the quarter ended September 30, 2021. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.

City Office REIT, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

(In thousands, except par value and share data)

	September 30, 2021	December 31, 2020
Assets
Real estate properties
Land	$ 169,984	$ 204,289
Building and improvement	744,818	777,184
Tenant improvement	102,683	104,694
Furniture, fixtures and equipment	664	642
	1,018,149	1,086,809
Accumulated depreciation	(149,901)	(131,220)
	868,248	955,589

Cash and cash equivalents	17,697	25,305
Restricted cash	52,484	20,646
Rents receivable, net	29,221	32,968
Deferred leasing costs, net	18,415	16,829
Acquired lease intangible assets, net	30,183	44,143
Other assets	17,753	15,758
Assets held for sale	118,382	46,054
Total Assets	$ 1,152,383	$ 1,157,292

Liabilities and Equity
Liabilities:
Debt	$ 603,334	$ 677,242
Accounts payable and accrued liabilities	32,096	25,414
Deferred rent	10,460	7,295
Tenant rent deposits	5,542	4,801
Acquired lease intangible liabilities, net	3,868	6,035
Other liabilities	47,662	18,099
Liabilities related to assets held for sale	2,873	531
Total Liabilities	705,835	739,417

Commitments and Contingencies
Equity:
6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares authorized, 4,480,000 shares issued and outstanding as of September 30, 2021 and December 31, 2020	112,000	112,000
Common stock, $0.01 par value per share, 100,000,000 shares authorized, 43,554,375 and 43,397,117 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	435	433
Additional paid-in capital	481,345	479,411
Accumulated deficit	(146,930)	(172,958)
Accumulated other comprehensive loss	(1,063)	(1,960)
Total Stockholders' Equity	445,787	416,926
Non-controlling interests in properties	761	949
Total Equity	446,548	417,875
Total Liabilities and Equity	$ 1,152,383	$ 1,157,292

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,
	2021	2020	2021	2020
Rental and other revenues	$ 44,889	$ 41,261	$ 124,369	$ 121,000

Operating expenses:
Property operating expenses	15,180	14,886	43,477	43,666
General and administrative	7,900	2,546	13,768	8,025
Depreciation and amortization	14,648	15,189	44,017	45,222
Total operating expenses	37,728	32,621	101,262	96,913

Operating income	7,161	8,640	23,107	24,087
Interest expense:
Contractual interest expense	(5,650)	(6,620)	(17,533)	(19,773)
Amortization of deferred financing costs and debt fair value	(267)	(328)	(869)	(993)
	(5,917)	(6,948)	(18,402)	(20,766)
Net gain on sale of real estate property	—	1,347	47,400	1,347
Net income	1,244	3,039	52,105	4,668
Less:
Net income attributable to non-controlling interests in properties	(378)	(153)	(760)	(514)
Net income attributable to the Company	866	2,886	51,345	4,154
Preferred stock distributions	(1,855)	(1,855)	(5,565)	(5,565)
Net (loss)/income attributable to common stockholders	$ (989)	$ 1,031	$ 45,780	$ (1,411)

Net (loss)/income per common share:
Basic	$ (0.02)	$ 0.02	$ 1.05	$ (0.03)
Diluted	$ (0.02)	$ 0.02	$ 1.04	$ (0.03)
Weighted average common shares outstanding:
Basic	43,554	43,593	43,478	48,508
Diluted	43,554	44,014	44,091	48,508

Dividend distributions declared per common share	$ 0.15	$ 0.15	$ 0.45	$ 0.45

City Office REIT, Inc.
Reconciliation of Net Income to Net Operating Income and Adjusted Cash NOI
(Unaudited)

(In thousands)

	Three Months Ended September 30, 2021
Net income	$ 1,244
Adjustments to net income:
General and administrative	7,900
Contractual interest expense	5,650
Amortization of deferred financing costs and debt fair value	267
Depreciation and amortization	14,648
Net Operating Income ("NOI")	$ 29,709
Net recurring straight-line rent/expense adjustment	310
Net amortization of above and below market leases	(18)
Portfolio Adjusted Cash NOI	$ 30,001
NCI in properties – share in cash NOI	(645)
Adjusted Cash NOI (CIO share)	$ 29,356

City Office REIT, Inc.
Reconciliation of Net Income to FFO, Core FFO and AFFO
(Unaudited)

(In thousands, except per share data)
	Three Months Ended September 30, 2021

Net loss attributable to common stockholders	$ (989)
(+) Depreciation and amortization	14,648
	13,659
Non-controlling interests in properties:
(+) Share of net income	378
(-) Share of FFO	(563)
FFO attributable to common stockholders	$ 13,474
(+) Stock based compensation	666
Core FFO attributable to common stockholders	$ 14,140
(+) Net recurring straight-line rent/expense adjustment	310
(+) Net amortization of above and below market leases	(18)
(+) Net amortization of deferred financing costs and debt fair value	265
(-) Net recurring tenant improvements and incentives	(2,400)
(-) Net recurring leasing commissions	(2,805)
(-) Net recurring capital expenditures	(958)
AFFO attributable to common stockholders	$ 8,534


FFO per common share	$ 0.31
Core FFO per common share	$ 0.32
AFFO per common share	$ 0.19


Dividends distributions declared per common share	$ 0.15
FFO Payout Ratio	49%
Core FFO Payout Ratio	47%
AFFO Payout Ratio	78%

Weighted average common shares outstanding - diluted	44,112

City Office REIT, Inc.
Reconciliation of Rental and Other Revenues to Same Store NOI and Same Store Cash NOI
(Unaudited)

(In thousands)

	Three Months Ended September 30,		Nine months Ended September 30,
	2021	2020	2021	2020
Rental and other revenues	$ 44,889	$ 41,261	$ 124,369	$ 121,000
Property operating expenses	15,180	14,886	43,477	43,666
Net operating income ("NOI")	$ 29,709	$ 26,375	$ 80,892	$ 77,334
Less: NOI of properties not included in same store	(401)	(1,783)	(2,045)	(5,353)
Same store NOI	$ 29,308	$ 24,592	$ 78,847	$ 71,981
Less:
Non-recurring other income	—	(29)	—	(29)
Termination fee income	(5,738)	(21)	(7,410)	(532)
Straight-line rent/expense adjustment	316	(1,245)	387	(1,613)
Above and below market leases	(35)	(24)	277	(39)
NCI in properties – share in cash NOI	(645)	(389)	(1,495)	(1,223)
Same store cash NOI	$ 23,206	$ 22,884	$ 70,606	$ 68,545

City Office REIT, Inc.
Reconciliation of Net Income to Core FFO Guidance
(Unaudited)

(In thousands, except per share data)

	Full Year 2021 Outlook
	Low	High
Net income attributable to common stockholders	$ 475,300	$ 477,300
(+) Depreciation and amortization	58,000	57,000
(-) Net gain on sale of real estate property	(478,000)	(478,000)
(-) Non-controlling interests in properties	(900)	(900)
FFO attributable to common stockholders	$ 54,400	$ 55,400
(+) Stock based compensation	2,600	2,600
Core FFO attributable to common stockholders	$ 57,000	$ 58,000

FFO per common share	$ 1.23	$ 1.26
Core FFO per common share	$ 1.29	$ 1.32

Weighted average shares of common stock	44,100	44,100