NYSE: CIO
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Press Release

City Office REIT Reports First Quarter 2020 Results

Company Release - 5/7/2020 6:00 AM ET

VANCOUVER--(BUSINESS WIRE)-- City Office REIT, Inc. (NYSE: CIO) (the “Company,” “City Office,” “we” or “our”) today announced its results for the quarter ended March 31, 2020.

First Quarter Highlights

  • GAAP net loss attributable to common stockholders was approximately $1.0 million, or ($0.02) per fully diluted share;
  • Core FFO was approximately $14.3 million, or $0.26 per fully diluted share;
  • AFFO was approximately $7.9 million, or $0.14 per fully diluted share;
  • Same Store Cash NOI increased 4.1% as compared to the first quarter of 2019;
  • In-place occupancy closed the quarter at 92.2%;
  • Executed approximately 221,000 square feet of new and renewal leases during the quarter;
  • Repurchased 1,451,249 shares of common stock at an average gross price of $7.99 per share for a total cost of approximately $11.6 million;
  • Declared a first quarter dividend of $0.15 per share of common stock, paid on April 24, 2020; and
  • Declared a first quarter dividend of $0.4140625 per share of Series A Preferred Stock, paid on April 24, 2020.

Highlights Subsequent to Quarter End

  • As of May 5, 2020, repurchased an additional 5,872,328 shares of common stock. Including repurchases during the first quarter, 7,323,577 shares have been repurchased at an average gross price of $8.26 per share for a total cost of approximately $60.5 million.

“We took early steps to position City Office ahead of feeling the full impact of COVID-19,” commented James Farrar, the Company’s Chief Executive Officer. “From the outset of the pandemic, we have ensured that all of our properties have remained open and available for our tenants. We have also halted our acquisition activity and allocated capital to our previously announced common share repurchase program, which we believe will be accretive to our shareholders over the long term. In addition, we drew down a portion of our unsecured credit facility to ensure ample cash and liquidity, modified our business plan to operate with lower overall leverage and adjusted our common stock dividend to a level we believe will be defensive over the long term.”

“Even with our quality portfolio and a strong first quarter, the uncertain operating environment has created challenges with predicting near-term performance. While we are encouraged to see early signs of the easing of business restrictions in many markets, the potential damage to the economy and our tenants is difficult to ascertain. That uncertainty is reflected in our updated guidance, including the removal of future vacant space leasing assumptions and the establishment of a provision for uncollectible rents. In the coming months, our focus will be to continue to take thoughtful, proactive measures to address near-term risks and to optimally position ourselves for the long term.”

A reconciliation of certain non-GAAP financial measures, including FFO, Core FFO, AFFO, NOI, Same Store NOI, Same Store Cash NOI and Adjusted Cash NOI, 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 March 31, 2020 contained 5.8 million net rentable square feet and was 92.2% occupied.

Within the Company’s first quarter results for the period ended March 31, 2020, the Company has taken a provision of $0.1 million for potential bad debts. This modest figure reflects that the overwhelming majority of City Office’s tenants had already paid rent before the impact of COVID-19 on the economy. In March and subsequent to quarter end, the Company has received certain requests for rent relief or deferral and is evaluating each request independently.

Subsequent to quarter end, the Company has collected approximately 98% of April contractual base rent payments. A break-down of the Company’s exposure to select industries is provided on page 15 of our supplemental financial information package.

City Office’s NOI was approximately $25.4 million, or approximately $24.7 million on an adjusted cash basis, during the first quarter of 2020.

Same Store Cash NOI increased 4.1% for the three months ended March 31, 2020 as compared to the same period in the prior year.

Investment and Disposition Activity

The Company remains under contract to sell a land parcel at its Circle Point property in Denver, Colorado at a sale price of $6.5 million, exclusive of closing costs. Including a deposit received after quarter end, the Company has received $750,000 of non-refundable deposits from the buyer and anticipates that the transaction will close in the third quarter of 2020, subject to customary closing conditions.

Leasing Activity

The Company’s total leasing activity during the first quarter of 2020 was approximately 221,000 square feet, which included 108,000 square feet of new leasing and 113,000 square feet of renewals. Approximately 219,000 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 9.0 years at a weighted average annual rent of $28.79 per square foot and at a weighted average cost of $7.69 per square foot per year.

Renewal Leasing – Renewal leases were signed with a weighted average lease term of 2.6 years at a weighted average annual rent of $30.68 per square foot and at a weighted average cost of $3.04 per square foot per year.

Capital Structure

As of March 31, 2020, the Company had total principal outstanding debt of approximately $710.8 million. Approximately $560.8 million or 78.9% 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, which effectively fixes the 30-day LIBOR rate, approximately 85.9% of the Company’s debt was effectively fixed rate. City Office’s total principal outstanding debt had a weighted average maturity of approximately 4.9 years and a weighted average interest rate of 3.8%.

On March 9, 2020, the Company’s Board of Directors approved a share repurchase plan authorizing the Company to repurchase up to $100 million of its outstanding shares of common stock. During the three months ended March 31, 2020, the Company repurchased 1,451,249 shares of its common stock at an average gross price of $7.99 per share for a total cost of approximately $11.6 million. Including incremental share repurchases completed after quarter end, as of May 5, the Company had settled on the repurchase of 7,323,577 shares at an average gross price of $8.26 per share for an aggregate cost of approximately $60.5 million.

Dividends

On March 25, 2020, 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 March 31, 2020. The dividend was paid on April 24, 2020 to common stockholders and unitholders of record as of April 9, 2020.

On March 25, 2020, 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. The dividend was paid on April 24, 2020 to preferred stockholders of record as of April 9, 2020.

Revised 2020 Outlook

The Company is updating its full year 2020 guidance based on year-to-date performance and its expectations for the remainder of the year.

2020 Core FFO per diluted share expectations were lowered by eliminating anticipated acquisition activity, removing future leasing assumptions for vacant space and establishing a provision for uncollectible rents associated with the anticipated impacts of COVID-19. These changes were offset by lower interest expense and lower expected weighted average fully diluted shares outstanding due to the share repurchase program.

Full Year 2020 Guidance

Previous

Updated

Low

High

 

Low

High

Net Property Acquisitions

$340M

$380M

 

Nil

Nil

Net Operating Income

$110.0M

$115.0M

 

$96.0M

$99.0M

General & Administrative Expenses

$11.0M

$12.0M

 

$10.5M

$11.5M

Interest Expense

$30.0M

$32.0M

 

$27.0M

$28.0M

2020 Core FFO per diluted share

$1.13

$1.18

 

$1.07

$1.12

Net Recurring Straight-Line Rent Adjustment

$2.0M

$3.0M

 

$1.5M

$2.5M

Same Store Cash NOI Change

1.0%

3.0%

 

(4.5%)

(1.5%)

December 31, 2020 Occupancy

92.0%

94.0%

 

88.5%

91.0%

This revised outlook reflects management’s view of current and future market conditions, including assumptions on share repurchases, 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.

Material Considerations:

  1. The General and Administrative Expenses guidance includes approximately $2.4 million for stock-based compensation. Our Core FFO definition excludes stock-based compensation. Excluding stock-based compensation, General and Administrative Expenses guidance would have been $8.1 – $9.1 million.
  2. Due to uncertainty created by COVID-19, Net Operating Income has been lowered to remove future leasing assumptions for vacant space and establishing a general provision for uncollectible rents of between 1% and 3% of rental revenue. These provisions are also reflected as decreased December 31, 2020 Occupancy and lower Same Store Cash NOI Change.
  3. Annual weighted average fully diluted shares of common stock outstanding are assumed to be approximately 47.2 – 47.6 million.

Webcast and Conference Call Details

City Office’s management will hold a conference call at 11:00 am Eastern Time on May 7, 2020.

The webcast will be available under the “Investor Relations” section of the Company’s website at www.cityofficereit.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 May 7, 2020, continuing through 11:59 pm Eastern Time on August 7, 2020 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 10141900. 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.cityofficereit.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 – 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.

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 recent 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, 2019 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 March 31, 2020 or relate to the quarter ended March 31, 2020. 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)

 

 

March 31,
2020

December 31,
2019

Assets

 

 

Real estate properties

 

 

Land

$

230,034

 

$

230,034

 

Building and improvement

 

786,939

 

 

784,636

 

Tenant improvement

 

97,474

 

 

94,218

 

Furniture, fixtures and equipment

 

285

 

 

285

 

 

 

1,114,732

 

 

1,109,173

 

Accumulated depreciation

 

(111,177

)

 

(101,835

)

 

 

1,003,555

 

 

1,007,338

 

Cash and cash equivalents

 

146,509

 

 

70,129

 

Restricted cash

 

18,328

 

 

17,394

 

Rents receivable, net

 

32,875

 

 

32,112

 

Deferred leasing costs, net

 

14,249

 

 

12,393

 

Acquired lease intangibles assets, net

 

62,104

 

 

67,533

 

Other assets

 

16,054

 

 

17,061

 

Assets held for sale

 

4,543

 

 

4,514

 

Total Assets

$

1,298,217

 

$

1,228,474

 

Liabilities and Equity

 

Liabilities:

 

 

Debt

$

706,031

 

$

607,250

 

Accounts payable and accrued liabilities

 

27,354

 

 

28,786

 

Deferred rent

 

5,298

 

 

6,593

 

Tenant rent deposits

 

5,660

 

 

5,658

 

Acquired lease intangible liabilities, net

 

7,604

 

 

8,194

 

Other liabilities

 

19,711

 

 

22,794

 

Liabilities related to assets held for sale

 

87

 

 

67

 

Total Liabilities

 

771,745

 

 

679,342

 

Commitments and Contingencies

 

 

Equity:

 

 

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

 

112,000

 

 

112,000

 

Common stock, $0.01 par value, 100,000,000 shares authorized, 53,175,051 and 54,591,047 shares issued and outstanding

 

531

 

 

545

 

Additional paid-in capital

 

566,122

 

 

577,131

 

Accumulated deficit

 

(151,264

)

 

(142,383

)

Accumulated other comprehensive (loss)/income

 

(2,026

)

 

715

 

Total Stockholders’ Equity

 

525,363

 

 

548,008

 

Non-controlling interests in properties

 

1,109

 

 

1,124

 

Total Equity

 

526,472

 

 

549,132

 

Total Liabilities and Equity

$

1,298,217

 

$

1,228,474

 

City Office REIT, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

 

Three Months Ended
March 31,

 

2020

 

2019

Rental and other revenues

$

40,122

 

$

37,120

 

Operating expenses:

 

 

Property operating expenses

 

14,694

 

 

13,844

 

General and administrative

 

2,783

 

 

2,299

 

Depreciation and amortization

 

14,953

 

 

14,417

 

Total operating expenses

 

32,430

 

 

30,560

 

 

 

 

Operating income

 

7,692

 

 

6,560

 

Interest expense:

 

 

Contractual interest expense

 

(6,362

)

 

(7,143

)

Amortization of deferred financing costs and debt fair value

 

(324

)

 

(337

)

 

 

(6,686

)

 

(7,480

)

Net income/(loss)

 

1,006

 

 

(920

)

Less:

 

 

Net income attributable to non-controlling interests in properties

 

(182

)

 

(169

)

Net income/(loss) attributable to the Company

 

824

 

 

(1,089

)

Preferred stock distributions

 

(1,855

)

 

(1,855

)

Net loss attributable to common stockholders

$

(1,031

)

$

(2,944

)

Net loss per common share:

 

 

Basic

$

(0.02

)

$

(0.07

)

Diluted

$

(0.02

)

$

(0.07

)

Weighted average common shares outstanding:

 

 

Basic

 

54,458

 

 

39,565

 

Diluted

 

54,458

 

 

39,565

 

Dividends distributions declared per common share

$

0.150

 

$

0.235

 

City Office REIT, Inc.

Reconciliation of Net Income to Net Operating Income and Adjusted Cash NOI

(Unaudited)

(In thousands)

 

 

Three Months Ended
March 31, 2020

 

 

Net income

$

1,006

Adjustments to net income:

 

General and administrative

 

2,783

Contractual interest expense

 

6,362

Amortization of deferred financing costs and debt fair value

 

324

Depreciation and amortization

 

14,953

Net Operating Income (“NOI”)

$

25,428

Net recurring straight line rent/expense adjustment

 

(361)

Net amortization of above and below market leases

 

16

Portfolio Adjusted Cash NOI

$

25,083

NCI in properties – share in cash NOI

 

(416)

Adjusted Cash NOI (CIO share)

$

24,667

City Office REIT, Inc.

Reconciliation of Net Income to FFO, Core FFO and AFFO

(Unaudited)

(In thousands, except per share data)

 

 

Three Months Ended
March 31, 2020

 

 

 

 

Net loss attributable to common stockholders

$

(1,031)

(+) Depreciation and amortization

 

14,953

 

 

13,922

Non-controlling interests in properties:

 

(+) Share of net income

 

182

(-) Share of FFO

 

(342)

FFO attributable to common stockholders

$

13,762

(+) Stock based compensation

 

569

Core FFO attributable to common stockholders

$

14,331

(+) Net recurring straight line rent/expense adjustment

 

(361)

(+) Net amortization of above and below market leases

 

16

(+) Net amortization of deferred financing costs and debt fair value

 

321

(-) Net recurring tenant improvements and incentives

 

(2,475)

(-) Net recurring leasing commissions

 

(2,464)

(-) Net recurring capital expenditures

 

(1,455)

AFFO attributable to common stockholders

$

7,913

 

 

Core FFO per common share

$

0.26

AFFO per common share

$

0.14

 

 

Dividends per common share

$

0.150

Core FFO Payout Ratio

 

58%

AFFO Payout Ratio

 

104%

Weighted average common shares outstanding - diluted

 

54,966

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
March 31,

 

2020

 

2019

Rental and other revenues

$

40,122

$

37,120

Property operating expenses

 

14,694

 

13,844

Net operating income (“NOI”)

$

25,428

$

23,276

Less: NOI of properties not included in same store

 

(3,398)

 

(1,684)

Same store NOI

$

22,030

$

21,592

Less:

 

 

Termination fee income

 

(380)

 

(203)

Straight line rent/expense adjustment

 

(56)

 

(772)

Above and below market leases

 

(95)

 

28

NCI in properties – cash NOI

 

(416)

 

(394)

Same store cash NOI

$

21,083

$

20,251

City Office REIT, Inc.

Reconciliation of Net Income to Core FFO Guidance

(Unaudited)

(In thousands, except per share data)

 

 

Full year 2020 Outlook

 

 

 

Low

High

Net loss attributable to common stockholders

$

(14,850)

$

(11,950)

(+) Depreciation and amortization

 

63,600

 

63,200

(-) Non-controlling interests in properties

 

(650)

 

(650)

(+) Stock based compensation

 

2,400

 

2,400

Core FFO attributable to common stockholders

$

50,500

$

53,000

 

 

 

Core FFO per common share

$

1.07

$

1.12

 

 

 

Weighted average shares of common stock

 

47,400

 

47,400

 

City Office REIT, Inc.
Anthony Maretic, CFO
+1-604-806-3366
investorrelations@cityofficereit.com

Source: City Office REIT, Inc.