City Office REIT(CIO) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited condensed consolidated financial statements for the period ended June 30, 2020, reflect decreased total assets and stockholders' equity due to common stock repurchases, a net loss of $1.4 million for the second quarter, increased net cash from operations, and significant cash usage in financing activities for share repurchases Condensed Consolidated Balance Sheets As of June 30, 2020, total assets slightly decreased to $1.21 billion, total liabilities increased to $771.3 million due to higher debt, and total stockholders' equity significantly decreased to $439.6 million, primarily from common stock repurchases Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,211,911 | $1,228,474 | | Cash and cash equivalents | $67,039 | $70,129 | | Real estate properties, net | $1,003,407 | $1,007,338 | | Total Liabilities | $771,256 | $679,342 | | Debt | $704,797 | $607,250 | | Total Stockholders' Equity | $439,551 | $548,008 | Condensed Consolidated Statements of Operations For the three months ended June 30, 2020, rental and other revenues decreased to $39.6 million, resulting in a net loss attributable to common stockholders of $1.4 million, and a reduced dividend of $0.150 per common share Key Operating Results (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Rental and other revenues | $39,617 | $41,171 | | Operating income | $7,756 | $8,679 | | Net income | $623 | $1,321 | | Net loss attributable to common stockholders | $(1,411) | $(699) | | Net loss per common share (Basic & Diluted) | $(0.03) | $(0.02) | | Dividend distributions declared per common share | $0.150 | $0.235 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2020, net cash provided by operating activities increased to $31.3 million, net cash used in investing activities decreased to $18.2 million due to no property acquisitions, and net cash used in financing activities significantly shifted to $17.5 million, driven by common stock repurchases Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Cash Provided By Operating Activities | $31,336 | $18,638 | | Net Cash Used In Investing Activities | $(18,196) | $(38,550) | | Net Cash (Used In)/Provided By Financing Activities | $(17,520) | $17,643 | - The significant increase in cash used for financing activities was primarily due to $89.7 million spent on repurchases of common stock during the first six months of 2020[24] Notes to Condensed Consolidated Financial Statements Key notes detail accounting policies, including COVID-19 rent relief guidance, with no real estate acquisitions in H1 2020, total debt at $709.2 million, and significant share repurchases under a $100 million plan, followed by further repurchases and a land sale - The company elected not to apply lease modification guidance for most COVID-19 related rent relief, such as deferrals or abatements, as long as it did not substantially increase lessor rights or lessee obligations[31] - On March 9, 2020, the Board approved a share repurchase plan of up to $100 million. During the six months ended June 30, 2020, the company repurchased 10,249,655 shares for approximately $89.3 million[62][64] - Subsequent to quarter end, the company repurchased an additional 1,114,196 shares for $10.7 million and completed the sale of a land parcel at the Circle Point property for $6.5 million, resulting in a gain of $1.3 million[73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the COVID-19 pandemic's impact, noting high rent collections but granted relief and expected slower leasing, with strategic shifts including ceasing acquisitions, initiating share repurchases, and adjusting dividends to enhance liquidity, while Q2 operations show decreased revenue and interest expense, maintaining adequate liquidity Overview and Properties As of June 30, 2020, City Office REIT owned 25 properties totaling approximately 5.8 million square feet of net rentable area, 91.9% leased, concentrated in key metropolitan areas Portfolio Overview as of June 30, 2020 | Metric | Value | | :--- | :--- | | Number of Properties | 25 | | Number of Buildings | 65 | | Net Rentable Area (sq. ft.) | ~5.8 million | | Occupancy | 91.9% | Factors That May Influence Our Operating Results and Financial Condition The COVID-19 pandemic is the primary influencing factor, with lower Q2 2020 building usage, high rent collections but granted relief to 1.0% of NRA, leading to strategic responses like halting acquisitions, initiating share repurchases, and adjusting dividends to preserve liquidity - Through August 3, 2020, the company collected over 99% of contractually required base rents for the three months ended June 30, 2020[86] - The company granted rent relief to nine tenants (approx. 1.0% of NRA), mostly in the form of rent deferrals or abatements[84] - Strategic adjustments due to COVID-19 include ceasing acquisition activities, allocating capital to the share repurchase program, and adjusting the common stock dividend to operate with lower leverage and higher liquidity[89] Results of Operations For Q2 2020, rental and other revenues decreased by $1.6 million due to a prior-year one-time gain, while total operating expenses decreased by $0.6 million; for the six-month period, revenues increased by $1.4 million and operating expenses by $1.2 million, with interest expense decreasing in both periods due to debt repayments Comparison of Three Months Ended June 30 (in millions) | Item | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Rental and Other Revenues | $39.6 | $41.2 | $(1.6) | | Total Operating Expenses | $31.9 | $32.5 | $(0.6) | | Interest Expense | $7.1 | $7.8 | $(0.7) | Comparison of Six Months Ended June 30 (in millions) | Item | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Rental and Other Revenues | $79.7 | $78.3 | $1.4 | | Total Operating Expenses | $64.3 | $63.1 | $1.2 | | Interest Expense | $13.8 | $15.3 | $(1.5) | Liquidity and Capital Resources As of June 30, 2020, the company held $67.0 million in cash and equivalents, with key credit facilities including a $250 million Unsecured Credit Facility and a $50 million Term Loan, and management believes it has sufficient liquidity from operations, cash, and credit to meet short-term needs - The company had approximately $67.0 million of cash and cash equivalents as of June 30, 2020[121] - The Unsecured Credit Facility has a capacity of up to $250 million, with an accordion feature up to $500 million. As of June 30, 2020, $100 million was drawn[122] Contractual Obligations Summary (in thousands) | Obligation Type | Total | Payments Due in 2020 | Payments Due 2021-2022 | | :--- | :--- | :--- | :--- | | Principal payments on mortgage loans | $709,176 | $3,163 | $195,884 | | Interest payments | $126,390 | $13,098 | $44,755 | | Total | $873,159 | $23,618 | $242,931 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, mainly related to LIBOR, which is managed through fixed-rate financing, with approximately 85.9% of total debt effectively fixed rate as of June 30, 2020, resulting in a nominal impact from hypothetical LIBOR changes - The company's primary market risk exposure is to interest rates, specifically LIBOR[136] - As of June 30, 2020, 78.8% of debt had fixed interest rates. Including a $50 million interest rate swap on the Term Loan, approximately 85.9% of total debt was effectively fixed rate[136] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer determined that the company's disclosure controls and procedures were effective as of June 30, 2020[138] - No changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[139] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in litigation from the ordinary course of business but does not believe any current proceedings will have a material adverse effect on its financial position or results of operations - As of June 30, 2020, management does not believe that any ongoing litigation will have a material adverse effect on the company's financial position or results[140] Item 1A. Risk Factors This section updates risk factors related to the COVID-19 pandemic, highlighting potential tenant rent issues, decreased office space demand, capital access difficulties, and debt covenant non-compliance, with the ultimate impact remaining highly uncertain - The primary updated risk factor relates to the adverse effects of the COVID-19 pandemic on the company's financial condition, results of operations, and stock price[141] - Specific risks highlighted include tenants' inability to pay rent, requests for rent relief, decreased demand for office space, difficulty accessing capital, and potential negative impacts on debt covenant compliance[144][146] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activity under its $100 million plan, with 8,798,406 shares repurchased at an average price of $8.84 during Q2 2020, leaving approximately $10.7 million available under the plan as of June 30, 2020 Share Repurchase Activity for Q2 2020 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2020 | 5,065,946 | $8.07 | | May 2020 | 2,275,063 | $9.83 | | June 2020 | 1,457,397 | $9.94 | | Total Q2 | 8,798,406 | $8.84 | - As of June 30, 2020, approximately $10.7 million remained available for purchase under the share repurchase plan[151] Item 5. Other Information On August 5, 2020, subsequent to the quarter's end, the company's Board of Directors approved a new share repurchase plan, authorizing the repurchase of up to an additional $50 million of its outstanding common stock - On August 5, 2020, the Board of Directors approved a new share repurchase plan authorizing up to an additional $50 million of common stock repurchases[154]