City Office REIT(CIO) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2021 Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for City Office REIT, Inc., including balance sheets, statements of operations, comprehensive income, changes in equity, and cash flows, along with detailed notes explaining the company's organization, accounting policies, real estate investments, debt, and equity activities for the quarter ended March 31, 2021 Condensed Consolidated Balance Sheets This table presents the company's financial position, including assets, liabilities, and equity, as of March 31, 2021, and December 31, 2020 | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :----------------- | :---------------------------- | :------------------------------- | | Total Assets | $1,088,151 | $1,157,292 | | Total Liabilities | $628,538 | $739,417 | | Total Equity | $459,613 | $417,875 | Condensed Consolidated Statements of Operations This table details the company's revenues, expenses, and net income for the three months ended March 31, 2021, and 2020 | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :----------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Rental and other revenues | $39,516 | $40,122 | | Operating income | $8,182 | $7,692 | | Net gain on sale of real estate property | $47,400 | — | | Net income | $49,009 | $1,006 | | Net income attributable to the Company | $48,817 | $824 | | Net income/(loss) attributable to common stockholders | $46,962 | $(1,031) | | Basic EPS | $1.08 | $(0.02) | | Diluted EPS | $1.07 | $(0.02) | | Dividend distributions declared per common share | $0.150 | $0.150 | Condensed Consolidated Statements of Comprehensive Income/(Loss) This table outlines the company's net income and other comprehensive income components for the three months ended March 31, 2021, and 2020 | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :----------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net income | $49,009 | $1,006 | | Other comprehensive income/(loss) | $669 | $(2,741) | | Comprehensive income/(loss) | $49,678 | $(1,735) | | Comprehensive income/(loss) attributable to the Company | $49,486 | $(1,917) | Condensed Consolidated Statements of Changes in Equity This table summarizes changes in the company's equity, including net income and dividend distributions, between December 31, 2020, and March 31, 2021 | Metric | Balance—December 31, 2020 (in thousands) | Balance—March 31, 2021 (in thousands) | | :----------------------------------------- | :--------------------------------------- | :------------------------------------ | | Total Stockholders' Equity | $416,926 | $458,692 | | Total Equity | $417,875 | $459,613 | | Net income attributable to the Company | N/A | $48,817 | | Other comprehensive income | N/A | $669 | | Common stock dividend distribution declared | N/A | $(6,510) | | Preferred stock dividend distribution declared | N/A | $(1,855) | Condensed Consolidated Statements of Cash Flows This table presents the company's cash flows from operating, investing, and financing activities for the three months ended March 31, 2021, and 2020 | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :----------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Cash Provided By Operating Activities | $15,524 | $10,739 | | Net Cash Provided by/(Used In) Investing Activities | $85,121 | $(5,332) | | Net Cash (Used In)/Provided By Financing Activities | $(113,411) | $71,907 | | Net (Decrease)/Increase in Cash, Cash Equivalents and Restricted Cash | $(12,766) | $77,314 | | Cash, Cash Equivalents and Restricted Cash, End of Period | $33,185 | $164,837 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Organization and Description of Business This note describes the company's formation, IPO, and operational structure as a Real Estate Investment Trust - City Office REIT, Inc. was organized in Maryland on November 26, 2013, and completed its initial public offering (IPO) on April 21, 2014[26] - The Company operates as a Real Estate Investment Trust (REIT) under the Internal Revenue Code, allowing it to deduct dividend distributions and avoid U.S. federal taxation at the company level[28] 2. Summary of Significant Accounting Policies This note outlines the accounting principles and policies used in preparing the unaudited condensed consolidated financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules and US GAAP, relying on management's estimates and assumptions[29] - The Company is evaluating the impact of recent FASB ASUs (2020-04 and 2021-01) on reference rate reform, which provide optional expedients for contract modifications and hedge accounting[30][31] 3. Real Estate Investments This note details significant transactions and classifications related to the company's real estate portfolio - On February 10, 2021, the Company sold the Cherry Creek property for $95.0 million, realizing a net gain of $47.4 million[32] - The Cherry Creek property was classified as held for sale as of December 31, 2020, with total assets held for sale valued at $46.054 million[33][34] 4. Lease Intangibles This note provides information on acquired lease intangible assets and liabilities, including estimated amortization expenses | Lease Intangible Category | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------ | :---------------------------- | :------------------------------- | | Acquired lease intangible assets, net | $39,641 | $44,143 | | Acquired lease intangible liabilities, net | $(5,644) | $(6,035) | | Year | Estimated Aggregate Amortization Expense (in thousands) | | :--------- | :------------------------------------------------------ | | 2021 | $9,446 | | 2022 | $8,118 | | 2023 | $5,424 | | 2024 | $3,101 | | 2025 | $2,703 | | Thereafter | $5,205 | | Total | $33,997 | 5. Debt This note details the company's debt structure, including principal amounts, credit facilities, and scheduled repayments | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | Total Principal Debt | $576,141 | $680,962 | | Unsecured Credit Facility | $55,000 | $75,000 | | Term Loan | $50,000 | $50,000 | | Midland Life Insurance (repaid) | — | $83,537 | | Year | Scheduled Principal Repayments (in thousands) | | :--------- | :-------------------------------------------- | | 2021 | $4,483 | | 2022 | $61,529 | | 2023 | $48,529 | | 2024 | $124,725 | | 2025 | $96,572 | | Thereafter | $240,303 | | Total | $576,141 | - The Unsecured Credit Facility matures in March 2022 (extendable to March 2023) and bears interest at LIBOR + 1.40% to 2.25%[37] - The Term Loan matures in September 2024 at LIBOR + 1.25% to 2.15%[37] 6. Fair Value of Financial Instruments This note describes the fair value measurements of the company's financial instruments, including derivative instruments - The Company uses an Interest Rate Swap for a notional amount of $50 million, designated as a cash flow hedge, to pay a fixed rate of approximately 1.27% and receive floating 30-day LIBOR payments[40][41] - As of March 31, 2021, the Interest Rate Swap was reported as a Level 2 liability at approximately $1.3 million, with $0.1 million in realized losses reclassified to interest expense for the three months ended March 31, 2021[42] - Fixed rate mortgage loans payable are classified as Level 3 fair value measurements, with a fair value of $474.1 million as of March 31, 2021, compared to a carrying value of $471.1 million[46] 7. Related Party Transactions This note discloses transactions and balances with related parties - The Company earned $0.1 million in administrative services from related parties (Second City Real Estate II Corporation and Clarity Real Estate Ventures GP, Limited Partnership) for both the three months ended March 31, 2021 and 2020[47] 8. Leases This note provides details on the company's lessor and lessee lease arrangements, including payments and liabilities | Lessor Lease Payments | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :-------------------- | :----------------------------------------------- | :----------------------------------------------- | | Fixed payments | $33,551 | $34,092 | | Variable payments | $5,907 | $6,016 | | Total | $39,458 | $40,108 | | Lessee Lease Liabilities | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :----------------------- | :---------------------------- | :------------------------------- | | Right-of-use asset – operating leases | $12,633 | $12,739 | | Lease liability – operating leases | $7,666 | $7,719 | | Right-of-use asset – financing leases | $49 | $55 | | Lease liability – financing leases | $49 | $55 | | Year | Future Minimum Lease Payments (Lessee - Operating Leases, in thousands) | | :--------- | :---------------------------------------------------------------------- | | 2021 | $383 | | 2022 | $798 | | 2023 | $663 | | 2024 | $597 | | 2025 | $596 | | Thereafter | $26,084 | | Total | $29,121 | 9. Commitments and Contingencies This note outlines the company's obligations for tenant improvements and potential environmental liabilities - The Company is obligated to fund tenant improvements and property expansions under certain leases[56] - Management believes the Company is in material compliance with environmental regulations and is not aware of any environmental liabilities or legal disputes that would have a material adverse impact on its financial position or results of operations[57][58] 10. Stockholders' Equity This note details changes in stockholders' equity, including share repurchase plans, dividend declarations, and equity incentive grants - The Company completed a $100 million share repurchase plan in July 2020 and approved an additional $50 million plan in August 2020, with no shares repurchased in Q1 2021[59][60] - A cash dividend of $0.15 per common share and $0.4140625 per Series A Preferred Stock share was declared for Q1 2021, totaling $6.5 million and $1.9 million respectively[61][63] - The Equity Incentive Plan granted 169,500 restricted stock units (RSUs) and 120,000 Performance RSU Awards in Q1 2021, resulting in $0.5 million and $0.2 million in compensation expense, respectively[66][67] 11. Subsequent Events This note discloses significant events that occurred after the reporting period but before the financial statements were issued - Subsequent to March 31, 2021, the Company entered into an agreement to acquire two properties in San Diego, California, for $43.3 million, with closing expected in Q2 2021[68] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition, highlighting the impact of COVID-19, business strategy, property portfolio, and a detailed comparison of operating results and cash flows for the three months ended March 31, 2021, versus the prior year Cautionary Statement Regarding Forward-Looking Statements This section warns that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties, including adverse economic conditions, COVID-19 impacts, competition, financing challenges, and the ability to maintain REIT status[71][72] - Actual results may differ materially from expectations due to various factors, and the Company undertakes no obligation to update these statements, except as required by law[73] Overview This section provides a general introduction to City Office REIT, Inc., its formation, and its property portfolio as of March 31, 2021 - City Office REIT, Inc. was formed in November 2013 and completed its IPO in April 2014, commencing operations as a REIT[74] - As of March 31, 2021, the Company owned 24 properties comprising 62 office buildings with approximately 5.5 million square feet of net rentable area (NRA), with an occupancy rate of approximately 90.5%[75] - Most leases are full-service gross or triple net, with triple net leases common in properties like Lake Vista Pointe, 2525 McKinnon, Sorrento Mesa, and Canyon Park[76] Factors That May Influence Our Operating Results and Financial Condition This section discusses key external and internal factors, such as the COVID-19 pandemic and leasing strategy, that could affect the company's financial performance - The COVID-19 pandemic has led to rent relief for approximately 0.1% of occupied NRA, with over 99% of base rents collected for Q1 2021, but future collection rates remain uncertain[79][81] - Leasing activity has been slow, except for the life science sector, and there is uncertainty regarding existing tenants' long-term space requirements, potentially impacting rental revenues[84] - The Company's strategy focuses on acquiring and owning high-quality office properties in target markets with growing populations, strong employment growth, and diversified industries, aiming for cash flow stability and long-term value appreciation[87] Our Properties This section provides a detailed breakdown of the company's property portfolio by metropolitan area, including net rentable area, occupancy, and annualized base rent | Metropolitan Area | NRA (000s Square Feet) | In Place Occupancy | Annualized Base Rent (000s) | | :---------------- | :--------------------- | :----------------- | :-------------------------- | | Phoenix, AZ | 1,164 | 86.3% | $29,805 | | Tampa, FL | 1,041 | 92.8% | $25,577 | | Denver, CO | 807 | 89.2% | $14,912 | | Orlando, FL | 565 | 95.8% | $13,307 | | San Diego, CA | 733 | 90.9% | $21,397 | | Dallas, TX | 577 | 86.0% | $12,066 | | Portland, OR | 331 | 99.0% | $7,983 | | Seattle, WA | 207 | 100.0% | $4,650 | | Total / Weighted Average | 5,475 | 90.5% | $129,701 | Operating Expenses This section explains the components of operating expenses and how they are managed through lease structures - Operating expenses include utilities, property taxes, insurance, and site maintenance costs, which are generally passed through to tenants in full-service gross leases (above a base year stop) or paid directly by tenants in net leases[94] Conditions in Our Markets This section discusses how external market conditions, including economic changes and the COVID-19 pandemic, can influence the company's performance - Market conditions, including economic changes, employment rates, and natural hazards, can impact performance, with the COVID-19 pandemic causing significant disruption and uncertainty in global financial markets and economies[95] Summary of Significant Accounting Policies This section confirms that the interim financial statements adhere to the accounting policies outlined in the previous annual report - The interim condensed consolidated financial statements adhere to the same accounting policies and procedures outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2020[96] Results of Operations This section analyzes the company's financial performance, detailing changes in revenues, expenses, and net income for the reporting period - Rental and other revenues decreased by $0.6 million (2%) to $39.5 million for Q1 2021, primarily due to the Cherry Creek disposition and decreased occupancy at 190 Office Center and Pima Center, partially offset by increases at 7595 Tech and Sorrento Mesa[97] - Total operating expenses decreased by $1.1 million (3%) to $31.3 million, mainly due to the Cherry Creek disposition[98] - Interest expense decreased by $0.1 million (2%) to $6.6 million, primarily due to debt repayment from the Cherry Creek sale proceeds[103] - The Company recorded a net gain of $47.4 million on the sale of the Cherry Creek property in February 2021[104] Cash Flows This section analyzes the company's cash generation and usage across operating, investing, and financing activities - Net cash provided by operating activities increased by $4.8 million to $15.5 million for Q1 2021, primarily due to changes in working capital[106] - Net cash provided by investing activities increased by $90.4 million to $85.1 million, mainly driven by proceeds from the Cherry Creek property sale[107] - Net cash used in financing activities increased by $185.3 million to $113.4 million, primarily due to higher debt repayments and lower net proceeds from borrowings[108] Liquidity and Capital Resources This section discusses the company's ability to meet its short-term and long-term financial obligations and funding sources - As of March 31, 2021, the Company had $14.9 million in cash and cash equivalents and $18.3 million in restricted cash[109] - The Company has an Unsecured Credit Facility with $55.0 million outstanding and a $50 million Term Loan, both bearing interest at LIBOR plus a margin[110][112] - Short-term liquidity needs are met through operations, existing cash reserves, public offerings, and borrowings, while long-term needs are funded by operations, debt, and equity issuances[114][115] Contractual Obligations and Other Long-Term Liabilities This section details the company's future payment obligations under various contracts and long-term liabilities | Contractual Obligations | Total (in thousands) | 2021 (in thousands) | 2022-2023 (in thousands) | 2024-2025 (in thousands) | More than 5 years (in thousands) | | :---------------------- | :------------------- | :------------------ | :----------------------- | :----------------------- | :------------------------------- | | Principal payments on mortgage loans | $576,141 | $4,483 | $110,058 | $221,297 | $240,303 | | Interest payments | $105,100 | $16,100 | $40,405 | $30,773 | $17,822 | | Tenant-related commitments | $12,395 | $12,395 | — | — | — | | Lease obligations | $29,172 | $403 | $1,492 | $1,193 | $26,084 | | Total | $722,808 | $33,381 | $151,955 | $253,263 | $284,209 | Off-Balance Sheet Arrangements This section describes the company's off-balance sheet commitments, such as letters of credit - As of March 31, 2021, the Company had a $4.8 million letter of credit outstanding under its Unsecured Credit Facility to satisfy escrow requirements for a mortgage lender[120] Inflation This section explains how the company's lease agreements help mitigate the impact of inflation on its operating results - The Company's office leases generally include provisions for real estate tax and operating expense escalations, as well as fixed annual rent increases, which are expected to partially offset inflationary increases[121] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details the Company's exposure to market risks, primarily interest rate risk, and its strategies for managing these risks through fixed-rate financing and derivative instruments - The primary market risk is interest rate risk, with approximately 81.8% of debt having fixed interest rates as of March 31, 2021[123] - Including the Interest Rate Swap, which effectively fixes the LIBOR component of the $50 million Term Loan, approximately 90.5% of the Company's debt was fixed rate[123] - A 10% increase or decrease in LIBOR would result in a nominal change to annual interest costs on outstanding debt[123] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures and reports no material changes to internal control over financial reporting - The Company's Chief Executive Officer and Chief Financial Officer determined that disclosure controls and procedures were effective as of March 31, 2021[125] - There have been no material changes to the Company's internal control over financial reporting during the period covered by the report[126] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and equity sales Item 1. Legal Proceedings This section states that the Company is involved in ordinary course litigation but does not anticipate any material adverse effects on its financial position or results of operations - Management does not believe that any current litigation will have a material adverse effect, individually or in the aggregate, on the Company's financial position or results of operations[128] Item 1A. Risk Factors This section indicates that there are no new material risk factors to report for the current period - No new material risk factors are reported for the current period[129] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section outlines the Company's share repurchase plans, including the completion of a $100 million plan and the approval of an additional $50 million plan - The Company completed a $100 million share repurchase plan in July 2020 and approved an additional $50 million plan in August 2020[130] - Repurchased shares are classified as authorized and unissued, with costs reducing stockholders' equity by first reducing common stock par value and then additional paid-in capital[131] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[132] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable to the Company[133] Item 5. Other Information This section indicates that there is no other information to report for the current period - No other information is reported[133] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, stock certificates, and various certifications - Exhibits include Articles of Amendment and Restatement, Second Amended and Restated Bylaws, Certificates of Common and Preferred Stock, and certifications under the Sarbanes-Oxley Act[135] SIGNATURES This section contains the official signatures of the Company's Chief Executive Officer and Chief Financial Officer, certifying the report - The report was signed on May 7, 2021, by James Farrar, Chief Executive Officer and Director, and Anthony Maretic, Chief Financial Officer, Secretary and Treasurer[137][139]