City Office REIT(CIO) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial information for City Office REIT, Inc., including financial statements and management's discussion and analysis Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements of City Office REIT, Inc. for the periods ended June 30, 2021, and December 31, 2020, including balance sheets, statements of operations, comprehensive income, changes in equity, and cash flows, along with accompanying notes detailing significant accounting policies, real estate investments, debt, lease intangibles, and equity Condensed Consolidated Balance Sheets The balance sheets show a decrease in total assets and liabilities, primarily driven by debt reduction, while total equity increased for the period ended June 30, 2021 Assets/Liabilities & Equity (in thousands) | Assets/Liabilities & Equity | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :--------------------------- | :------------------------------- | | Assets: | | | | Real estate properties, net | $983,304 | $955,589 | | Cash and cash equivalents | $13,394 | $25,305 | | Total Assets | $1,128,152 | $1,157,292 | | Liabilities: | | | | Debt | $612,510 | $677,242 | | Total Liabilities | $674,728 | $739,417 | | Equity: | | | | Total Stockholders' Equity | $452,515 | $416,926 | | Total Equity | $453,424 | $417,875 | - Total Assets decreased by $29.14 million (2.5%) from $1,157.292 million at December 31, 2020, to $1,128.152 million at June 30, 2021, primarily due to a decrease in cash and cash equivalents and assets held for sale, partially offset by an increase in real estate properties, net[13] - Total Liabilities decreased by $64.689 million (8.7%) from $739.417 million at December 31, 2020, to $674.728 million at June 30, 2021, mainly driven by a significant reduction in debt[13] - Total Equity increased by $35.549 million (8.5%) from $417.875 million at December 31, 2020, to $453.424 million at June 30, 2021[13] Condensed Consolidated Statements of Operations Net income attributable to the Company significantly increased for both the three and six-month periods ended June 30, 2021, largely due to a substantial gain on the sale of real estate property Metric (in thousands, except per share data) | Metric (in thousands, except per share data) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Rental and other revenues | $39,964 | $39,617 | $79,480 | $79,739 | | Total operating expenses | $32,201 | $31,861 | $63,534 | $64,292 | | Operating income | $7,763 | $7,756 | $15,946 | $15,447 | | Interest expense | $(5,911) | $(7,133) | $(12,485) | $(13,818) | | Net gain on sale of real estate property | — | — | $47,400 | — | | Net income attributable to the Company | $1,662 | $444 | $50,479 | $1,268 | | Net (loss)/income attributable to common stockholders | $(193) | $(1,411) | $46,769 | $(2,442) | | Basic Net (loss)/income per common share | $0.00 | $(0.03) | $1.08 | $(0.05) | | Diluted Net (loss)/income per common share | $0.00 | $(0.03) | $1.06 | $(0.05) | - Net income attributable to the Company significantly increased for both the three-month period (274.3% YoY) and six-month period (3889.7% YoY) ended June 30, 2021, primarily driven by a $47.4 million net gain on the sale of real estate property in the six-month period[15][108] - Rental and other revenues remained relatively stable, with a slight increase of 1% for the three months ended June 30, 2021, and a slight decrease of 0% for the six months ended June 30, 2021, compared to the prior year periods[15][94][101] Condensed Consolidated Statements of Comprehensive Income/(Loss) Comprehensive income attributable to the Company saw a substantial increase for the six months ended June 30, 2021, driven by higher net income and positive other comprehensive income Metric (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $1,852 | $623 | $50,861 | $1,629 | | Other comprehensive income/(loss) | $100 | $(298) | $769 | $(3,039) | | Comprehensive income/(loss) attributable to the Company | $1,762 | $146 | $51,248 | $(1,771) | - Comprehensive income attributable to the Company saw a substantial increase, reaching $51.248 million for the six months ended June 30, 2021, compared to a loss of $(1.771) million in the prior year, primarily due to higher net income and positive other comprehensive income[18] Condensed Consolidated Statements of Changes in Equity Total equity increased by $35.549 million from December 31, 2020, to June 30, 2021, primarily due to net income contributions, which also significantly improved the accumulated deficit Equity Component (in thousands) | Equity Component (in thousands) | Balance—December 31, 2020 | Balance—June 30, 2021 | | :------------------------------ | :------------------------ | :-------------------- | | Preferred stock | $112,000 | $112,000 | | Common stock | $433 | $435 | | Additional paid-in capital | $479,411 | $480,629 | | Accumulated deficit | $(172,958) | $(139,358) | | Accumulated other comprehensive loss | $(1,960) | $(1,191) | | Total stockholders' equity | $416,926 | $452,515 | | Non-controlling interests in properties | $949 | $909 | | Total equity | $417,875 | $453,424 | - Total equity increased by $35.549 million from December 31, 2020, to June 30, 2021, primarily driven by net income of $48.817 million and $1.662 million for the first and second quarters of 2021, respectively, partially offset by dividend distributions[22] - Accumulated deficit improved significantly, decreasing from $(172.958) million at December 31, 2020, to $(139.358) million at June 30, 2021, reflecting positive net income contributions[22] Condensed Consolidated Statements of Cash Flows Cash, cash equivalents, and restricted cash decreased, with operating cash flows increasing, investing activities shifting to a net inflow due to property sales, and financing activities seeing a significant increase in cash used for debt repayments Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net Cash Provided By Operating Activities | $35,685 | $31,336 | | Net Cash Provided By/(Used In) Investing Activities | $37,417 | $(18,196) | | Net Cash Used In Financing Activities | $(82,730) | $(17,520) | | Net Decrease in Cash, Cash Equivalents and Restricted Cash | $(9,628) | $(4,380) | | Cash, Cash Equivalents and Restricted Cash, End of Period | $36,323 | $83,143 | - Net cash provided by investing activities significantly increased by $55.6 million, shifting from an outflow of $18.2 million in 2020 to an inflow of $37.4 million in 2021, primarily due to proceeds from the sale of the Cherry Creek property[26][110] - Net cash used in financing activities increased by $65.2 million, from $17.5 million in 2020 to $82.7 million in 2021, mainly due to higher repayment of borrowings and lower net proceeds from new borrowings[26][111] Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures on the Company's accounting policies, real estate investments, debt, lease intangibles, equity, and other financial instruments 1. Organization and Description of Business City Office REIT, Inc. was organized in Maryland in 2013 and completed its IPO in 2014, contributing proceeds to its Operating Partnership. The Company operates as the sole general partner of the Operating Partnership and has elected to qualify as a Real Estate Investment Trust (REIT) to deduct dividend distributions and avoid federal income tax at the company level - The Company was organized in Maryland on November 26, 2013, and completed its IPO on April 21, 2014[28] - The Company operates as the sole general partner of City Office REIT Operating Partnership, L.P., managing its business[29] - The Company has elected to be taxed and will continue to operate as a REIT, allowing it to deduct dividend distributions and eliminate U.S. federal taxation of income at the Company level[30] 2. Summary of Significant Accounting Policies This section outlines the basis of preparation for the unaudited condensed consolidated financial statements, adhering to SEC rules, US GAAP, and management's estimates. It also details recent accounting pronouncements, specifically ASU 2020-04 and ASU 2021-01, which provide optional expedients for contract modifications and hedge accounting related to reference rate reform, with the Company currently evaluating their impact - Financial statements are prepared in accordance with SEC rules and US GAAP, relying on management's estimates and assumptions[31] - The FASB issued ASU 2020-04 and ASU 2021-01, offering optional expedients for contract modifications and hedge accounting related to reference rate reform (e.g., LIBOR transition), available for use through December 31, 2022[32] - The Company has not yet adopted these new standards and is evaluating their potential impact on its financial statements, with the option to elect expedients in future periods[32] 3. Real Estate Investments The Company engaged in both acquisitions and dispositions of real estate properties during the six months ended June 30, 2021. It acquired two properties adjacent to its Sorrento Mesa portfolio for $43.256 million and sold the Cherry Creek property for $95.0 million, realizing a net gain of $47.4 million Acquisitions During the six months ended June 30, 2021, the Company acquired two properties, 5910 Pacific Center and 9985 Pacific Heights, for a total purchase price of $43.256 million - During the six months ended June 30, 2021, the Company acquired 5910 Pacific Center and 9985 Pacific Heights (Sorrento Mesa portfolio) for a total purchase price of $43.256 million[33][34] Acquired Assets (in thousands) | Acquired Assets (in thousands) | 5910 Pacific Center and 9985 Pacific Heights | | :----------------------------- | :------------------------------------------- | | Land | $37,294 | | Building and improvement | $2,979 | | Tenant improvement | $917 | | Lease intangible assets | $2,469 | | Other assets | $19 | | Accounts payable and other liabilities | $(319) | | Lease intangible liabilities | $(103) | | Net assets acquired | $43,256 | Sale of Real Estate Property On February 10, 2021, the Company sold the Cherry Creek property for a gross sales price of $95.0 million, resulting in a net gain of $47.4 million - On February 10, 2021, the Company sold the Cherry Creek property in Denver, Colorado, for a gross sales price of $95.0 million[35] - The sale resulted in an aggregate net gain of $47.4 million, which is classified as net gain on sale of real estate property in the condensed consolidated statements of operations[35] Assets Held for Sale The Cherry Creek property was classified as held for sale as of December 31, 2020, with total assets held for sale amounting to $46.054 million - The Cherry Creek property was classified as held for sale as of December 31, 2020, with total assets held for sale amounting to $46.054 million and related liabilities of $(0.531) million[36][37] 4. Lease Intangibles This note details the Company's lease intangibles, including above-market leases, in-place leases, and leasing commissions, as well as below-market lease liabilities. As of June 30, 2021, net acquired lease intangible assets were $37.363 million, and net acquired lease intangible liabilities were $(5.352) million. The estimated aggregate amortization expense for lease intangibles for the next five years is also provided Lease Intangibles (in thousands) | Lease Intangibles (in thousands) | June 30, 2021 | December 31, 2020 | | :------------------------------- | :------------ | :---------------- | | Acquired lease intangible assets, net | $37,363 | $44,143 | | Acquired lease intangible liabilities, net | $(5,352) | $(6,035) | Estimated Aggregate Amortization Expense (in thousands) | Estimated Aggregate Amortization Expense (in thousands) | | :------------------------------------------------------ | | 2021 | $6,112 | | 2022 | $8,941 | | 2023 | $5,914 | | 2024 | $3,118 | | 2025 | $2,720 | | Thereafter | $5,206 | | Total | $32,011 | 5. Debt The Company's debt portfolio includes an Unsecured Credit Facility, a Term Loan, and various property-specific mortgage loans. Total principal debt decreased from $680.962 million at December 31, 2020, to $615.617 million at June 30, 2021, primarily due to the repayment of the Midland Life Insurance mortgage loan. The Unsecured Credit Facility and Term Loan bear interest at LIBOR plus a margin, with the Term Loan partially hedged by an interest rate swap Debt (in thousands) | Debt (in thousands) | June 30, 2021 | December 31, 2020 | | :------------------ | :------------ | :---------------- | | Total Principal | $615,617 | $680,962 | | Total Debt | $612,510 | $677,242 | - The Midland Life Insurance mortgage loan, with a balance of $83.537 million, was repaid in full in February 2021[39] Scheduled Principal Repayments of Debt (in thousands) | Scheduled Principal Repayments of Debt (in thousands) | | :---------------------------------------------------- | | 2021 | $2,967 | | 2022 | $102,539 | | 2023 | $48,539 | | 2024 | $124,736 | | 2025 | $91,997 | | Thereafter | $244,839 | | Total | $615,617 | 6. Fair Value of Financial Instruments The Company uses a fair value hierarchy (Level 1, 2, 3) for financial instruments. An Interest Rate Swap with a notional amount of $50 million, designated as a cash flow hedge, is classified as a Level 2 liability. The fair value of fixed rate mortgage loans payable, determined using discounted cash flow analysis, is classified as Level 3 - The Interest Rate Swap, designated as a cash flow hedge, had a fair value liability of approximately $1.2 million as of June 30, 2021, and $2.0 million as of December 31, 2020, classified as a Level 2 fair value measurement[42][44][45] - For the six months ended June 30, 2021, approximately $0.3 million of realized losses from the Interest Rate Swap were reclassified to interest expense[44] - The fair value of fixed rate mortgage loans payable was $476.4 million (carrying value $469.6 million) as of June 30, 2021, and $573.6 million (carrying value $556.0 million) as of December 31, 2020, classified as Level 3 fair value measurements[47] 7. Related Party Transactions The Company earned $0.3 million in administrative services fees from Second City Real Estate II Corporation, Clarity Real Estate Ventures GP, Limited Partnership, and their affiliates for both the six months ended June 30, 2021, and 2020 - The Company earned $0.3 million in administrative services from related parties (Second City, Clarity, and affiliates) for the six months ended June 30, 2021, consistent with the prior year[48] 8. Leases This section details the Company's accounting for leases both as a lessor and a lessee. As a lessor, the Company primarily uses operating leases with fixed and variable payments, recognizing rental income on a straight-line basis. As a lessee, the Company has operating and financing leases, with right-of-use assets and lease liabilities recorded on the balance sheet, using a weighted average discount rate of 6.2% Lessor Accounting As a lessor, the Company primarily utilizes full-service gross or net operating leases, recognizing rental income on a straight-line basis, with future minimum lease payments totaling $541.464 million - The Company's properties are primarily leased under full-service gross or net operating leases, with rental income recognized on a straight-line basis[49] Lease Payments (in thousands) | Lease Payments (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Fixed payments | $34,311 | $33,907 | $67,862 | $67,999 | | Variable payments | $5,629 | $5,697 | $11,536 | $11,713 | | Total | $39,940 | $39,604 | $79,398 | $79,712 | Future Minimum Lease Payments to be Received (in thousands) | Future Minimum Lease Payments to be Received (in thousands) | | :---------------------------------------------------------- | | 2021 | $61,009 | | 2022 | $108,545 | | 2023 | $88,167 | | 2024 | $68,482 | | 2025 | $55,089 | | Thereafter | $160,172 | | Total | $541,464 | Lessee Accounting As a lessee, the Company holds operating and financing leases with a weighted average remaining lease term of 49 years, recording right-of-use assets and lease liabilities using a 6.2% weighted average discount rate - As a lessee, the Company has operating and financing leases with remaining terms of 1 to 67 years and a weighted average remaining lease term of 49 years[51] Lessee Lease Balances (in thousands) | Lessee Lease Balances (in thousands) | June 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------ | :---------------- | | Right-of-use asset – operating leases | $14,362 | $12,739 | | Lease liability – operating leases | $9,447 | $7,719 | | Right-of-use asset – financing leases | $43 | $55 | | Lease liability – financing leases | $43 | $55 | - The Company uses a weighted average discount rate of 6.2% for determining its lease liabilities[51] Operating Lease Expenses (in thousands) | Operating Lease Expenses (in thousands) | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | | :-------------------------------------- | :------------------------------- | :----------------------------- | | Operating lease expenses | $300 | $500 | 9. Commitments and Contingencies The Company has commitments to fund tenant improvements and is subject to environmental laws, but management believes there are no material adverse environmental liabilities. The Company is also involved in ordinary course lawsuits, which management does not expect to have a material adverse effect on its financial position or results of operations - The Company is obligated to fund tenant improvements and property expansions under certain tenant leases[55] - Management believes the Company is in material compliance with environmental regulations and is not aware of any environmental liability that would materially impact its financial position or results of operations[57] - Legal proceedings arising in the ordinary course of business are not expected to have a material adverse effect on the Company's financial position or results of operations as of June 30, 2021[58] 10. Stockholders' Equity This note details the Company's share repurchase plans, dividend distributions for common and preferred stock, and its equity incentive plan. The Company completed its $100 million share repurchase plan in July 2020 and an additional $50 million plan in August 2020, but made no repurchases in the first half of 2021. It declared quarterly cash dividends of $0.15 per common share and $0.4140625 per Series A Preferred Stock share for Q2 2021. The equity incentive plan includes grants of restricted stock units (RSUs) and performance-based RSUs (Performance RSU Awards) to executive officers, directors, and employees Share Repurchase Plan The Company completed $150 million in share repurchase plans in 2020, but made no repurchases during the first six months of 2021 - The Company completed a $100 million share repurchase plan in July 2020 and an additional $50 million plan in August 2020[59] - No shares were repurchased during the six months ended June 30, 2021[61] - During the six months ended June 30, 2020, the Company repurchased 10,249,655 shares of common stock for approximately $89.3 million[61] Common Stock and Common Unit Distributions A cash dividend distribution of $0.15 per common share, totaling $6.5 million, was declared for the quarter ended June 30, 2021 - A cash dividend distribution of $0.15 per common share was declared for the quarter ended June 30, 2021, totaling $6.5 million[61] Preferred Stock Distributions A cash dividend distribution of $0.4140625 per share of 6.625% Series A Preferred Stock, totaling $1.9 million, was declared for the quarter ended June 30, 2021 - A cash dividend distribution of $0.4140625 per share of 6.625% Series A Preferred Stock was declared for the quarter ended June 30, 2021, totaling $1.9 million[62] Equity Incentive Plan The Equity Incentive Plan allows for various equity-based awards, with 2,263,580 shares available, and resulted in $0.9 million and $0.4 million in compensation expense for RSUs and Performance RSU Awards, respectively, during the first half of 2021 - The Equity Incentive Plan allows for grants of various equity-based awards, with 2,263,580 shares of common stock available for issuance[63] - During the six months ended June 30, 2021, 169,500 RSUs with a fair value of $1.6 million were granted, resulting in $0.9 million in compensation expense[66] - During the same period, 120,000 Performance RSU Awards with a fair value of $1.2 million were granted, leading to $0.4 million in compensation expense[67] 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 key financial results for the three and six months ended June 30, 2021. It also discusses liquidity, capital resources, and contractual obligations Cautionary Statement Regarding Forward-Looking Statements This section advises readers that the report contains forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Key risks include economic conditions, the ongoing COVID-19 pandemic's impact on tenants and demand for office space, interest rate changes, and the Company's ability to maintain REIT status - Forward-looking statements are identified by words like 'anticipate,' 'expect,' 'will,' and 'may,' and are subject to risks and uncertainties[71] - Key risks include adverse economic or real estate developments, changes in local/regional/national/international economic conditions (including COVID-19 impact), tenant defaults or non-renewals, increased interest rates, and the Company's ability to qualify and maintain REIT status[71][72] - The Company cautions against undue reliance on forward-looking statements and undertakes no obligation to update them, except as required by law[73] Overview City Office REIT, Inc. was formed in 2013 and completed its IPO in 2014, operating as a REIT focused on office properties. As of June 30, 2021, the Company owned 24 properties comprising 64 office buildings with approximately 5.6 million square feet of net rentable area, with an occupancy rate of 89.7%. Most leases are full-service gross or net leases Company City Office REIT, Inc. was formed on November 26, 2013, and completed its initial public offering on April 21, 2014 - City Office REIT, Inc. was formed on November 26, 2013, and completed its IPO on April 21, 2014[74] Revenue Base As of June 30, 2021, the Company owned 24 properties (64 office buildings) with approximately 5.6 million square feet of net rentable area, achieving an occupancy rate of 89.7% - As of June 30, 2021, the Company owned 24 properties (64 office buildings) with approximately 5.6 million square feet of net rentable area[75] - The Company's properties were approximately 89.7% leased as of June 30, 2021[75] Office Leases Most of the Company's office leases are structured as full-service gross with a base year expense stop or triple net leases, where tenants are responsible for all property taxes and operating expenses - Most leases are full-service gross (with base year expense 'stop') or triple net leases (tenant responsible for all property taxes and operating expenses)[76] - All tenants in Lake Vista Pointe, Superior Pointe, 2525 McKinnon, and Canyon Park properties have triple net leases[76] Factors That May Influence Our Operating Results and Financial Condition This section discusses key factors influencing the Company's performance, including the ongoing impact of the COVID-19 pandemic on tenant behavior, leasing activity, and economic conditions. It also outlines the Company's business strategy of acquiring office properties in growing target markets, and how rental revenue, operating expenses, and market conditions affect financial results COVID-19 The COVID-19 pandemic has negatively impacted the global economy and regional U.S. economies, affecting some tenants' ability to pay rent and slowing leasing activity - The COVID-19 pandemic has negatively impacted the global economy and regional U.S. economies, affecting some tenants' ability to pay rent[77] - The Company collected over 99% of contractually required base rents for the three months ended June 30, 2021, and granted rent relief to tenants comprising approximately 0.1% of occupied NRA[80] - Leasing activity has been slow, with uncertainty over existing tenants' long-term space requirements, potentially reducing anticipated rental revenues and increasing subleasing activity[81] Business and Strategy The Company's strategy focuses on acquiring and owning office properties in target markets characterized by growing populations, strong employment, diversified industries, and a high quality of life - The Company focuses on owning and acquiring office properties in target markets characterized by growing populations, strong employment growth, diversified industries, and a high quality of life[85] - The strategy leverages management's market-specific knowledge and local relationships to identify acquisition opportunities offering cash flow stability and long-term value appreciation[85] Rental Revenue and Tenant Recoveries Net rental revenue is influenced by maintaining occupancy rates, leasing available space, and increasing rental rates, with current average rental rates generally in-line or slightly below market rates - Net rental revenue depends on maintaining occupancy rates, leasing available space, and increasing rental rates[86] - The average rental rates for the Company's portfolio are generally in-line or slightly below current average quoted market rates[86] Our Properties As of June 30, 2021, the Company owned 24 properties (64 office buildings) totaling approximately 5.6 million square feet of net rentable area across eight metropolitan areas - As of June 30, 2021, the Company owned 24 properties (64 office buildings) totaling approximately 5.6 million square feet of NRA across metropolitan areas including Dallas, Denver, Orlando, Phoenix, Portland, San Diego, Seattle, and Tampa[88] Metropolitan Area (NRA in 000s Square Feet, Annualized Base Rent in $000s) | Metropolitan Area | NRA (000s Square Feet) | In Place Occupancy | Annualized Base Rent ($000s) | | :---------------- | :--------------------- | :----------------- | :--------------------------- | | Phoenix, AZ | 1,264 | 87.4% | $30,571 | | Tampa, FL | 1,037 | 92.4% | $26,012 | | Denver, CO | 807 | 89.7% | $15,093 | | Orlando, FL | 720 | 94.2% | $16,720 | | San Diego, CA | 681 | 80.4% | $19,063 | | Dallas, TX | 577 | 84.7% | $11,910 | | Portland, OR | 203 | 98.4% | $4,517 | | Seattle, WA | 335 | 97.2% | $8,035 | | Total / Weighted Average | 5,578 | 89.7% | $131,949 | Operating Expenses Operating expenses, including utilities, property taxes, insurance, and site maintenance, are generally passed along to tenants in full-service gross leases or paid in full by tenants in net leased properties - Operating expenses include utilities, property taxes, insurance, and site maintenance costs[91] - Increases in these expenses above tenants' base years are generally passed along to tenants in full-service gross leases or paid in full by tenants in net leased properties[91] Conditions in Our Markets Economic conditions, including state budgetary shortfalls, employment rates, and natural hazards, can impact the Company's performance, with the long-term impact of the COVID-19 pandemic remaining highly uncertain - Economic conditions, including state budgetary shortfalls, employment rates, and natural hazards, can impact the Company's performance in its operating markets[92] - The COVID-19 pandemic has caused significant disruption, and its long-term impact on the Company's markets, tenants, and business strategy remains highly uncertain and not reasonably estimable[92] Summary of Significant Accounting Policies The interim condensed consolidated financial statements adhere to the same accounting policies and procedures as outlined in the audited consolidated financial statements for the year ended December 31, 2020 - The interim condensed consolidated financial statements follow the same accounting policies and procedures as outlined in the audited consolidated financial statements for the year ended December 31, 2020[93] Results of Operations The Company's results of operations for the three and six months ended June 30, 2021, show a slight increase in rental and other revenues for the three-month period, primarily due to acquisitions and significant leasing transactions, offset by the disposition of Cherry Creek. Total operating expenses also saw a marginal increase for the three-month period. For the six-month period, revenues slightly decreased, while total operating expenses decreased, largely influenced by the Cherry Creek disposition and a significant net gain on sale of real estate property Comparison of Three Months Ended June 30, 2021 to Three Months Ended June 30, 2020 This section compares the Company's financial performance for the three months ended June 30, 2021, against the same period in 2020, detailing changes in revenues, operating expenses, and other income/expenses Rental and Other Revenues Rental and other revenues increased by $0.4 million (1%) for the three months ended June 30, 2021, driven by acquisitions and termination fees, partially offset by the Cherry Creek disposition - Rental and other revenues increased by $0.4 million (1%) to $40.0 million for the three months ended June 30, 2021, from $39.6 million in the prior year[94] - This increase was driven by $0.4 million from Sorrento Mesa acquisitions, $0.5 million from 7595 Tech, $0.6 million from existing Sorrento Mesa, and $0.9 million from termination fees at SanTan and Park Tower[94] - The disposition of Cherry Creek resulted in a $2.1 million decrease in revenue[94] Operating Expenses Total operating expenses increased by $0.3 million (1%) for the three months ended June 30, 2021, primarily due to acquisitions and higher professional fees, partially offset by the Cherry Creek disposition Total Operating Expenses Total operating expenses increased by $0.3 million (1%) to $32.2 million for the three months ended June 30, 2021, primarily due to acquisitions and higher professional fees, offset by the Cherry Creek disposition - Total operating expenses increased by $0.3 million (1%) to $32.2 million for the three months ended June 30, 2021, from $31.9 million in the prior year[95] - Increases were due to $0.4 million from Sorrento Mesa acquisitions, $0.6 million from Mission City, and $0.4 million in higher professional fees (general and administrative)[95] - The disposition of Cherry Creek resulted in a $1.3 million decrease in total operating expenses[95] Property Operating Expenses Property operating expenses increased by $0.1 million (1%) for the three months ended June 30, 2021, due to acquisitions, partially offset by the Cherry Creek disposition - Property operating expenses increased by $0.1 million (1%) to $14.2 million for the three months ended June 30, 2021, from $14.1 million in the prior year[96] - This increase was due to $0.1 million from Sorrento Mesa acquisitions and $0.3 million from Mission City[96] - The disposition of Cherry Creek resulted in a $0.7 million decrease in property operating expenses[96] General and Administrative General and administrative expenses increased by $0.4 million (14%) for the three months ended June 30, 2021, primarily due to higher professional fees - General and administrative expenses increased $0.4 million (14%) to $3.1 million for the three months ended June 30, 2021, from $2.7 million in the prior year, due to higher professional fees[98] Depreciation and Amortization Depreciation and amortization decreased by $0.1 million (1%) for the three months ended June 30, 2021, primarily due to the Cherry Creek disposition, partially offset by Sorrento Mesa acquisitions - Depreciation and amortization decreased $0.1 million (1%) to $15.0 million for the three months ended June 30, 2021, from $15.1 million in the prior year[99] - The decrease was primarily due to a $0.6 million reduction from the Cherry Creek disposition, partially offset by a $0.3 million increase from Sorrento Mesa acquisitions[99] Other Expense (Income) This section details changes in non-operating expenses and income, specifically highlighting the decrease in interest expense due to debt repayment Interest Expense Interest expense decreased by $1.2 million (17%) for the three months ended June 30, 2021, primarily due to debt repayment from the Cherry Creek sale - Interest expense decreased $1.2 million (17%) to $5.9 million for the three months ended June 30, 2021, from $7.1 million in the prior year, primarily due to debt repayment from the Cherry Creek sale[100] Comparison of Six Months Ended June 30, 2021 to Six Months Ended June 30, 2020 This section compares the Company's financial performance for the six months ended June 30, 2021, against the same period in 2020, detailing changes in revenues, operating expenses, and other income/expenses Rental and Other Revenues Rental and other revenues decreased by $0.2 million (0%) for the six months ended June 30, 2021, primarily due to the Cherry Creek disposition and lower occupancy, partially offset by acquisitions and termination income - Rental and other revenues decreased by $0.2 million (0%) to $79.5 million for the six months ended June 30, 2021, from $79.7 million in the prior year[101] - The decrease was primarily due to a $3.2 million reduction from the Cherry Creek disposition and decreases at 190 Office Center ($0.5 million) and Pima Center ($0.6 million) due to lower occupancy[101] - Offsetting increases included $0.4 million from Sorrento Mesa acquisitions, $0.9 million from 7595 Tech, $1.2 million from existing Sorrento Mesa, $0.3 million from City Center, and $0.9 million from termination income at SanTan and Park Tower[101] Operating Expenses Total operating expenses decreased by $0.8 million (1%) for the six months ended June 30, 2021, mainly due to the Cherry Creek disposition, partially offset by acquisitions and higher professional fees Total Operating Expenses Total operating expenses decreased by $0.8 million (1%) to $63.5 million for the six months ended June 30, 2021, primarily due to the Cherry Creek disposition, partially offset by acquisitions and higher professional fees - Total operating expenses decreased by $0.8 million (1%) to $63.5 million for the six months ended June 30, 2021, from $64.3 million in the prior year[102] - The decrease was mainly due to a $2.1 million reduction from the Cherry Creek disposition[102] - Offsetting increases included $0.4 million from Sorrento Mesa acquisitions, $0.4 million from the Denver Tech portfolio, and $0.4 million in higher professional fees[102] Property Operating Expenses Property operating expenses decreased by $0.5 million (2%) for the six months ended June 30, 2021, primarily due to the Cherry Creek disposition, partially offset by Sorrento Mesa acquisitions - Property operating expenses decreased by $0.5 million (2%) to $28.3 million for the six months ended June 30, 2021, from $28.8 million in the prior year[103] - The decrease was primarily due to a $1.0 million reduction from the Cherry Creek disposition, partially offset by a $0.1 million increase from Sorrento Mesa acquisitions[103] General and Administrative General and administrative expenses increased by $0.4 million (7%) for the six months ended June 30, 2021, primarily due to higher professional fees - General and administrative expenses increased $0.4 million (7%) to $5.9 million for the six months ended June 30, 2021, from $5.5 million in the prior year, due to higher professional fees[105] Depreciation and Amortization Depreciation and amortization decreased by $0.6 million (2%) for the six months ended June 30, 2021, primarily due to the Cherry Creek disposition, partially offset by Sorrento Mesa acquisitions - Depreciation and amortization decreased $0.6 million (2%) to $29.4 million for the six months ended June 30, 2021, from $30.0 million in the prior year[106] - The decrease was primarily due to a $1.1 million reduction from the Cherry Creek disposition, partially offset by depreciation related to Sorrento Mesa acquisitions[106] Other Expense (Income) This section details changes in non-operating expenses and income, including a decrease in interest expense and a significant net gain from the sale of real estate property Interest Expense Interest expense decreased by $1.3 million (10%) for the six months ended June 30, 2021, primarily due to debt repayment from the Cherry Creek sale - Interest expense decreased $1.3 million (10%) to $12.5 million for the six months ended June 30, 2021, from $13.8 million in the prior year, primarily due to debt repayment from the Cherry Creek sale[107] Net Gain on the Sale of Real Estate Property The Company recorded a significant net gain of $47.4 million on the sale of its Cherry Creek property for the six months ended June 30, 2021 - The Company recorded a net gain of $47.4 million on the sale of its Cherry Creek property for the six months ended June 30, 2021[108] Cash Flows The Company's cash, cash equivalents, and restricted cash decreased from $83.1 million at June 30, 2020, to $36.3 million at June 30, 2021. Operating cash flows increased, while investing activities shifted from a net use to a net provision of cash due to property sales. Financing activities saw a significant increase in cash used, primarily due to higher debt repayments Comparison of Six Months Ended June 30, 2021 to Six Months Ended June 30, 2020 This section compares the Company's cash flow activities for the six months ended June 30, 2021, against the same period in 2020, detailing changes in operating, investing, and financing cash flows Cash flow from operating activities Net cash provided by operating activities increased by $4.4 million to $35.7 million for the six months ended June 30, 2021, primarily due to changes in working capital - Net cash provided by operating activities increased by $4.4 million to $35.7 million for the six months ended June 30, 2021, compared to $31.3 million in the prior year, primarily due to changes in working capital[109] Cash flow from investing activities Net cash provided by investing activities increased by $55.6 million to $37.4 million for the six months ended June 30, 2021, primarily due to proceeds from the Cherry Creek property sale - Net cash provided by investing activities increased by $55.6 million to $37.4 million for the six months ended June 30, 2021, compared to $18.2 million used in the prior year[110] - This increase was primarily due to proceeds from the sale of the Cherry Creek property, partially offset by the acquisition of two Sorrento Mesa buildings[110] Cash flow to financing activities Net cash used in financing activities increased by $65.2 million to $82.7 million for the six months ended June 30, 2021, mainly due to higher debt repayments and lower net proceeds from new borrowings - Net cash used in financing activities increased by $65.2 million to $82.7 million for the six months ended June 30, 2021, compared to $17.5 million in the prior year[111] - The increase was primarily due to higher repayment of borrowings, including the Midland Life Insurance loan, and lower net proceeds from new borrowings[111] Liquidity and Capital Resources The Company's liquidity is supported by cash, an Unsecured Credit Facility, and a Term Loan. Short-term needs are met by operations and existing cash, while long-term needs are funded through debt, equity issuances, and the Unsecured Credit Facility. The Company's contractual obligations include principal and interest payments on debt, tenant-related commitments, and lease obligations, totaling $767.5 million as of June 30, 2021 Analysis of Liquidity and Capital Resources As of June 30, 2021, the Company had $13.4 million in cash and cash equivalents and $22.9 million in restricted cash, supported by an Unsecured Credit Facility and a Term Loan for both short-term and long-term liquidity needs - As of June 30, 2021, the Company had $13.4 million in cash and cash equivalents and $22.9 million in restricted cash[112] - The Unsecured Credit Facility provides commitments up to $250 million (with an accordion feature up to $500 million), maturing in March 2022 (extendable to March 2023); as of June 30, 2021, $96.0 million was outstanding[114] - A five-year $50 million Term Loan, entered in September 2019, bears interest at LIBOR plus a margin and is partially hedged by an interest rate swap[115] - Short-term liquidity needs are met by operations, reserves, public offerings, and borrowings, while long-term needs are funded by operations, long-term debt, and equity issuances[117][118] Contractual Obligations and Other Long-Term Liabilities As of June 30, 2021, the Company's contractual obligations, including principal and interest payments on debt, tenant-related commitments, and lease obligations, totaled $767.5 million Contractual Obligations (in thousands) | Contractual Obligations (in thousands) | Total | Payments 2021 | Due by Period 2022-2023 | 2024-2025 | More than 5 years | | :------------------------------------- | :--------- | :------------ | :---------------------- | :-------- | :---------------- | | Principal payments on mortgage loans | $615,617 | $2,967 | $151,078 | $216,733 | $244,839 | | Interest payments | $100,122 | $11,011 | $40,538 | $30,751 | $17,822 | | Tenant-related commitments | $20,196 | $19,984 | $212 | — | — | | Lease obligations | $31,568 | $315 | $1,838 | $1,540 | $27,875 | | Total | $767,503 | $34,277 | $193,666 | $249,024 | $290,536 | Off-Balance Sheet Arrangements As of June 30, 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 - As of June 30, 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[122] Inflation The Company anticipates that inflationary increases may be partially offset by contractual rent increases and expense escalations embedded in its office leases - The Company believes that inflationary increases may be at least partially offset by contractual rent increases and expense escalations in its office leases[123] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk is interest rate risk, mainly exposed to LIBOR fluctuations. It manages this risk primarily through fixed interest rate financing and derivative financial instruments like interest rate swaps. As of June 30, 2021, approximately 84.4% of its debt was fixed rate, and 15.6% was variable rate (after factoring in the interest rate swap) - The primary market risk is interest rate risk, with exposure to LIBOR[125] - As of June 30, 2021, approximately 76.3% ($469.6 million) of debt had fixed interest rates, and 23.7% ($146.0 million) had variable rates[126] - Factoring in the Interest Rate Swap, approximately 84.4% of debt was fixed rate and 15.6% was variable rate as of June 30, 2021[126] Item 4. Controls and Procedures The Company's CEO and CFO evaluated the disclosure controls and procedures, determining them to be effective as of June 30, 2021. There have been no material changes to the internal control over financial reporting during the period - The Company's disclosure controls and procedures were effective as of June 30, 2021, as determined by the CEO and CFO[128] - No material changes to internal control over financial reporting occurred during the period covered by the report[129] PART II. OTHER INFORMATION This section provides additional information beyond the financial statements, including legal proceedings, risk factors, equity sales, defaults, and other disclosures Item 1. Legal Proceedings The Company and its subsidiaries are occasionally involved in litigation arising from ordinary business operations. As of June 30, 2021, management believes that no such litigation will have a material adverse effect on the Company's financial position or results of operations - The Company is involved in ordinary course litigation, but management does not believe it will have a material adverse effect on financial position or results of operations as of June 30, 2021[130] Item 1A. Risk Factors This section states that there are no new material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 - No new material risk factors are reported in this quarterly filing[131] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company's Board of Directors approved share repurchase plans totaling $150 million in 2020, which were completed. Repurchased shares are classified as authorized and unissued, reducing stockholders' equity. No shares were repurchased during the six months ended June 30, 2021 - The Company's Board approved share repurchase plans totaling $150 million in 2020, which were fully completed[132] - Repurchased shares are classified as authorized and unissued, reducing common stock and additional paid-in capital[133] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[134] Item 4. Mine Safety Disclosures This item is not applicable to the Company's operations - Mine Safety Disclosures are not applicable to the Company[135] Item 5. Other Information On August 4, 2021, the Company entered into Amendment No. 2 to the employment agreements with its CEO, President/COO, and CFO. These amendments clarify provisions related to the vesting of equity awards upon the death or disability of executive officers - On August 4, 2021, the Company amended employment agreements with its CEO, President/COO, and CFO[136] - The amendments clarify provisions regarding the vesting of equity awards upon the death or disability of executive officers[136] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to the Company's charter and bylaws, certificates for common and preferred stock, and recent amendments to executive employment agreements. It also includes certifications under the Sarbanes-Oxley Act and Interactive Data Files - Exhibits include amendments to the Company's charter and bylaws, certificates for common and preferred stock, and executive employment agreement amendments[138] - Certifications by the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[138] - Interactive Data Files (formatted as Inline XBRL) are provided[138] Signatures The report is duly signed on behalf of City Office REIT, Inc. by James Farrar, Chief Executive Officer and Director, and Anthony Maretic, Chief Financial Officer, Secretary, and Treasurer, on August 5, 2021 - The report was signed by James Farrar, Chief Executive Officer and Director, and Anthony Maretic, Chief Financial Officer, Secretary and Treasurer[142] - The signing date for the report was August 5, 2021[142]