City Office REIT(CIO) - 2023 Q4 - Annual Report

Part I Business City Office REIT, Inc. is an internally-managed REIT focused on acquiring and operating high-quality office properties in Sun Belt markets, with a portfolio of 58 buildings totaling 5.7 million square feet and an 84.5% occupancy rate as of December 31, 2023 - The company is an internally-managed REIT focused on owning, operating, and acquiring high-quality office properties predominantly in Sun Belt markets[20] Portfolio Snapshot as of December 31, 2023 | Metric | Value | | :--- | :--- | | Office Buildings | 58 | | Net Rentable Area (NRA) | ~5.7 million sq. ft. | | Occupancy Rate | 84.5% | | Weighted Average Remaining Lease Term | 4.6 years | - Key business strategies include driving value through dispositions, accretive capital redeployment, rent growth, new acquisitions, leasing vacant space, and property enhancements[24][25][26][31] - 2023 highlights include completing approximately 599,000 square feet of leasing, increasing the unsecured credit facility to $375 million, and renewing two property loans[28][33] - As of December 31, 2023, the company had 20 full-time employees and focuses on diversity, employee development, and fair compensation[39] Risk Factors The company faces diverse risks across its business operations, properties, REIT status, organizational structure, and general operations, including market conditions, tenant defaults, debt, tax compliance, and cybersecurity Risks Related to Our Business and Our Properties This section details risks inherent to the company's real estate operations, including lease expirations, tenant concentration, work-from-home impacts, substantial indebtedness, and environmental liabilities Scheduled Lease Expirations (as % of Annualized Base Rent) | Year | % of Annualized Base Rent Expiring | | :--- | :--- | | 2024 | 11.0% | | 2025 | 10.6% | | 2026 | 9.9% | - The company is exposed to tenant concentration risk, with its ten largest tenants accounting for approximately 25.4% of its base rental revenue as of December 31, 2023[63] - The work-from-home trend poses a significant risk, potentially leading to a long-term decrease in demand for office space, impacting leasing activity and rental rates[57][65] - Following WeWork's Chapter 11 bankruptcy filing, the company wrote off a $1.4 million straight-line receivable and a $1.5 million intangible asset for the Block 23 lease, with remaining exposure across two properties totaling $1.4 million in receivables, $2.8 million in tenant improvements, and $8.5 million in intangible assets[58][59][113] - The company has substantial outstanding indebtedness, totaling approximately $672.7 million as of December 31, 2023, which could affect its ability to pay distributions and exposes it to default risk[72] - As of December 31, 2023, lenders for three mortgage borrowings have directed property cash flows into restricted accounts, totaling $9.3 million, until certain financial thresholds are met[77] Risks Related to Our Status as a REIT This section outlines risks associated with maintaining REIT status, including severe tax consequences for non-compliance and the potential need to borrow funds to meet the 90% taxable income distribution requirement - Failure to maintain REIT qualification would lead to severe tax consequences, including taxation at regular corporate rates and inability to deduct dividends paid to stockholders[132][133] - To maintain REIT status, the company must distribute at least 90% of its taxable income annually, which may necessitate borrowing funds during unfavorable market conditions to cover distributions and capital needs[4][61][136] - Compliance with complex REIT asset and income tests may force the company to liquidate attractive investments or forego certain opportunities to avoid disqualification[143][149] Risks Related to Our Organizational Structure The company's holding company structure, operating through its Operating Partnership, presents risks including structural subordination of stockholder claims, potential conflicts of interest, and anti-takeover provisions that may deter a change of control - As a holding company, the company relies on distributions from its Operating Partnership, and stockholder claims are structurally subordinated to all liabilities of the Operating Partnership[153] - The company's charter imposes a 9.8% ownership limit on its capital stock to protect its REIT status, which may delay or prevent a change of control transaction[163] - Provisions of Maryland law, including 'business combination' and 'control share' rules, could inhibit a third-party acquisition proposal, even though the company has currently opted out of some[165][167] General Risk Factors This section covers broader operational risks, including adverse effects from climate change, litigation risks, and significant disruptions from cybersecurity breaches that could compromise data and reputation - Climate change poses risks through extreme weather, potential water supply issues in markets like Arizona, and increased costs to comply with environmental legislation[176] - The company faces risks from security breaches and cyber-attacks that could result in unauthorized access to confidential information, disruption of building systems, and damage to its reputation[182][183][187] - Deficiencies in disclosure controls and internal controls over financial reporting could lead to misstatements or restatements of financial results[180] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[190] Cybersecurity The company integrates cybersecurity risk management into its overall risk framework, with oversight from the Audit Committee and management by the CFO and CEO, reporting no material incidents during the period - Cybersecurity risk management is integrated into the company's overall risk framework, with the CFO working with an IT service provider and internal auditors to manage threats[191] - The Audit Committee has primary responsibility for overseeing cybersecurity risks, receiving briefings from the CFO and CEO at least annually[193][194] - The company has not been materially affected by any cybersecurity incidents for the reporting period and has not experienced any material threats or incidents in recent years[186] Properties As of December 31, 2023, the company's portfolio comprised 58 office buildings totaling approximately 5.7 million square feet of NRA with an 84.5% occupancy rate, with 9.7% of NRA subject to lease expiration in 2024 Portfolio Overview by Metropolitan Area (Top 3 by NRA) | Metropolitan Area | % of Total NRA | NRA (000s sq. ft.) | In-Place Occupancy | Annualized Base Rent ($000s) | | :--- | :--- | :--- | :--- | :--- | | Phoenix, AZ | 26.7% | 1,519 | 76.9% (Weighted Avg) | $33,844 | | Tampa, FL | 18.5% | 1,052 | 93.0% (Weighted Avg) | $28,202 | | Denver, CO | 14.1% | 805 | 87.6% (Weighted Avg) | $14,847 | | Total Portfolio | 100.0% | 5,694 | 84.5% | $141,953 | Lease Expiration Schedule (% of NRA) | Year of Lease Expiration | % of NRA | | :--- | :--- | | 2024 | 9.7% | | 2025 | 8.8% | | 2026 | 9.0% | | 2027 | 12.6% | | 2028 | 11.3% | | 2029 & Thereafter | 34.1% | | Vacant / Contracted | 15.5% | Legal Proceedings The company is not currently subject to any material litigation, with ongoing proceedings being routine actions not expected to have a material adverse effect - The company is not presently subject to any material litigation, other than routine actions not expected to have a material adverse effect[205] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[206] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "CIO", with a new $50 million share repurchase program authorized in May 2023, though no shares were repurchased in 2023 - The company's common stock has been listed on the NYSE under the symbol "CIO" since April 15, 2014[209] - On May 4, 2023, the Board of Directors approved a new share repurchase program authorizing the company to repurchase up to $50 million of its outstanding common or Series A Preferred Stock[215] - No shares were repurchased during the year ended December 31, 2023, while in 2022, the company repurchased 4,006,897 shares for approximately $50.0 million[217] Reserved This item is reserved - This item is marked as [RESERVED][223] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, analyzing operating results, liquidity, capital resources, and debt structure, while highlighting the impact of economic conditions and work-from-home trends Factors That May Influence Our Operating Results and Financial Condition The company's operating results are influenced by the volatile economic environment, including inflation, rising interest rates, the ongoing work-from-home trend, and the specific impact of the WeWork bankruptcy - The volatile economic environment, marked by inflation and rising interest rates, has increased the company's cost of capital and made private market debt financing more challenging[237] - Evolving remote and hybrid work trends continue to impact the business through tenant uncertainty, potentially reducing anticipated rental revenues and increasing subleasing[239][240] - The company is monitoring the impact of the WeWork bankruptcy, with the lease at its Block 23 property having been rejected subsequent to year-end[245] Results of Operations For the year ended December 31, 2023, rental revenues decreased by 0.8% to $179.1 million, while operating expenses decreased by 6.2% to $147.8 million, and interest expense rose 23% to $33.2 million Comparison of Operating Results (Year Ended Dec 31, in millions) | Line Item | 2023 (millions) | 2022 (millions) | Change (millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | Rental and other revenues | $179.1 | $180.5 | ($1.4) | -0.8% | | Total operating expenses | $147.8 | $157.5 | ($9.7) | -6.2% | | Operating income | $31.3 | $23.0 | $8.3 | +36.1% | | Interest expense | $33.2 | $27.0 | $6.2 | +23.0% | | Impairment of real estate | $0.0 | $13.4 | ($13.4) | -100.0% | | Net (loss)/income | ($2.0) | $17.7 | ($19.7) | -111.3% | Liquidity and Capital Resources As of December 31, 2023, the company had $30.1 million in cash, $13.3 million in restricted cash, and $672.7 million in total indebtedness, with primary liquidity from operations and its $375 million unsecured credit facility - As of December 31, 2023, the company had $30.1 million of cash and cash equivalents and $13.3 million of restricted cash[343] - The company's Unsecured Credit Facility has total authorized borrowings of $375 million, with $200.0 million outstanding under the facility and $75.0 million under related term loans as of year-end 2023[322] Consolidated Indebtedness as of December 31, 2023 | Type | Amount (millions) | | :--- | :--- | | Total Principal Indebtedness | $672.7 | | Effectively Fixed Rate Debt | 91.1% | Contractual Obligations Summary (in thousands) | Obligation | Total (thousands) | Due in 2024 (thousands) | | :--- | :--- | :--- | | Principal payments on mortgage loans | $672,720 | $107,675 | | Interest payments | $83,938 | $31,323 | | Tenant-related commitments | $12,104 | $12,104 | | Lease obligations | $36,264 | $658 | | Total | $805,026 | $151,760 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed with interest rate swaps, resulting in 91.1% of debt at fixed or effectively fixed rates, with a 1% SOFR change impacting annual interest costs by $0.6 million - The company's primary market risk exposure is to interest rate changes[285] - As of December 31, 2023, approximately 91.1% of the company's $672.7 million in debt had fixed or effectively fixed interest rates through interest rate swaps[284][287] - A hypothetical 1% increase in the SOFR rate would result in a $0.6 million increase in annual interest costs on the company's variable-rate debt outstanding as of December 31, 2023[287] Financial Statements and Supplementary Data This section indicates that the required financial statements and supplementary data are included in Item 15 of the Annual Report - The information required by Item 8 is included in Item 15, "Exhibits, Financial Statement Schedules"[289] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[289] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, a conclusion affirmed by KPMG LLP - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[292] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[294] - The effectiveness of internal control over financial reporting was audited by KPMG LLP, which issued an unqualified opinion[295] Other Information The company reports that no director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the fourth quarter of 2023 - During the three months ended December 31, 2023, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement[269] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[297] Part III Directors, Executive Officers and Corporate Governance The information for this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 annual stockholders' meeting - The information required by Item 10 is incorporated by reference to the company's definitive Proxy Statement for its 2024 annual stockholders' meeting[272] Executive Compensation The information for this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 annual stockholders' meeting - The information required by Item 11 is incorporated by reference to the company's definitive Proxy Statement for its 2024 annual stockholders' meeting[273] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information for this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 annual stockholders' meeting - The information required by Item 12 is incorporated by reference to the company's definitive Proxy Statement for its 2024 annual stockholders' meeting[273] Certain Relationships and Related Transactions, and Director Independence The information for this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 annual stockholders' meeting - The information required by Item 13 is incorporated by reference to the company's definitive Proxy Statement for its 2024 annual stockholders' meeting[274] Principal Accountant Fees and Services The information for this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 annual stockholders' meeting - The information required by Item 14 is incorporated by reference to the company's definitive Proxy Statement for its 2024 annual stockholders' meeting[275] Part IV Exhibits, Financial Statement Schedules This section contains the index to the company's consolidated financial statements, financial statement schedules, and a list of all exhibits filed with the Form 10-K, including the independent auditor's report Report of Independent Registered Public Accounting Firm KPMG LLP issued unqualified opinions on the company's consolidated financial statements and internal control over financial reporting, noting a critical audit matter regarding revenue recognition for new and modified lease arrangements - KPMG LLP issued an unqualified opinion, stating that the consolidated financial statements present fairly, in all material respects, the financial position of the company as of December 31, 2023 and 2022[265] - KPMG LLP also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[266][371] - A critical audit matter was identified concerning the assessment of revenue recognition for new and modified lease arrangements, which required complex auditor judgment regarding the ownership of tenant improvements[350][351] Form 10-K Summary This item is noted as 'None' in the exhibit index, indicating no summary is provided here - None[553]