City Office REIT(CIO) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's Q1 2024 financial statements reflect an increased net loss, slightly lower revenues, and a shift in financing activities Condensed Consolidated Statements of Operations The company's Q1 2024 operations show decreased rental revenues, lower operating income, and an increased net loss per share, with dividends halved Q1 2024 vs Q1 2023 Statement of Operations (in thousands, except per share data) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Rental and other revenues | $44,493 | $45,957 | | Total operating expenses | $36,530 | $36,789 | | Operating income | $7,963 | $9,168 | | Net (loss)/income attributable to the Company | $(589) | $704 | | Net loss attributable to common stockholders | $(2,444) | $(1,151) | | Net loss per common share (Basic & Diluted) | $(0.06) | $(0.03) | | Dividend distributions declared per common share | $0.10 | $0.20 | Condensed Consolidated Balance Sheets As of March 31, 2024, total assets slightly decreased to $1.51 billion, with stable liabilities and reduced equity Balance Sheet Highlights (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Real estate properties, net | $1,317,416 | $1,323,075 | | Cash and cash equivalents | $29,533 | $30,082 | | Total Assets | $1,505,527 | $1,511,376 | | Total Debt | $668,249 | $669,510 | | Total Liabilities | $737,874 | $738,743 | | Total Equity | $767,653 | $772,633 | Condensed Consolidated Statements of Cash Flows Q1 2024 cash flows show increased operating cash, decreased investing cash usage, and a significant shift in financing activities Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net Cash Provided By Operating Activities | $16,386 | $13,883 | | Net Cash Used In Investing Activities | $(7,494) | $(12,420) | | Net Cash (Used In)/Provided By Financing Activities | $(8,920) | $6,514 | | Net (Decrease)/Increase in Cash | $(28) | $7,977 | | Cash, End of Period | $43,364 | $52,239 | Notes to the Condensed Consolidated Financial Statements The notes detail the company's debt, interest rate management, tenant bankruptcy, and a post-quarter loan default on a property - As of March 31, 2024, total principal debt outstanding was $671.2 million, with significant maturities in 2024 ($106.1 million), 2025 ($254.7 million), and 2027-2028 ($280.8 million)[123][126][127] - Tenant WeWork Inc. filed for Chapter 11 bankruptcy, rejecting a 46,000 sq ft lease. As of March 31, 2024, WeWork still operated at two locations totaling 131,000 sq ft, with the company monitoring for potential future lease rejections[36] - On May 1, 2024, a default was triggered on the non-recourse loan for the Cascade Station property after the company did not repay the principal at maturity. The process to transfer the property to the lender has been initiated[76] - The Board of Directors approved a share repurchase plan in May 2023, authorizing up to $50 million in repurchases of common or preferred stock. No shares were repurchased during Q1 2024[58][59] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the challenging office market, portfolio performance, revenue decline, and liquidity, noting a post-quarter loan default and cash-sweep triggers - As of March 31, 2024, the company owned 24 properties with 5.7 million square feet of net rentable area (NRA), which were approximately 83.0% leased[80] - The economic environment, marked by high interest rates and inflation, has made retaining and attracting tenants more challenging. The portfolio's vacancy rate increased to 14.0% as of March 31, 2024, from 12.5% a year prior[73][74] - The company's strategy is to focus on owning and acquiring office properties in growth markets, predominantly in the Sun Belt, characterized by growing populations and above-average employment growth[83] Results of Operations Q1 2024 results show a 3% decrease in rental revenues primarily due to a property disposition, with slightly lower operating expenses - Rental and other revenues decreased by $1.5 million (3%), primarily due to a $1.7 million reduction from the disposition of 190 Office Center in May 2023[154] - Total operating expenses decreased by $0.3 million (1%), with the disposition of 190 Office Center reducing expenses by $1.1 million, partially offset by higher costs at other properties[155] Leasing Activity - Q1 2024 | Leasing Type | Square Feet (000's) | Average Effective Rents | | :--- | :--- | :--- | | New Leasing | 110 | $33.33 | | Renewal Leasing | 81 | $32.50 | | Total Leasing | 191 | $32.98 | Liquidity and Capital Resources The company's liquidity is supported by cash and a credit facility, but is impacted by a post-quarter loan default and cash-sweep triggers on four properties - The company had $29.5 million of cash and cash equivalents and $13.8 million of restricted cash as of March 31, 2024[181] - Post-quarter end, the company defaulted on the non-recourse loan for its Cascade Station property and is transferring the asset to the lender[183] - As of March 31, 2024, lenders for four mortgage borrowings have triggered 'cash-sweep periods', directing property cash flows into restricted accounts totaling $9.6 million[163] Contractual Obligations as of March 31, 2024 (in thousands) | Contractual Obligations | Total | Payments Due in 2024 | Payments Due in 2025-2026 | Payments Due in 2027-2028 | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Principal payments on mortgage loans | $671,191 | $106,146 | $284,260 | $280,785 | $0 | | Interest payments | $75,759 | $23,165 | $40,082 | $12,512 | $0 | | Lease obligations | $36,071 | $465 | $1,510 | $1,190 | $32,906 | | Total | $798,019 | $144,774 | $325,852 | $294,487 | $32,906 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations, largely mitigated by fixed-rate debt and swaps, with a hypothetical 1% SOFR increase impacting annual interest costs by $0.6 million - The company's main market risk is from interest rate changes, which it manages using derivative financial instruments like interest rate swaps[173] - As of March 31, 2024, approximately $611.2 million, or 91.1%, of the company's debt had fixed or effectively fixed interest rates[174] - A 1% increase in the SOFR would lead to a $0.6 million increase in annual interest costs on the $60.0 million of variable-rate debt[174] Controls and Procedures The company's CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - The Company's Chief Executive Officer and Chief Financial Officer determined that disclosure controls and procedures were effective as of March 31, 2024[141] - No material changes to internal control over financial reporting occurred during the quarter[142] PART II. OTHER INFORMATION Legal Proceedings The company is involved in litigation that arises in the ordinary course of business, which management does not believe will have a material adverse effect on financial position or operational results - Management believes that ongoing litigation, which arises in the ordinary course of business, will not have a material adverse effect on the Company's financial position or results of operations[193][57] Risk Factors This section of the report does not present any new or updated risk factors, typically referring to the comprehensive risk factor disclosure in the company's most recent Annual Report on Form 10-K - There were no new risk factors reported for the period. The report references disclosures in previous filings[198] Defaults Upon Senior Securities The company disclosed a default on the non-recourse loan for its Cascade Station property, initiating transfer to the lender without expected material gain or loss due to prior impairment - On May 1, 2024, an event of default was triggered on the non-recourse loan for the Cascade Station property following non-payment at maturity[194] - The company is transferring the property to the lender and does not anticipate a material gain or loss due to a prior impairment charge on the asset[194]