VANCOUVER


,


Aug. 4, 2022


/PRNewswire/ — City Office REIT, Inc. (NYSE: CIO) (the “Company,” “City Office,” “we” or “our”) today announced its results for the quarter ended

June 30, 2022

.

Second Quarter Highlights

• Rental and other revenues were
  
  $45.5 million
  
  . GAAP net income attributable to common stockholders was approximately
  
  $1.0 million
  
  , or
  
  $0.02
  
  per fully diluted share;
• Core FFO was approximately
  
  $17.6 million
  
  , or
  
  $0.40
  
  per fully diluted share;
• AFFO was approximately
  
  $8.0 million
  
  , or
  
  $0.18
  
  per fully diluted share;
• Closed the disposition of the Lake Vista Pointe property in
  
  Dallas, Texas
  
  for a gross sales price of
  
  $43.8 million
  
  , generating a gain on sale of
  
  $21.7 million
  
  ;
• In-place occupancy closed the quarter at 86.9%;
• Executed approximately 254,000 square feet of new and renewal leases during the quarter;
• During the quarter and subsequent to quarter end, the Company completed the repurchase of 2,302,694 shares of common stock at an average gross price of
  
  $13.11
  
  per share for an aggregate cost of approximately
  
  $30.2 million
  
  ;
• Declared a second quarter dividend of
  
  $0.20
  
  per share of common stock, paid on
  
  July 22, 2022
  
  ; and
• Declared a second quarter dividend of
  
  $0.4140625
  
  per share of Series A Preferred Stock, paid on
  
  July 22, 2022
  
  .

“Our properties are predominantly located in desirable Sun Belt locations positioned for long term growth,” commented

James Farrar

, the Company’s Chief Executive Officer.  “We have built an attractive portfolio of high-quality and amenitized buildings that aligns with tenants’ desire for vibrant office locations.  Leasing tour activity and tenant utilization trends continue to improve, giving us confidence in the trajectory of our business.”

“During 2022, a major priority has been executing our spec suite program and advancing strategic enhancements across our portfolio to drive leasing results.  We are also focused on  opportunities to generate incremental value.  In that regard, we closed the sale of our Lake Vista Pointe property for a

$22 million

gain and have repurchased

$30 million

of shares of common stock to date at what we believe is a steep discount to their inherent value.  We have provided a slide analyzing the stock repurchase metrics in our August Investor Presentation that can be found in the Investor Relations section of our website at

www.cioreit.com

.”

A reconciliation of certain non-GAAP financial measures, including FFO, Core FFO, AFFO, NOI, Same Store NOI, Same Store Cash NOI, Adjusted Cash NOI and their equivalent per share measures, to the most directly comparable financial measure under U.S. generally accepted accounting principles (“GAAP”) can be found at the end of this release.

Portfolio Operations

The Company reported that its total portfolio as of

June 30, 2022

contained 6.0 million net rentable square feet and was 86.9% occupied. Occupancy was impacted by the newly constructed Bloc 83 property in

Raleigh, North Carolina

that is completing its initial lease-up phase and has signed leases that have not yet taken occupancy.  Excluding the Bloc 83 property, portfolio occupancy was 88.6% as of

June 30, 2022

.

Net Operating Income was approximately

$28.7 million

and Adjusted Cash NOI (CIO share) was approximately

$26.9 million

for the second quarter of 2022. Net Operating Income benefited from

$1.1 million

of termination fee income recognized in the quarter.

Same Store Cash NOI decreased 7.1% for the three months ended

June 30, 2022

as compared to the same period in the prior year. Same Store Cash NOI decreased 5.9% for the six months ended

June 30, 2022

as compared to the same period in the prior year.

Investment and Disposition Activity

On

June 15, 2022

, the Company completed the previously announced

$43.8 million

sale of its Lake Vista Pointe property in

Dallas

, Texas.  The disposition translates to a gain on sale of

$21.7 million

and a 6.1% cash capitalization rate, including an adjustment for an unfunded tenant improvement allowance.  $16.8 million of mortgage debt secured by the property was repaid upon the close of the transaction.

Leasing Activity

The Company’s total leasing activity during the second quarter of 2022 was approximately 254,000 square feet, which included 126,000 square feet of new leasing and 128,000 square feet of renewals. Approximately 233,000 square feet of leases signed within the quarter will commence subsequent to quarter end.

New Leasing

– New leases were signed with a weighted average lease term of 6.6 years at a weighted average annual rent of

$32.47

per square foot and at a weighted average cost of

$7.63

per square foot per year.  Of note, leasing activity continues to be strong at the Company’s Bloc 83 property in

Raleigh, North Carolina

, where two leases for a total of approximately 23,000 square feet were signed during the quarter.

Renewal Leasing

– Renewal leases were signed with a weighted average lease term of 4.6 years at a weighted average annual rent of

$28.15

per square foot and at a weighted average cost of

$6.90

per square foot per year.

Capital Structure

As of

June 30, 2022

, the Company had total principal outstanding debt of approximately

$658.6 million

. Approximately

$446.6 million

, or 67.8%, of the Company’s outstanding debt was fixed rate. When factoring in the

$50 million

term loan as fixed rate debt due to an interest swap, approximately 75.4% of the Company’s debt was effectively fixed rate. City Office’s total principal outstanding debt had a weighted average maturity of approximately 3.8 years and a weighted average interest rate of 3.7%.

On

August 5, 2020

the Company’s Board of Directors approved a share purchase plan authorizing the Company to repurchase up to an aggregate amount of

$50 million

of its outstanding shares of common stock. During the three months ended

June 30, 2022

, the Company settled on the repurchase of 394,833 shares of its common stock at an average gross price of

$12.64

per share for a total cost of approximately

$5.0 million

. Including incremental share repurchases completed after quarter end, the Company had completed the repurchase of 2,302,694 shares at an average gross price of

$13.11

per share for an aggregate cost of approximately

$30.2 million

.

Dividends

On

June 16, 2022

, the Company’s Board of Directors approved and the Company declared a cash dividend of

$0.20

per share of the Company’s common stock for the three months ended

June 30, 2022

. The dividend was paid on

July 22, 2022

to common stockholders and unitholders of record as of

July 8, 2022

.

On

June 16, 2022

, the Company’s Board of Directors approved and the Company declared a cash dividend of

$0.4140625

per share of the Company’s 6.625% Series A Preferred Stock for the three months ended

June 30, 2022

. The dividend was paid on

July 22, 2022

to preferred stockholders of record as of

July 8, 2022

.

2022 Outlook

The Company is updating its 2022 guidance based on year-to-date performance and its expectations for the remainder of the year.  The midpoint of full year 2022 Core FFO per share expectations has been adjusted downward by

$0.025

per share.  This net change is the result of several positive and negative impacts to prior expectations.  Projected interest expense has increased due to higher forecasted interest rates on the floating rate portion of the Company’s unsecured credit facility as well as higher outstanding debt from the share repurchase program.  2022 Net Operating Income is also expected to be lower primarily due to the timing of certain leasing assumptions. Offsetting part of these impacts is the accretion generated from the share repurchase program.

Material Considerations:

1. Dispositions reflects the
   
   June 15, 2022
   
   sale of the Lake Vista Pointe property in
   
   Dallas, Texas
   
   .
2. Termination fee income of
   
   $3.4 million
   
   has been included in 2022 guidance.
3. The General and Administrative Expenses guidance includes approximately
   
   $4.0 million
   
   for stock-based compensation. Our Core FFO definition excludes stock-based compensation. Excluding stock-based compensation, General and Administrative Expenses guidance for Full Year 2022 would have been
   
   $10.2 million
   
   –
   
   $10.7 million
   
   .
4. Annual weighted average fully diluted shares of common stock outstanding are assumed to be approximately 43.4 million in the low scenario with
   
   $30 million
   
   of shares of common stock repurchased and approximately 42.8 million in the high scenario with
   
   $50 million
   
   of shares of common stock repurchased.

The Company’s guidance is based on current plans and assumptions and subject to the risks and uncertainties more fully described in the Company’s filings with the United States Securities and Exchange Commission. This outlook reflects management’s view of current and future market conditions, including assumptions such as the pace of future acquisitions and dispositions, rental rates, occupancy levels, leasing activity, uncollectible rents, operating and general administrative expenses, weighted average diluted shares outstanding and rising interest rates.  The Company reminds investors that the impacts of the COVID-19 pandemic are uncertain and impossible to predict.  See “Forward-looking Statements” below.

Webcast and Conference Call Details

City Office’s management will hold a conference call at

11:00 am Eastern Time

on

August 4

, 2022.

The webcast will be available under the “Investor Relations” section of the Company’s website at

www.cioreit.com

.  The conference call can be accessed by dialing 1-844-200-6205 for domestic callers and 1-929-526-1599 for international callers.  The passcode for the conference call is 134483.

A replay of the call will be available later in the day on

August 4, 2022

, continuing through

November 2, 2022

and can be accessed by dialing 1-866-813-9403 for domestic callers and 44-204-525-0658 for international callers.  The passcode for the replay is 007327.  A replay will also be available for twelve months following the call at “Webcasts & Events” in the “Investor Relations” section of the Company’s website.

A supplemental financial information package to accompany the discussion of the results will be posted on

www.cioreit.com

under the “Investor Relations” section.

Non-GAAP Financial Measures

Funds from Operations (“FFO”)

– The National Association of Real Estate Investment Trusts (“NAREIT”) states FFO should represent net income or loss (computed in accordance with GAAP) plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments of unconsolidated partnerships and joint ventures, gains or losses on the sale of property and impairments to real estate.

The Company uses FFO as a supplemental performance measure because the Company believes that FFO is beneficial to investors as a starting point in measuring the Company’s operational performance.  We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare the Company’s operating performance with that of other REITs.

However, because FFO excludes depreciation and amortization and captures neither the changes in the value of the Company’s properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of the Company’s properties, all of which have real economic effects and could materially impact the Company’s results from operations, the utility of FFO as a measure of the Company’s performance is limited.  In addition, other equity REITs may not calculate FFO in accordance with the NAREIT definition as the Company does, and, accordingly, the Company’s FFO may not be comparable to such other REITs’ FFO.  Accordingly, FFO should be considered only as a supplement to net income as a measure of the Company’s performance.

Core Funds from Operations (“Core FFO”)

– We calculate Core FFO by using FFO as defined by NAREIT and adjusting for certain other non-core items.   We also exclude from our Core FFO calculation acquisition costs, loss on early extinguishment of debt, changes in the fair value of the earn-out, changes in fair value of contingent consideration and the amortization of stock based compensation.

We believe Core FFO provides a useful metric in comparing operations between reporting periods and in assessing the sustainability of our ongoing operating performance. Other equity REITs may calculate Core FFO differently or not at all, and, accordingly, the Company’s Core FFO may not be comparable to such other REITs’ Core FFO.

Adjusted Funds from Operations (“AFFO”)

– We compute AFFO by adding to Core FFO the non-cash amortization of deferred financing fees and non-real estate depreciation and then subtracting cash paid for recurring tenant improvements, leasing commissions, and capital expenditures, and eliminating the net effect of straight-line rent / expense, deferred market rent and debt fair value amortization.  Recurring capital expenditures exclude development / redevelopment activities, capital expenditures planned at acquisition and costs to reposition a property.  We exclude first generation leasing costs within the first two years of our initial public offering or acquisition, which are generally to fill vacant space in properties we acquire or were planned at acquisition.  We have further excluded all costs associated with tenant improvements, leasing commissions and capital expenditures which were funded by the entity contributing the properties at closing.

Along with FFO and Core FFO, we believe AFFO provides investors with appropriate supplemental information to evaluate the ongoing operations of the Company. Other equity REITs may calculate AFFO differently, and, accordingly, the Company’s AFFO may not be comparable to such other REITs’ AFFO.

Net Operating Income (“NOI”), Adjusted Cash NOI (CIO share)

– We define NOI as rental and other revenues less property operating expenses.  We define Adjusted Cash NOI as NOI less the effect of recurring straight-line rent / expense, deferred market rent, and any amounts which are funded by the selling entities and NCI in properties.

We consider NOI and Adjusted Cash NOI to be appropriate supplemental performance measures to net income because we believe they provide information useful in understanding the core operations and operating performance of our portfolio.

Same Store Net Operating Income (“Same Store NOI”) and Same Store Cash Net Operating Income (“Same Store Cash NOI”)

– Same Store NOI and Same Store Cash NOI is calculated as the NOI attributable to the properties continuously owned and operated for the entirety of the reporting periods presented. The Company’s definition of Same Store NOI and Same Store Cash NOI excludes properties that were not stabilized during both of the applicable reporting periods. These exclusions may include, but are not limited to, acquisitions, dispositions and properties undergoing repositioning or significant renovations.

We believe Same Store NOI and Same Store Cash NOI is an important measure of comparison because it allows for comparison of operating results of stabilized properties owned and operated for the entirety of both applicable periods and therefore eliminates variations caused by acquisitions, dispositions or repositionings during such periods. Other REITs may calculate Same Store NOI and Same Store Cash NOI differently and our calculation should not be compared to that of other REITs.

Forward-looking Statements

This press release contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in this press release, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of the federal securities laws and as such are based upon the Company’s current beliefs as to the outcome and timing of future events. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “approximately,” “anticipate,” “assume,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “hypothetical,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will”  or other similar words or expressions. There can be no assurance that actual forward-looking statements, including projected capital resources, projected profitability and portfolio performance, estimates or developments affecting the Company will be those anticipated by the Company. Examples of forward-looking statements include those pertaining to expectations regarding our financial performance, including under metrics such as NOI and FFO, market rental rates, national or local economic growth, including the impact of inflation, estimated replacement costs of our properties, the Company’s expectations regarding tenant occupancy, re-leasing periods, projected capital improvements, expected sources of financing, expectations as to the likelihood and timing of closing of acquisitions, dispositions, or other transactions, the expected operating performance of the Company’s current properties, anticipated near-term acquisitions and descriptions relating to these expectations, including, without limitation, the anticipated net operating income yield and cap rates, lower than expected yields, increased interest rates and operating costs, and changes in local, regional, national and international economic conditions, including as a result of the ongoing COVID-19 pandemic. Forward-looking statements presented in this press release are based on management’s beliefs and assumptions made by, and information currently available to, management.

The forward-looking statements contained in this press release are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to the factors, risks and uncertainties described above, changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors described in our news releases and filings with the SEC, including but not limited to those described in our Annual Report on Form 10-K for the year ended

December 31, 2021

under the heading “Risk Factors” and in our subsequent reports filed with the SEC, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this press release speaks only as of the date of this press release. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. The Company does not guarantee that the assumptions underlying such forward-looking statements contained in this press release are free from errors. Unless otherwise stated, historical financial information and per share and other data are as of

June 30, 2022

or relate to the quarter ended

June 30, 2022

. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.

Contact

City Office REIT, Inc.

Anthony Maretic

, CFO

+1-604-806-3366

[email protected]

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SOURCE City Office REIT, Inc.