City Office REIT Reports First Quarter 2024 Results
City Office REIT, Inc. (NYSE: CIO) reported Q1 2024 results with $44.5 million in revenue, $2.4 million net loss, and $13.5 million in Core FFO. They signed significant leases and updated guidance due to WeWork modifications. They expect a $1.8 million reduction in Core FFO for 2024.
Strong rental and other revenues of $44.5 million.
Executed significant new leases, enhancing property occupancy rates.
Company's guidance outlook reflects strategic property renovations for value enhancement.
GAAP net loss of approximately $2.4 million.
Expected reduction in Core FFO for 2024 due to WeWork lease modifications.
Decrease in Same Store Cash NOI by 1.0% compared to the same period in the prior year.
Insights
The disclosure of City Office REIT's Q1 2024 results presents a mixed bag. The reported rental and other revenues amounting to
From a capital structure standpoint, the maturity profile of debts, with a weighted average maturity of 2.3 years and average rate of 4.8%, signals near-term refinancing risks amidst fluctuating interest rates. The unchanged dividend for common stock depicts stability, yet the pending lease modifications with WeWork could foreshadow volatility in future cash flows, a concern for dividend sustainability.
Investors should note the slight
The occupancy levels reported by City Office REIT – 83.0% at quarter-end and 86.0% including signed leases not yet occupied – correlate with the broader market's recovery trajectory as larger tenant prospects return. However, the shift in leasing strategy, particularly the potential reclamation of space from WeWork, underscores an industry-wide trend towards diversification of tenant mix in the post-pandemic era.
The leasing activity, with approximately 191,000 square feet executed during the quarter, reflects the company's ability to attract both financial and healthcare tenants, sectors that traditionally promise stability. The focus on renovations to enhance property value is prudent, yet execution risk persists, potentially affecting future valuations and investor returns.
Regarding the updated guidance, the non-cash write-off relating to WeWork's straight-line rent signifies a strategic maneuver to recalibrate the tenant mix amidst evolving work trends, albeit with an immediate financial impact. Investors should weigh these developments against macroeconomic factors and sector-specific trends.
The emphasis on the company's capital structure, particularly the predominance of fixed rate or effectively fixed-rate debt, is indicative of conservative financial management in an uncertain interest rate environment. However, the short weighted average maturity presents a refinancing risk, given the possibility of a rising rate environment, which could pressure interest expenses and consequently margins.
Furthermore, the potential for lease amendments with WeWork introduces an element of unpredictability not only to earnings but also to the perceived creditworthiness of the REIT. Investors typically evaluate such scenarios to gauge future debt servicing capabilities and overall financial health.
Lastly, the unchanged dividend declarations amidst these operational and financial adjustments may be interpreted as a signal of confidence by management in their liquidity and cash flow management strategies. It's a balancing act that requires close monitoring of the company's performance against its debt obligations.
First Quarter Highlights
- Rental and other revenues were
$44.5 million $2.4 million $0.06 - Core FFO was approximately
$13.5 million $0.33 - AFFO was approximately
$9.1 million $0.22 - In-place occupancy was
83.0% as of quarter end, or86.0% including signed leases not yet occupied; - Executed approximately 191,000 square feet of new and renewal leases during the quarter;
- Declared a first quarter dividend of
$0.10 - Declared a first quarter dividend of
$0.41 40625
"The first quarter's results tracked our expectations and we progressed renovations at several of our properties to drive incremental value," commented James Farrar, the Company's Chief Executive Officer. "As far as the leasing marketplace, we continue to see the return of larger tenant prospects. During the first quarter, we executed two sizable new leases, including a 29,000 square foot 11-year lease with a financial tenant at Bloc 83 in
"Our guidance outlook has been updated to reflect our latest expectations for our co-working tenant WeWork at two of our properties. While we have not finalized lease amendments, we have updated our expectations to reflect taking back one floor at each of the Terraces building located in the premium Preston Center submarket of
A reconciliation of certain non-GAAP financial measures, including FFO, Core FFO, AFFO, NOI, Same Store NOI, Same Store Cash NOI and their equivalent per share measures, to the most directly comparable financial measure under
Portfolio Operations
The Company reported that its total portfolio as of March 31, 2024 contained 5.7 million net rentable square feet and was
Net Operating Income was approximately
Same Store Cash NOI decreased
Leasing Activity
The Company's total leasing activity during the first quarter of 2024 was approximately 191,000 square feet, which included 110,000 square feet of new leasing and 81,000 square feet of renewals. Approximately 184,000 square feet of leases signed within the quarter are expected to commence subsequent to quarter end.
New Leasing – New leases were signed with a weighted average lease term of 9.1 years at a weighted average annual rent of
Renewal Leasing – Renewal leases were signed with a weighted average lease term of 4.2 years at a weighted average annual rent of
Capital Structure
As of March 31, 2024, the Company had total principal outstanding debt of approximately
Dividends
On March 15, 2024, the Company's Board of Directors approved and the Company declared a cash dividend of
On March 15, 2024, the Company's Board of Directors approved and the Company declared a cash dividend of
2024 Outlook
Following City Office's performance for the first quarter of 2024, the Company's outlook for full year 2024 guidance remains unchanged except for the expectation that the Company will take back portions of WeWork leased spaces at the Terraces property in
The outlook includes the following assumptions:
Full Year 2024 Guidance | Previous | Updated | |||
Low | High | Low | High | ||
Dispositions | |||||
Net Operating Income | |||||
General & Administrative Expenses | |||||
Interest Expense | |||||
2024 Core FFO per fully diluted share | |||||
Net Recurring Straight-Line Rent Adjustment | |||||
Same Store Cash NOI Change | (1.0 %) | 1.0 % | (2.0 %) | 0.0 % | |
December 31, 2024 Occupancy | 84.5 % | 86.5 % | 83.5 % | 85.5 % | |
Material Considerations:
- Dispositions reflects the expected disposition of the Cascade Station property in
Portland to the lender and the expected disposition amount represents the outstanding principal balance of the loan. - The General & Administrative Expenses guidance includes approximately
$4.3 million $10.2 million $11.2 million - Annual weighted average fully diluted shares of common stock outstanding are assumed to be approximately 41.3 million.
- 2024 guidance assumes no share issuances, no acquisitions and no share repurchase activity.
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 timing and magnitude of future acquisitions and dispositions, if any, rental rates, occupancy levels, leasing activity, our ability to renew expiring leases, 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 work-from-home trend, inflation and general market conditions 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 May 3, 2024.
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 1-833-470-1428 for domestic callers and 1-404-975-4839 for international callers. The passcode for the conference call is 855802.
A replay of the call will be available later in the day on May 3, 2024, continuing through August 1, 2024 and can be accessed by dialing 1-866-813-9403 for domestic callers and 1-929-458-6194 for international callers. The passcode for the replay is 497483. 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 earn-outs, 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 certain first generation leasing costs, 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") – We define NOI as rental and other revenues less property operating expenses.
We consider NOI to be an appropriate supplemental performance measure to net income because we believe it provides 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 is calculated as the NOI attributable to the properties continuously owned and operated for the entirety of the reporting periods presented, and Same Store Cash NOI is calculated as Same Store NOI less non-recurring other income, termination fee income, straight-line rent / expense, deferred market rent and the non-controlling interest's share of cash NOI. The Company's definitions of Same Store NOI and Same Store Cash NOI exclude 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 are important measures of comparison because each 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, the Company's ability to renew expiring leases, tenant compliance with contractual lease obligations, projected capital improvements, expected sources of financing and ability to service existing 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, operating costs and costs of capital, and changes in local, regional, national and international economic conditions, including as a result of the systemic and structural changes in the demand for commercial office space. 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, 2023 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 March 31, 2024 or relate to the quarter ended March 31, 2024. 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.
City Office REIT, Inc. Consolidated Balance Sheets (Unaudited) | |||
(In thousands, except par value and share data) | |||
March 31, 2024 | December 31, 2023 | ||
Assets | |||
Real estate properties | |||
Land | $ 193,524 | $ 193,524 | |
Building and improvement | 1,196,003 | 1,194,819 | |
Tenant improvement | 156,625 | 152,540 | |
Furniture, fixtures and equipment | 944 | 820 | |
1,547,096 | 1,541,703 | ||
Accumulated depreciation | (229,680) | (218,628) | |
1,317,416 | 1,323,075 | ||
Cash and cash equivalents | 29,533 | 30,082 | |
Restricted cash | 13,831 | 13,310 | |
Rents receivable, net | 53,114 | 53,454 | |
Deferred leasing costs, net | 23,220 | 21,046 | |
Acquired lease intangible assets, net | 40,459 | 42,434 | |
Other assets | 27,954 | 27,975 | |
Total Assets | $ 1,505,527 | $ 1,511,376 | |
Liabilities and Equity | |||
Liabilities: | |||
Debt | $ 668,249 | $ 669,510 | |
Accounts payable and accrued liabilities | 29,908 | 29,070 | |
Deferred rent | 8,040 | 7,672 | |
Tenant rent deposits | 7,853 | 7,198 | |
Acquired lease intangible liabilities, net | 7,393 | 7,736 | |
Other liabilities | 16,431 | 17,557 | |
Total Liabilities | 737,874 | 738,743 | |
Commitments and Contingencies | |||
Equity: | |||
4,480,000 issued and outstanding as of March 31, 2024 and December 31, 2023 | 112,000 | 112,000 | |
Common stock, shares issued and outstanding as of March 31, 2024 and December 31, 2023 | 401 | 399 | |
Additional paid-in capital | 438,909 | 438,867 | |
Retained earnings | 214,709 | 221,213 | |
Accumulated other comprehensive income/(loss) | 1,515 | (248) | |
Total Stockholders' Equity | 767,534 | 772,231 | |
Non-controlling interests in properties | 119 | 402 | |
Total Equity | 767,653 | 772,633 | |
Total Liabilities and Equity | $ 1,511,376 | ||
City Office REIT, Inc. Consolidated Statements of Operations (Unaudited) | ||||
(In thousands, except per share data) | ||||
Three Months Ended | ||||
2024 | 2023 | |||
Rental and other revenues | $ 44,493 | $ 45,957 | ||
Operating expenses: | ||||
Property operating expenses | 17,744 | 17,720 | ||
General and administrative | 3,711 | 3,765 | ||
Depreciation and amortization | 15,075 | 15,304 | ||
Total operating expenses | 36,530 | 36,789 | ||
Operating income | 7,963 | 9,168 | ||
Interest expense: | ||||
Contractual interest expense | (8,098) | (7,972) | ||
Amortization of deferred financing costs and debt fair value | (319) | (323) | ||
(8,417) | (8,295) | |||
Net (loss)/income | (454) | 873 | ||
Less: | ||||
Net income attributable to non-controlling interests in properties | (135) | (169) | ||
Net (loss)/income attributable to the Company | (589) | 704 | ||
Preferred stock distributions | (1,855) | (1,855) | ||
Net loss attributable to common stockholders | $ (2,444) | $ (1,151) | ||
Net loss per common share: | ||||
Basic | $ (0.06) | $ (0.03) | ||
Diluted | $ (0.06) | $ (0.03) | ||
Weighted average common shares outstanding: | ||||
Basic | 40,097 | 39,873 | ||
Diluted | 40,097 | 39,873 | ||
Dividend distributions declared per common share | $ 0.10 | $ 0.20 | ||
City Office REIT, Inc. Reconciliation of Net Income to FFO, Core FFO and AFFO (Unaudited) | |
(In thousands, except per share data) | |
Three Months Ended March 31, 2024 | |
Net loss attributable to common stockholders | $ (2,444) |
(+) Depreciation and amortization | 15,075 |
12,631 | |
Non-controlling interests in properties: | |
(+) Share of net income | 135 |
(-) Share of FFO | (294) |
FFO attributable to common stockholders | $ 12,472 |
(+) Stock based compensation | 1,070 |
Core FFO attributable to common stockholders | $ 13,542 |
(-) Net recurring straight-line rent/expense adjustment | (305) |
(-) Net amortization of above and below market leases | (27) |
(+) Net amortization of deferred financing costs and debt fair value | 316 |
(-) Net recurring tenant improvements and incentives | (2,172) |
(-) Net recurring leasing commissions | (815) |
(-) Net recurring capital expenditures | (1,464) |
AFFO attributable to common stockholders | $ 9,075 |
FFO per common share | $ 0.30 |
Core FFO per common share | $ 0.33 |
AFFO per common share | $ 0.22 |
Dividends distributions declared per common share | $ 0.10 |
FFO Payout Ratio | 33 % |
Core FFO Payout Ratio | 30 % |
AFFO Payout Ratio | 45 % |
Weighted average common shares outstanding - diluted | 41,155 |
City Office REIT, Inc. Reconciliation of Rental and Other Revenues to Same Store NOI and Same Store Cash NOI (Unaudited) | |||
(In thousands) | |||
Three Months Ended | |||
2024 | 2023 | ||
Rental and other revenues | $ 44,493 | $ 45,957 | |
Property operating expenses | 17,744 | 17,720 | |
Net operating income ("NOI") | $ 26,749 | $ 28,237 | |
Less: NOI of properties not included in same store | (735) | (1,574) | |
Same store NOI | $ 26,014 | $ 26,663 | |
Less: | |||
Termination fee income | (934) | (26) | |
Straight-line rent/expense adjustment | (359) | (1,716) | |
Above and below market leases | (20) | 27 | |
NCI in properties – share in cash NOI | (426) | (434) | |
Same store cash NOI | $ 24,275 | $ 24,514 | |
City Office REIT, Inc. Reconciliation of Net Income to Core FFO Guidance (Unaudited) | ||||
(In thousands, except per share data) | ||||
Full Year 2024 Outlook | ||||
Low | High | |||
Net loss attributable to common stockholders | $ (16,900) | $ (16,150) | ||
(+) Depreciation and amortization | 60,000 | 61,000 | ||
(+) Net loss on disposition of real estate property | 100 | 100 | ||
(-) Non-controlling interests in properties | (500) | (500) | ||
FFO attributable to common stockholders | $ 42,700 | $ 44,450 | ||
(+) Stock based compensation | 4,300 | 4,300 | ||
Core FFO attributable to common stockholders | $ 47,000 | $ 48,750 | ||
FFO per common share | $ 1.03 | $ 1.08 | ||
Core FFO per common share | $ 1.14 | $ 1.18 | ||
Weighted average shares of common stock | 41,300 | 41,300 | ||
Contact
City Office REIT, Inc.
Anthony Maretic, CFO
+1-604-806-3366
investorrelations@cityofficereit.com
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SOURCE City Office REIT, Inc.
FAQ
<p>What were City Office REIT's Q1 2024 revenues?</p>
City Office REIT reported $44.5 million in rental and other revenues for Q1 2024.
<p>What was the GAAP net loss for City Office REIT in Q1 2024?</p>
The GAAP net loss for City Office REIT in Q1 2024 was approximately $2.4 million.
<p>How did City Office REIT update their guidance for 2024?</p>
City Office REIT updated their guidance, expecting a $1.8 million reduction in Core FFO for 2024 due to WeWork lease modifications.
