City Office REIT Reports Second Quarter 2021 Results

Rhea-AI Summary

City Office REIT (CIO) reported its Q2 results for 2021, revealing total revenues of $40 million and a slight net loss of $0.2 million. Core FFO reached $15.3 million, equating to $0.35 per diluted share, while AFFO stood at $9.9 million or $0.22 per share. Same Store Cash NOI increased by 2.7%. The company executed 249,000 square feet in leases and acquired two properties in San Diego for $43.3 million. A dividend of $0.15 per common share was declared, contributing to shareholder value amidst ongoing strategic initiatives.

Positive

• Core FFO of $15.3 million, or $0.35 per share.
• Acquisition of two properties in San Diego for $43.3 million enhances portfolio value.
• Same Store Cash NOI increased by 2.7% year-over-year.
• Executed 249,000 square feet in new and renewal leases.
• Declared a dividend of $0.15 per common share.

Negative

• Net loss attributable to common stockholders of $0.2 million.
• Total occupancy rate at 89.7%, indicating potential weaknesses in demand.

VANCOUVER, Aug. 5, 2021 /PRNewswire/ -- City Office REIT, Inc. (NYSE: CIO) (the "Company," "City Office," "we" or "our") today announced its results for the quarter ended June 30, 2021.

Second Quarter Highlights

• Rental and other revenues were $40.0 million. GAAP net loss attributable to common stockholders was approximately $0.2 million, or $0.00 per fully diluted share;
• Core FFO was approximately $15.3 million, or $0.35 per fully diluted share;
• AFFO was approximately $9.9 million, or $0.22 per fully diluted share;
• Same Store Cash NOI increased 2.7% as compared to the second quarter of 2020;
• In-place occupancy closed the quarter at 89.7%;
• Executed approximately 249,000 square feet of new and renewal leases during the quarter;
• Acquired two properties in San Diego, California for $43.3 million, which are adjacent and complementary to the Company's Sorrento Mesa life science portfolio;
• Declared a second quarter dividend of $0.15 per share of common stock, paid on July 23, 2021; and
• Declared a second quarter dividend of $0.4140625 per share of Series A Preferred Stock, paid on July 23, 2021.

"We have been focused on pursuing creative ways to generate value for our shareholders," commented James Farrar, the Company's Chief Executive Officer.  "During the quarter we negotiated a significant value-enhancing leasing transaction at our Park Tower property in Tampa.  We secured a 66,000 square foot long-term tenant to replace a tenant that was not using its space, and in doing so generated termination fee income that covered our new lease transaction costs and an improvement of the space."

"Also during the quarter, we completed a strategic two-property acquisition in San Diego contiguous with our Sorrento Mesa life science portfolio.  Our assemblage of cash flowing life science assets combined with over one million square feet of zoned life science development potential has generated enormous value for the Company.  We are currently advancing alternatives to further maximize value for shareholders." 

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, 2021 contained 5.6 million net rentable square feet and was 89.7% occupied.

Net Operating Income was approximately $25.8 million and Adjusted Cash NOI (CIO share) was approximately $25.7 million for the second quarter of 2021. 

Same Store Cash NOI increased 2.7% for the three months ended June 30, 2021 as compared to the same period in the prior year. Same Store Cash NOI increased 3.8% for the six months ended June 30, 2021 as compared to the same period in the prior year.

Investment and Disposition Activity

During the quarter, the Company completed the $43.3 million acquisition of two properties in the Sorrento Mesa submarket of San Diego, California. The properties are contiguous with the Company's existing Sorrento Mesa life science portfolio.  The acquisition consists of two office buildings located on highly valuable infill development land. The purchase is complementary to the development potential of the Company's Sorrento Mesa holdings, creating an attractive portfolio with cash flowing life science assets and over one million square feet of zoned potential life science development density.

Leasing Activity

The Company's total leasing activity during the second quarter of 2021 was approximately 249,000 square feet, which included 144,000 square feet of new leasing and 105,000 square feet of renewals. Approximately 183,000 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 6.9 years at a weighted average annual rent of $32.94 per square foot and at a weighted average cost of $8.11 per square foot per year. 

Renewal Leasing – Renewal leases were signed with a weighted average lease term of 5.8 years at a weighted average annual rent of $30.50 per square foot and at a weighted average cost of $4.33 per square foot per year.

During the quarter, the Company executed an eight-year, 66,000 square foot lease at the Company's Park Tower property in Tampa, Florida.  The lease is with a fin-tech tenant and is expected to commence in May 2022. The tenant will replace a 51,000 square foot tenant whose lease continued through February 2025 but who was not utilizing the space. In connection with the termination, the Company received a termination fee of $5.4 million and the tenant will continue to pay its rent obligation through to the end of November 30, 2021.  The termination fee represents approximately 85% of the base rent and estimated reimbursement obligation that the tenant would have paid under the remainder of its lease. $0.5 million of this termination income was recognized in the Company's second quarter results.

Capital Structure

As of June 30, 2021, the Company had total principal outstanding debt of approximately $615.6 million. Approximately $469.6 million, or 76.3%, 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 84.4% of the Company's debt was effectively fixed rate. City Office's total principal outstanding debt had a weighted average maturity of approximately 4.2 years and a weighted average interest rate of 3.6%.

Dividends

On June 15, 2021, the Company's board of directors approved and the Company declared a cash dividend of $0.15 per share of the Company's common stock for the three months ended June 30, 2021.  The dividend was paid on July 23, 2021 to common stockholders and unitholders of record as of July 9, 2021.

On June 15, 2021, 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, 2021. The dividend was paid on July 23, 2021 to preferred stockholders of record as of July 9, 2021.

Revised 2021 Outlook

The Company is updating its full year 2021 guidance based on year-to-date performance and its expectations for the remainder of the year. 2021 Core FFO per diluted share expectations were increased primarily due to incremental termination fee income received in a value-enhancing leasing transaction at the Company's Park Tower property.  The leasing transaction results in temporarily lower December 31, 2021 Occupancy guidance, as the new tenant is expected to take occupancy in May 2022. 

Full Year 2021 Guidance	Previous			Updated
	Low	High		Low	High
Net Operating Income	$98.5M	$100.5M		$104.5M	$106.0M
General & Administrative Expenses	$10.8M	$11.8M		$11.5M	$12.0M
2021 Core FFO per diluted share	$1.28	$1.31		$1.40	$1.43
Net Recurring Straight-Line Rent Adjustment	$1.0M	$2.0M		$0.5M	$1.5M
Same Store Cash NOI Change	1.0%	2.5%		1.5%	2.5%
December 31, 2021 Occupancy	88.5%	90.5%		87.0%	89.0%

Material Considerations:

1. The amount and timing of future acquisitions and dispositions, if any, could have an effect on our Net Operating Income and Core FFO results for Full Year 2021.   
2. Termination fee income of $2.0 million related to a tenant at the SanTan property in Phoenix and termination fee income of $5.4 million related to a tenant at the Park Tower property in Tampa have been included in 2021 guidance.
3. The General and Administrative Expenses guidance includes approximately $2.6 million for stock-based compensation. Our Core FFO definition excludes stock-based compensation.  Excluding stock-based compensation, General and Administrative Expenses guidance would have been $8.9 – $9.4 million.
4. Annual weighted average fully diluted shares of common stock outstanding are assumed to be approximately 44.1 million.

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 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 5, 2021.  

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 1-866-262-0919 for domestic callers and 1-412-902-4106 for international callers.  

A replay of the call will be available later in the day on August 5, 2021, continuing through 11:59 pm Eastern Time on November 5, 2021 and can be accessed by dialing 1-877-344-7529 for domestic callers and 1-412-317-0088 for international callers.  The passcode for the replay is 10157564.  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, 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, 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, 2020 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, 2021 or relate to the quarter ended June 30, 2021. 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
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value and share data)
	June 30,  2021	December 31, 2020
Assets
Real estate properties
Land	$     241,582	$     204,289
Building and improvement	783,264	777,184
Tenant improvement	106,876	104,694
Furniture, fixtures and equipment	669	642
	1,132,391	1,086,809
Accumulated depreciation	(149,087)	(131,220)
	983,304	955,589
Cash and cash equivalents	13,394	25,305
Restricted cash	22,929	20,646
Rents receivable, net	32,448	32,968
Deferred leasing costs, net	20,253	16,829
Acquired lease intangible assets, net	37,363	44,143
Other assets	18,461	15,758
Assets held for sale	—	46,054
Total Assets	$  1,128,152	$   1,157,292
Liabilities and Equity
Liabilities:
Debt	$     612,510	$      677,242
Accounts payable and accrued liabilities	21,668	25,414
Deferred rent	10,208	7,295
Tenant rent deposits	5,921	4,801
Acquired lease intangible liabilities, net	5,352	6,035
Other liabilities	19,069	18,099
Liabilities related to assets held for sale	—	531
Total Liabilities	674,728	739,417
Commitments and Contingencies
Equity:
6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares authorized, 4,480,000 shares issued and outstanding as of June 30, 2021 and December 31, 2020	112,000	112,000
Common stock, $0.01 par value per share, 100,000,000 shares authorized, 43,554,375 and 43,397,117 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively	435	433
Additional paid-in capital	480,629	479,411
Accumulated deficit	(139,358)	(172,958)
Accumulated other comprehensive loss	(1,191)	(1,960)
Total Stockholders' Equity	452,515	416,926
Non-controlling interests in properties	909	949
Total Equity	453,424	417,875
Total Liabilities and Equity	$ 1,128,152	$   1,157,292

 

City Office REIT, Inc
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
	Three Months Ended June 30,		Six Months Ended June 30,
	2021	2020	2021	2020
Rental and other revenues	$           39,964	$           39,617	$           79,480	$           79,739
Operating expenses:
Property operating expenses	14,179	14,084	28,297	28,780
General and administrative	3,068	2,697	5,868	5,480
Depreciation and amortization	14,954	15,080	29,369	30,032
Total operating expenses	32,201	31,861	63,534	64,292
Operating income	7,763	7,756	15,946	15,447
Interest expense:
Contractual interest expense	(5,639)	(6,792)	(11,883)	(13,153)
Amortization of deferred financing costs and debt fair value	(272)	(341)	(602)	(665)
	(5,911)	(7,133)	(12,485)	(13,818)
Net gain on sale of real estate property	—	—	47,400	—
Net income	1,852	623	50,861	1,629
Less:
Net income attributable to non-controlling interests in properties	(190)	(179)	(382)	(361)
Net income attributable to the Company	1,662	444	50,479	1,268
Preferred stock distributions	(1,855)	(1,855)	(3,710)	(3,710)
Net (loss)/income attributable to common stockholders	$              (193)	$           (1,411)	$           46,769	$           (2,442)
Net (loss)/income per common share:
Basic	$               0.00	$             (0.03)	$               1.08	$             (0.05)
Diluted	$               0.00	$             (0.03)	$               1.06	$             (0.05)
Weighted average common shares outstanding:
Basic	43,482	47,542	43,440	50,993
Diluted	43,482	47,542	44,080	50,993
Dividend distributions declared per common share	$               0.15	$               0.15	$               0.30	$               0.30

 

City Office REIT, Inc
Reconciliation of Net Income to Net Operating Income and Adjusted Cash NOI
(Unaudited)
(In thousands)
	Three Months Ended June 30, 2021
Net income	$                      1,852
Adjustments to net income:
General and administrative	3,068
Contractual interest expense	5,639
Amortization of deferred financing costs and debt fair value	272
Depreciation and amortization	14,954
Net Operating Income ("NOI")	$                    25,785
Net recurring straight-line rent/expense adjustment	114
Net amortization of above and below market leases	194
Portfolio Adjusted Cash NOI	$                    26,093
NCI in properties – share in cash NOI	(425)
Adjusted Cash NOI (CIO share)	$                    25,668

 

City Office REIT, Inc
Reconciliation of Net Income to FFO, Core FFO and AFFO
(Unaudited)
(In thousands, except per share data)
	Three Months Ended June 30, 2021
Net loss attributable to common stockholders	$                    (193)
(+) Depreciation and amortization	14,954
	14,761
Non-controlling interests in properties:
(+) Share of net income	190
(-) Share of FFO	(340)
FFO attributable to common stockholders	$                 14,611
(+) Stock based compensation	666
Core FFO attributable to common stockholders	$                 15,277
(+) Net recurring straight-line rent/expense adjustment	114
(+) Net amortization of above and below market leases	194
(+) Net amortization of deferred financing costs and debt fair value	270
(-) Net recurring tenant improvements and incentives	(1,702)
(-) Net recurring leasing commissions	(2,773)
(-) Net recurring capital expenditures	(1,469)
AFFO attributable to common stockholders	$                   9,911
FFO per common share	$                     0.33
Core FFO per common share	$                     0.35
AFFO per common share	$                     0.22
Dividends distributions declared per common share	$                     0.15
FFO Payout Ratio	45%
Core FFO Payout Ratio	43%
AFFO Payout Ratio	67%
Weighted average common shares outstanding - diluted	44,116

 

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 June 30,		Six Months Ended June 30,
	2021	2020	2021	2020
Rental and other revenues	$         39,964	$         39,617	$         79,480	$         79,739
Property operating expenses	14,179	14,084	28,297	28,780
Net operating income ("NOI")	$         25,785	$         25,533	$         51,183	$         50,959
Less: NOI of properties not included in same store	(267)	(1,502)	(1,644)	(3,570)
Same store NOI	$         25,518	$         24,031	$         49,539	$         47,389
Less:
Termination fee income	(1,495)	(131)	(1,672)	(511)
Straight-line rent/expense adjustment	121	(144)	71	(368)
Above and below market leases	184	(59)	312	(15)
NCI in properties – share in cash NOI	(425)	(418)	(850)	(834)
Same store cash NOI	$         23,903	$         23,279	$         47,400	$         45,661

 

City Office REIT, Inc.
Reconciliation of Net Income to Core FFO Guidance
(Unaudited)
(In thousands, except per share data)
		Full Year 2021 Outlook
		Low	High
Net income attributable to common stockholders		$         48,200	$         50,450
(+) Depreciation and amortization		59,000	58,000
(-) Net gain on sale of real estate property		(47,400)	(47,400)
(-) Non-controlling interests in properties		(650)	(650)
FFO attributable to common stockholders		$         59,150	$         60,400
(+) Stock based compensation		2,600	2,600
Core FFO attributable to common stockholders		$         61,750	$         63,000
FFO per common share		$             1.34	$             1.37
Core FFO per common share		$             1.40	$             1.43
Weighted average shares of common stock		44,100	44,100

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

What were City Office REIT's Q2 2021 results?

City Office REIT reported revenues of $40 million, a net loss of $0.2 million, and a Core FFO of $15.3 million for Q2 2021.

How much was the dividend declared by City Office REIT in Q2 2021?

City Office REIT declared a dividend of $0.15 per share of common stock for the second quarter of 2021.

What acquisition did City Office REIT complete in Q2 2021?

In Q2 2021, City Office REIT acquired two properties in San Diego for $43.3 million.

What is City Office REIT's occupancy rate as of June 30, 2021?

As of June 30, 2021, City Office REIT's occupancy rate was 89.7%.

What was the increase in Same Store Cash NOI for Q2 2021?

Same Store Cash NOI increased by 2.7% compared to Q2 2020.

What is the significance of the termination fee income reported by City Office REIT?

The termination fee income of $5.4 million from a leasing transaction contributed to a positive outlook for Core FFO.