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Section 1: 10-Q (FORM 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission File Number: 001-36409

 

 

CITY OFFICE REIT, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland     98-1141883

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification No.)

666 Burrard Street

Suite 3210

Vancouver, BC

V6C 2X8

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (604) 806-3366

Former name, former address and former fiscal year, if changed since last report: N/A

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading

Symbol(s)

 

Name of each Exchange

on Which Registered

Common Stock, $0.01 par value

6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share

 

“CIO”

“CIO.PrA”

 

New York Stock Exchange

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   ☒    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes     No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    ☒  No

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at October 29, 2019 was 54,547,063.

 

 

 


Table of Contents

City Office REIT, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2019

Table of Contents

 

PART I. FINANCIAL INFORMATION

     3  

Item 1.

   Financial Statements      3  
   Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018      3  
   Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018      4  
   Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018      5  
   Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2019 and 2018      6  
   Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018      8  
   Notes to Condensed Consolidated Financial Statements      9  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      20  

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      29  

Item 4.

   Controls and Procedures      29  

PART II. OTHER INFORMATION

     30  

Item 1.

   Legal Proceedings      30  

Item 1A.

   Risk Factors      30  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      30  

Item 3.

   Defaults Upon Senior Securities      30  

Item 4.

   Mine Safety Disclosures      30  

Item 5.

   Other Information      30  

Item 6.

   Exhibits      30  

Signatures

     32  

 

2


Table of Contents

PART I.    FINANCIAL INFORMATION

Item 1. Financial Statements

City Office REIT, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except par value and share data)

 

     September 30,
2019
    December 31,
2018
 

Assets

    

Real estate properties

    

Land

   $ 230,034     $ 223,789  

Building and improvement

     782,576       704,113  

Tenant improvement

     91,016       77,426  

Furniture, fixtures and equipment

     285       319  
  

 

 

   

 

 

 
     1,103,911       1,005,647  

Accumulated depreciation

     (93,623     (70,484
  

 

 

   

 

 

 
     1,010,288       935,163  
  

 

 

   

 

 

 

Cash and cash equivalents

     12,281       16,138  

Restricted cash

     20,240       17,007  

Rents receivable, net

     31,844       26,095  

Deferred leasing costs, net

     11,235       10,402  

Acquired lease intangible assets, net

     73,394       75,501  

Other assets

     16,830       2,755  

Assets held for sale

     13,905       17,370  
  

 

 

   

 

 

 

Total Assets

   $ 1,190,017     $ 1,100,431  
  

 

 

   

 

 

 

Liabilities and Equity

    

Liabilities:

    

Debt

   $ 651,693     $ 645,354  

Accounts payable and accrued liabilities

     28,431       25,892  

Deferred rent

     5,574       5,331  

Tenant rent deposits

     5,691       4,564  

Acquired lease intangible liabilities, net

     8,763       8,887  

Other liabilities

     21,349       11,148  

Liabilities related to assets held for sale

     356       878  
  

 

 

   

 

 

 

Total Liabilities

     721,857       702,054  
  

 

 

   

 

 

 

Commitments and Contingencies (Note 9)

    

Equity:

    

6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares authorized, 4,480,000 issued and outstanding

     112,000       112,000  

Common stock, $0.01 par value, 100,000,000 shares authorized, 47,647,063 and 39,544,073 shares issued and outstanding

     476       395  

Additional paid-in capital

     483,200       377,126  

Accumulated deficit

     (128,823     (92,108

Accumulated other comprehensive income

     247       —    
  

 

 

   

 

 

 

Total Stockholders’ Equity

     467,100       397,413  

Non-controlling interests in properties

     1,060       964  
  

 

 

   

 

 

 

Total Equity

     468,160       398,377  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 1,190,017     $ 1,100,431  
  

 

 

   

 

 

 

Subsequent Events (Note 11)

    

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2019     2018     2019     2018  
                          

Rental and other revenues

   $ 38,946     $ 33,547     $ 117,236     $ 95,317  

Operating expenses:

        

Property operating expenses

     14,384       13,253       42,754       36,627  

General and administrative

     2,775       1,850       8,435       5,793  

Depreciation and amortization

     15,035       13,379       44,057       37,044  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,194       28,482       95,246       79,464  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,752       5,065       21,990       15,853  

Interest expense:

        

Contractual interest expense

     (7,378     (5,915     (22,022     (16,184

Amortization of deferred financing costs and debt fair value

     (321     (311     (992     (1,297
  

 

 

   

 

 

   

 

 

   

 

 

 
     (7,699     (6,226     (23,014     (17,481

Net gain on sale of real estate property

     —         —         478       46,980  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

     (947     (1,161     (546     45,352  

Less:

        

Net income attributable to non-controlling interests in properties

     (164     (135     (498     (384
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to the Company

     (1,111     (1,296     (1,044     44,968  

Preferred stock distributions

     (1,855     (1,855     (5,565     (5,565
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to common stockholders

   $ (2,966   $ (3,151   $ (6,609   $ 39,403  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income per common share:

        

Basic

   $ (0.07   $ (0.08   $ (0.16   $ 1.08  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.07   $ (0.08   $ (0.16   $ 1.07  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     42,591       37,494       40,610       36,572  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     42,591       37,494       40,610       36,920  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividend distributions declared per common share

   $ 0.235     $ 0.235     $ 0.705     $ 0.705  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2019     2018     2019     2018  
                          

Net (loss)/income

   $ (947   $ (1,161   $ (546   $ 45,352  

Unrealized cash flow hedge gains

     247       —         247       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income

     (700     (1,161     (299     45,352  

Less:

        

Comprehensive income attributable to non-controlling interests in properties

     (164     (135     (498     (384
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income attributable to the Company

     (864     (1,296     (797     44,968  

Preferred stock distributions

     (1,855     (1,855     (5,565     (5,565
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)/income attributable to common stockholders

   $ (2,719   $ (3,151   $ (6,362   $ 39,403  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Changes in Equity

(Unaudited)

(In thousands)

 

    Number of
shares of
preferred
stock
    Preferred
stock
    Number of
shares of
common stock
    Common
stock
    Additional
paid-in capital
    Accumulated
deficit
    Accumulated
other
comprehensive
income
    Total
stockholders’
equity
    Non-
controlling
interests in
properties
    Total equity  

Balance – December 31, 2018

    4,480     $ 112,000       39,544     $ 395     $ 377,126     $ (92,108   $ —       $ 397,413     $ 964     $ 398,377  

Restricted stock award grants and vesting

    —         —         92       1       302       (83     —         220       —         220  

Common stock dividend distributions declared

    —         —         —         —         —         (9,314     —         (9,314     —         (9,314

Preferred stock dividend distributions declared

    —         —         —         —         —         (1,855     —         (1,855     —         (1,855

Contributions

    —         —         —         —         —         —         —         —         12       12  

Distributions

    —         —         —         —         —         —         —         —         (134     (134

Net income

    —         —         —         —         —         (1,089     —         (1,089     169       (920
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2019

    4,480     $ 112,000       39,636     $ 396     $ 377,428     $ (104,449   $ —       $ 385,375     $ 1,011     $ 386,386  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted stock award grants and vesting

    —         —         11       —         509       (99     —         410       —         410  

Common stock dividend distributions declared

    —         —         —         —         —         (9,318     —         (9,318     —         (9,318

Preferred stock dividend distributions declared

    —         —         —         —         —         (1,855     —         (1,855     —         (1,855

Contributions

    —         —         —         —         —         —         —         —         10       10  

Distributions

    —         —         —         —         —         —         —         —         (156     (156

Net income

    —         —         —         —         —         1,156       —         1,156       165       1,321  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2019

    4,480     $ 112,000       39,647     $ 396     $ 377,937     $ (114,565   $ —       $ 375,768     $ 1,030     $ 376,798  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted stock award grants and vesting

    —         —         —         —         527       (95     —         432       —         432  

Net proceeds from sale of common stock

    —         —         8,000       80       104,736       —         —         104,816       —         104,816  

Common stock dividend distributions declared

    —         —         —         —         —         (11,197     —         (11,197     —         (11,197

Preferred stock dividend distributions declared

    —         —         —         —         —         (1,855     —         (1,855     —         (1,855

Contributions

    —         —         —         —         —         —         —         —         46       46  

Distributions

    —         —         —         —         —         —         —         —         (180     (180

Net income

    —         —         —         —         —         (1,111     —         (1,111     164       (947

Unrealized cash flow hedge gains

    —         —         —         —         —         —         247       247       —         247  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2019

    4,480     $ 112,000       47,647     $ 476     $ 483,200     $ (128,823   $ 247     $ 467,100     $ 1,060     $ 468,160  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

6


Table of Contents
    Number of
shares of
preferred
stock
    Preferred
stock
    Number of
shares of
common stock
    Common
stock
    Additional
paid-in capital
    Accumulated
deficit
    Accumulated
other
comprehensive
income
    Total
stockholders’
equity
    Non-
controlling
interests in
properties
    Total equity  

Balance—December 31, 2017

    4,480     $ 112,000       36,012     $ 360     $ 334,241     $ (86,977   $ —       $ 359,624     $ 208     $ 359,832  

Restricted stock award grants and vesting

    —         —         120       1       356       (72     —         285       —         285  

Common stock dividend distributions declared

    —         —         —         —         —         (8,491     —         (8,491     —         (8,491

Preferred stock dividend distributions declared

    —         —         —         —         —         (1,855     —         (1,855     —         (1,855

Distributions

    —         —         —         —         —         —         —         —         (29     (29

Net income

    —         —         —         —         —         47,063       —         47,063       135       47,198  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—March 31, 2018

    4,480     $ 112,000       36,132     $ 361     $ 334,597     $ (50,332   $ —       $ 396,626     $ 314     $ 396,940  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted stock award grants and vesting

    —         —         1       —         412       (80     —         332       —         332  

Common stock dividend distributions declared

    —         —         —         —         —         (8,491     —         (8,491     —         (8,491

Preferred stock dividend distributions declared

    —         —         —         —         —         (1,855     —         (1,855     —         (1,855

Contributions

    —         —         —         —         —         —         —         —         43       43  

Distributions

    —         —         —         —         —         —         —         —         (135     (135

Net income

    —         —         —         —         —         (798     —         (798     114       (684
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—June 30, 2018

    4,480     $ 112,000       36,133     $ 361     $ 335,009     $ (61,556   $ —       $ 385,814     $ 336     $ 386,150  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted stock award grants and vesting

    —         —         —         —         436       (79     —         357       —         357  

Net proceeds from sale of common stock

    —         —         3,411       34       42,868       —         —         42,902       —         42,902  

Common stock dividend distributions declared

    —         —         —         —         —         (9,293     —         (9,293     —         (9,293

Preferred stock dividend distributions declared

    —         —         —         —         —         (1,855     —         (1,855     —         (1,855

Minority interest buyout

    —         —         —         —         (1,624     —         —         (1,624     485       (1,139

Distributions

    —         —         —         —         —         —         —         —         (210     (210

Net income

    —         —         —         —         —         (1,296     —         (1,296     135       (1,161
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—September 30, 2018

    4,480     $ 112,000       39,544     $ 395     $ 376,689     $ (74,079   $ —       $ 415,005     $ 746     $ 415,751  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7


Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

     Nine Months Ended September 30,  
             2019                     2018          

Cash Flows from Operating Activities:

    

Net (loss)/income

   $ (546   $ 45,352  

Adjustments to reconcile net (loss)/income to net cash provided by operating activities:

    

Depreciation and amortization

     44,057       37,044  

Amortization of deferred financing costs and debt fair value

     992       1,297  

Amortization of above/below market leases

     (67     (143

Increase in straight-line rent/expense

     (4,591     (3,491

Non-cash stock compensation

     1,310       1,061  

Net gain on sale of real estate property

     (478     (46,980

Changes in non-cash working capital:

    

Rents receivable, net

     (1,512     (1,177

Other assets

     (337     (162

Accounts payable and accrued liabilities

     (1,217     (1,434

Deferred rent

     73       (1,428

Tenant rent deposits

     (421     140  
  

 

 

   

 

 

 

Net Cash Provided By Operating Activities

     37,263       30,079  
  

 

 

   

 

 

 

Cash Flows to Investing Activities:

    

Additions to real estate properties

     (13,855     (15,785

Acquisition of real estate

     (108,358     (162,462

Net proceeds from sale of real estate

     33,941       84,839  

Deferred leasing costs

     (2,474     (3,222
  

 

 

   

 

 

 

Net Cash Used In Investing Activities

     (90,746     (96,630
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Proceeds from sale of common stock

     104,816       42,902  

Debt issuance and extinguishment costs

     (995     (2,662

Proceeds from borrowings

     154,750       269,824  

Repayment of borrowings

     (171,575     (212,128

Shares withheld for payment of taxes on restricted stock unit vesting

     (246     (87

Minority interest buyout

     —         (1,139

Contributions from non-controlling interests in properties

     68       43  

Distributions to non-controlling interests in properties

     (470     (374

Dividend distributions paid to stockholders and Operating Partnership unitholders

     (33,489     (31,010
  

 

 

   

 

 

 

Net Cash Provided By Financing Activities

     52,859       65,369  
  

 

 

   

 

 

 

Net Decrease in Cash, Cash Equivalents and Restricted Cash

     (624     (1,182

Cash, Cash Equivalents and Restricted Cash, Beginning of Period

     33,145       35,014  
  

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash, End of Period

   $ 32,521     $ 33,832  
  

 

 

   

 

 

 

Reconciliation of Cash, Cash Equivalents and Restricted Cash:

    

Cash and Cash Equivalents, End of Period

   $ 12,281     $ 13,696  

Restricted Cash, End of Period

     20,240       20,136  
  

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash, End of Period

   $ 32,521     $ 33,832  
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

    

Cash paid for interest

   $ 22,262     $ 15,967  

Purchases of additions in real estate properties included in accounts payable

   $ 2,264     $ 4,379  

Purchases of deferred leasing costs included in accounts payable

   $ 298     $ 430  

Unrealized cash flow hedge gains

   $ 247     $ —    

Debt assumed on acquisition of real estate

   $ 22,473     $ —    

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

City Office REIT, Inc.

Notes to the Condensed Consolidated Financial Statements

1. Organization and Description of Business

City Office REIT, Inc. (the “Company”) was organized in the state of Maryland on November 26, 2013. On April 21, 2014, the Company completed its initial public offering (“IPO”) of shares of the Company’s common stock. The Company contributed the net proceeds of the IPO to City Office REIT Operating Partnership, L.P., a Maryland limited partnership (the “Operating Partnership”), in exchange for common units of limited partnership interest in the Operating Partnership (“common units”).

The Company’s interest in the Operating Partnership entitles the Company to share in distributions from, and allocations of profits and losses of, the Operating Partnership in proportion to the Company’s percentage ownership of common units. As the sole general partner of the Operating Partnership, the Company has the exclusive power under the Operating Partnership’s partnership agreement, as amended, to manage and conduct the Operating Partnership’s business, subject to limited approval and voting rights of the limited partners.

The Company has elected to be taxed, and will continue to operate in a manner that will allow it to continue to qualify, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Subject to qualification as a REIT, the Company will be permitted to deduct dividend distributions paid to its stockholders, eliminating the U.S. federal taxation of income represented by such distributions at the Company level. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and, for tax years beginning before 2018, any applicable alternative minimum tax.

2. Summary of Significant Accounting Policies

Basis of Preparation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with Securities and Exchange Commission rules and regulations and generally accepted accounting principles in the United States of America (“US GAAP”) and in the opinion of management contain all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

New Accounting Pronouncements

Adopted in the Current Year

In February 2016, the Financial Accounting Standards Board, or FASB, established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02, which requires lessors to classify leases as a sales-type, direct financing, or operating lease and requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.

The Company adopted the new standard effective January 1, 2019 and elected the effective date method for the transition. The Company elected the following practical expedients:

 

   

Transition method practical expedient – permits the Company to use the effective date as the date of initial application. Upon adoption, the Company did not have a cumulative-effect adjustment to the opening balance of retained earnings. Financial information and disclosures for periods before January 1, 2019 were not updated.

 

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Table of Contents
   

Package of practical expedients – permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. This allowed the Company to continue classifying its leases at transition in substantially the same manner.

 

   

Single component practical expedient – permits the Company to not separate lease and non-lease components of leases. Upon transition, rental income, expense reimbursement, and other were aggregated into a single line within rental and other revenues on the condensed consolidated statement of operations.

 

   

Land easement practical expedient – permits the Company not to reassess under the new standard its prior conclusions about land easements.

 

   

Short-term lease practical expedient – permits the Company not to recognize leases with a term equal to or less than 12 months.

Lessor Accounting

The accounting for lessors under the new standard remained relatively unchanged with a few targeted updates impacting the Company, which included: (i) narrower definition of initial direct costs that requires certain costs to be expensed rather than capitalized, and (ii) provisions for uncollectible rents to be recorded as a reduction in revenue rather than as bad debt expense.

Lessee Accounting

The new standard requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating at inception, with classification affecting the pattern and recording of expenses in the statement of operations. Upon transition the Company recognized right-of use assets and lease liabilities principally for its ground and office leases.

3. Real Estate Investments

Acquisitions

During the nine months ended September 30, 2019 and 2018 the Company acquired the following properties:

 

Property

   Date Acquired      Percentage Owned  

7601 Tech

     September 2019        100

Cascade Station

     June 2019        100

Canyon Park

     February 2019        100

The Quad

     July 2018        100

Circle Point

     July 2018        100

Pima Center

     April 2018        100

Each of the foregoing acquisitions were accounted for as asset acquisitions.

 

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Table of Contents

The following table summarizes the Company’s allocation of the purchase price of assets acquired and liabilities assumed during the nine months ended September 30, 2019 (in thousands):

 

     7601 Tech      Canyon Park      Cascade Station      Total Sept. 30,
2019
 

Land

   $ 10,865      $ 7,098      $ —        $ 17,963  

Buildings and improvements

     25,677        36,619        25,141        87,437  

Tenant improvements

     3,858        1,797        2,080        7,735  

Lease intangible assets

     7,401        8,109        3,134        18,644  

Other assets

     293        10        3,164        3,467  

Debt

     —          —          (697      (697

Accounts payable and other liabilities

     (668      (1,266      (186      (2,120

Lease intangible liabilities

     (79      (1,297      (220      (1,596
  

 

 

    

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 47,347      $ 51,070      $ 32,416      $ 130,833  
  

 

 

    

 

 

    

 

 

    

 

 

 

The acquisition of the Cascade Station property was partially funded through an assumption of debt in the amount of $22.5 million.

The following table summarizes the Company’s allocation of the purchase price of assets acquired and liabilities assumed during the nine months ended September 30, 2018 (in thousands):

 

     The Quad      Circle Point      Pima Center      Total Sept. 30,
2018
 

Land

   $ 8,079      $ 8,744      $ —        $ 16,823  

Buildings and improvements

     38,060        33,708        42,235        114,003  

Tenant improvements

     1,798        5,393        2,898        10,089  

Lease intangible assets

     4,209        10,299        10,691        25,199  

Other assets

     15        25        95        135  

Accounts payable and other liabilities

     (527      (1,157      (337      (2,021

Lease intangible liabilities

     (1,247      (390      (129      (1,766
  

 

 

    

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 50,387      $ 56,622      $ 55,453      $ 162,462  
  

 

 

    

 

 

    

 

 

    

 

 

 

Sale of Real Estate Property

On May 7, 2019, the Company sold the 10455 Pacific Center building of the Sorrento Mesa property in San Diego, California for $16.5 million, resulting in an aggregate gain of $0.5 million net of disposal-related costs, which has been classified as net gain on sale of real estate property in the condensed consolidated statements of operations.

On February 7, 2019, the Company sold the Plaza 25 property in Denver, Colorado for $17.9 million. No gain or loss was recognized on the sale as the property was carried at fair value less cost to sell on the date of disposition.

On March 8, 2018, the Company sold the Washington Group Plaza property in Boise, Idaho for $86.5 million, resulting in an aggregate net gain of $47.0 million, net of $1.7 million in costs, which has been classified as net gain on sale of real estate property in the condensed consolidated statements of operations. In connection with the sale of the property, certain debt repayments were made.

Assets Held for Sale

On May 10, 2019, the Company entered into a Purchase and Sale agreement to sell a land parcel at the Circle Point property for $6.5 million. The Company determined that the land parcel met the criteria for classification as held for sale as of September 30, 2019. The transaction is anticipated to close in the first quarter of 2020, subject to customary closing conditions. As of September 30, 2019, the Company has received a $0.5 million non-refundable deposit.

 

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As of September 30, 2019 the Company determined that the Logan Tower property met the criteria for classification as held for sale.

These properties have been classified as held for sale as of September 30, 2019 (in thousands):

 

September 30, 2019

   Logan Tower     Circle Point
Land
    Total  

Real estate properties, net

   $ 9,034     $ 4,441     $ 13,475  

Deferred leasing costs, net

     239       —         239  

Acquired lease intangible assets, net

     2       —         2  

Rents receivable, prepaid expenses and other assets

     189       —         189  
  

 

 

   

 

 

   

 

 

 

Assets held for sale

   $ 9,464     $ 4,441     $ 13,905  
  

 

 

   

 

 

   

 

 

 

Acquired lease intangible liabilities, net

     (10     —         (10

Accounts payable, accrued expenses, deferred rent and tenant rent deposits

     (296     (50     (346
  

 

 

   

 

 

   

 

 

 

Liabilities related to assets held for sale

   $ (306   $ (50   $ (356
  

 

 

   

 

 

   

 

 

 

On November 30, 2018, the Company entered into a Purchase and Sale agreement to sell the Plaza 25 property for $17.9 million. The transaction closed in February 2019. The property was presented as held for sale as of December 31, 2018 (in thousands):

 

December 31, 2018

   Plaza 25  

Real estate properties, net

   $ 16,149  

Deferred leasing costs, net

     419  

Acquired lease intangible assets, net

     11  

Rents receivable, prepaid expenses and other assets

     791  
  

 

 

 

Assets held for sale

   $ 17,370  
  

 

 

 

Accounts payable, accrued expenses, deferred rent and tenant rent deposits

     (878
  

 

 

 

Liabilities related to assets held for sale

   $ (878
  

 

 

 

4. Lease Intangibles

Lease intangibles and the value of assumed lease obligations as of September 30, 2019 and December 31, 2018 were comprised as follows (in thousands):

 

     Lease Intangible Assets     Lease Intangible Liabilities  

September 30, 2019

   Above
Market
Leases
    Below Market
Ground
Lease(1)
     In Place
Leases
    Leasing
Commissions
    Total     Below
Market
Leases
    Below Market
Ground
Lease(1)
    Total  

Cost

   $ 15,510     $ —        $ 87,957     $ 36,523     $ 139,990     $ (14,181   $ (138   $ (14,319

Accumulated amortization

     (6,363     —          (44,822     (15,411     (66,596     5,517       39       5,556  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 9,147     $ —        $ 43,135     $ 21,112     $ 73,394     $ (8,664   $ (99   $ (8,763
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Lease Intangible Assets     Lease Intangible Liabilities  

December 31, 2018

   Above
Market
Leases
    Below Market
Ground
Lease(1)
    In Place
Leases
    Leasing
Commissions
    Total     Below
Market
Leases
    Below Market
Ground
Lease(1)
    Total  

Cost

   $ 10,595     $ 1,855     $ 82,474     $ 31,706     $ 126,630     $ (12,925   $ (138   $ (13,063

Accumulated amortization

     (4,800     (19     (34,273     (12,037     (51,129     4,140       36       4,176  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 5,795     $ 1,836     $ 48,201     $ 19,669     $ 75,501     $ (8,785   $ (102   $ (8,887
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For the below market ground lease asset, the Company is the lessee, whereas, for the below market ground lease liability, the Company is the lessor. Upon the adoption of Topic 842 on January 1, 2019, the Company derecognized the below market ground lease intangible asset related to one of its lessee ground leases and included the net carrying value of the intangible asset within the right-of-use asset recognized upon transition to the new standard.

The estimated aggregate amortization expense for lease intangibles for the next five years and in the aggregate are as follows (in thousands):

 

2019

   $ 5,098  

2020

     19,302  

2021

     15,990  

2022

     8,223  

2023

     5,361  

Thereafter

     10,657  
  

 

 

 
   $ 64,631  
  

 

 

 

5. Debt

The following table summarizes the indebtedness as of September 30, 2019 and December 31, 2018 (dollars in thousands):

 

Property

   September 30,
2019
     December 31,
2018
     Interest Rate as
of September 30,

2019 (1)
    Maturity  

Unsecured Credit Facility (3)

   $ 43,325      $ 147,500        LIBOR +1.50 %(2)      March 2022  

Term Loan (4)

     50,000        —          LIBOR +1.40 (2)      September 2024  

Midland Life Insurance (5)

     85,720        86,973        4.34       May 2021  

Mission City

     47,000        47,000        3.78       November 2027  

190 Office Center

     41,007        41,250        4.79       October 2025  

Canyon Park (6)

     40,950        —          4.30       March 2027  

Circle Point

     39,650        39,650        4.49       September 2028  

SanTan

     34,250        34,682        4.56       March 2027  

Intellicenter

     33,102        33,481        4.65       October 2025  

The Quad

     30,600        30,600        4.20       September 2028  

FRP Collection (7)

     29,142        29,589        3.10       September 2023  

2525 McKinnon

     27,000        27,000        4.24       April 2027  

Cascade Station

     22,390        —          4.55       May 2024  

Greenwood Blvd (7)

     22,425        22,425        3.15       December 2025  

5090 N 40th St

     22,000        22,000        3.92       January 2027  

AmberGlen

     20,000        20,000        3.69       May 2027  

Lake Vista Pointe

     17,800        18,044        4.28       August 2024  

Central Fairwinds (8)

     17,626        17,882        3.15       September 2024  

FRP Ingenuity Drive

     17,000        17,000        4.44       December 2024  

Carillon Point (7)

     16,067        16,330        3.10       October 2023  
  

 

 

    

 

 

      

Total Principal

     657,054        651,406       

Deferred financing costs, net

     (6,058      (6,052     

Unamortized fair value adjustments

     697        —         
  

 

 

    

 

 

      

Total

   $ 651,693      $ 645,354       
  

 

 

    

 

 

      

 

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Table of Contents
(1)

All interest rates are fixed interest rates with the exception of the unsecured credit facility (“Unsecured Credit Facility”) and the term loan (“Term Loan”) as explained in footnotes 3 and 4 below.

(2)

As of September 30, 2019, the one month LIBOR rate was 2.09%.

(3)

On March 15, 2018, the Company entered into a $250 million Unsecured Credit Facility, which includes an accordion feature that will permit the Company to borrow up to $500 million, subject to customary terms and conditions. The Unsecured Credit Facility matures in March 2022, which may be extended to March 2023 at the Company’s option upon meeting certain conditions. As of September 30, 2019, the Unsecured Credit Facility had $43.3 million drawn and $7.0 million of letters of credit to satisfy escrow requirements for mortgage lenders. Borrowings under the Unsecured Credit Facility will bear interest at a rate equal to the LIBOR rate plus a margin of between 140 to 225 basis points depending upon the Company’s consolidated leverage ratio. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.

(4)

In September 2019, the Company entered into a $50 million Term Loan increasing its authorized borrowings from $250 million to $300 million. Borrowings under the Term Loan will bear interest at a rate equal to the LIBOR rate plus a margin between 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the Company also entered into a pay-fixed receive-variable interest rate swap with a five year term, effectively fixing the LIBOR component of the Term Loan at approximately 1.27% (the “Interest Rate Swap”). See Note 6 – Fair Value of Financial Measurements.

(5)

The mortgage loan is cross-collateralized by Cherry Creek, City Center and 7595 Tech (formerly “DTC crossroads”).

(6)

The mortgage loan anticipated repayment date (“ARD”) is March 1, 2027. The final scheduled maturity date can be extended up to 5 years beyond the ARD. If the loan is not paid off at ARD, loan’s interest rate shall be adjusted to the greater of (i) the initial interest rate plus 200 basis points or (ii) the yield on the five year “on the run” treasury reported by Bloomberg market data service plus 450 basis points.

(7)

In August 2019, the Company entered into loan modification agreements for FRP Collection, Carillon Point and Greendwood Blvd reducing the interest rates from 3.85% to 3.1%, 3.5% to 3.1% and 4.6% to 3.15% respectively.

(8)

In September 2019, the Company entered into a loan modification agreement for Central Fairwinds reducing the interest rate from 4.0% to 3.15%.

The scheduled principal repayments of debt as of September 30, 2019 are as follows (in thousands):

 

2019

   $ 1,400  

2020

     6,328  

2021

     89,314  

2022

     49,853  

2023

     48,528  

Thereafter

     461,631  
  

 

 

 
   $ 657,054  
  

 

 

 

6. Fair Value of Financial Instruments

Fair value measurements are based on assumptions that market participants would use in pricing an asset or a liability. The hierarchy for inputs used in measuring fair value is as follows:

Level 1 Inputs – quoted prices in active markets for identical assets or liabilities

Level 2 Inputs – observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3 Inputs – unobservable inputs

During the three months ended September 30, 2019, the Company entered into an interest rate swap agreement for a notional amount of $50.0 million, which became effective September 2019. The five-year swap agreement terminates in September 2024. Pursuant to the agreement, the Company will pay a fixed rate of approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate 30-day LIBOR payments.

The Interest Rate Swap qualifies as a cash flow hedge and has been recognized on the consolidated balance sheets at fair value. Gains and losses resulting from changes in the fair value of derivatives that qualify as cash flow hedges are reported as a component of other comprehensive income (loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.

As of September 30, 2019, the Interest Rate Swap was reported as an asset at its fair value of approximately $0.2 million, which is included in other assets on the Company’s condensed consolidated balance sheet. For the nine months ended September 30, 2019 the amount of realized gains reclassified to interest expense due to payments received by the swap counterparty were nominal. Accordingly, the fair value of the Interest Rate Swap has been classified as a Level 2 fair value measurement.

As of December 31, 2018, the Company did not have any hedges or derivatives.

 

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Table of Contents

Cash, Cash Equivalents, Restricted Cash, Rents Receivable, Accounts Payable and Accrued Liabilities

The Company estimates that the fair value approximates carrying value due to the relatively short-term nature of these instruments.

Fair Value of Financial Instruments Not Carried at Fair Value

With the exception of fixed rate mortgage loans payable, the carrying amounts of the Company’s financial instruments approximate their fair value. The Company determines the fair value of its fixed rate mortgage loan payable based on a discounted cash flow analysis using a discount rate that approximates the current borrowing rates for instruments of similar maturities. Based on this, the Company has determined that the fair value of these instruments was $586.1 million and $503.3 million as of September 30, 2019 and December 31, 2018, respectively. Accordingly, the fair value of mortgage loans payable have been classified as Level 3 fair value measurements.

7. Related Party Transactions

Administrative Services Agreement

For the nine months ended September 30, 2019 and 2018, the Company earned $0.4 million and $0.5 million, respectively, in administrative services performed for Second City Real Estate II Corporation and its affiliates (collectively, “Second City”). Also during the nine months ended September 30, 2019, the Company was assigned a purchase contract which had been entered into by an entity affiliated with principals of Second City, which principals are also officers of the Company. The Company subsequently assigned the purchase contract to a third party during the nine months ended September 30, 2019. The Company paid no consideration to the related party for the contract other than return of deposits which the Company subsequently recovered from a third party in addition to an assignment fee. The Company recognized income of $2.6 million on the assignment of the purchase contract to the third party, which was recorded in rental and other revenues on the condensed consolidated statement of operations.

During the three months ended September 30, 2019, an indirect, wholly-owned subsidiary of the Company entered into an Administrative Services Agreement (the “Administrative Services Agreement”) with Clarity Real Estate III GP, Limited Partnership and Clarity Real Estate Ventures GP, Limited Partnership (together, “Clarity”), entities affiliated with principals of Second City and officers of the Company. Pursuant to the Administrative Services Agreement, the Company will provide various administrative services and support to the related entities managing the Clarity funds. During the three months ended September 30, 2019 the amounts earned by the Company for the administrative services performed for Clarity were nominal.

8. Leases

Lessor Accounting

The Company is focused on acquiring, owning and operating high-quality office properties for lease to a stable and diverse tenant base. Our properties have both full-service gross and net leases which are generally classified as operating leases. Rental income related to such leases is recognized on a straight-line basis over the remaining lease term. The Company’s total revenue includes fixed base rental payments provided under the lease and variable payments which principally consist of tenant expense reimbursements for certain property operating expenses. The Company elected the practical expedient to account for its lease and non-lease components as a single combined operating lease component under the new leasing standard. As a result, rental income, expense reimbursement, and other were aggregated into a single line within rental and other revenues on the condensed consolidated statement of operations.

For the three and nine months ended September 30, 2019, the Company recognized $38.9 million and $114.5 million, respectively, of rental and other revenue related to its operating leases (in thousands):

 

    

                

    

                

     Three months ended
September 30, 2019
     Nine months ended
September 30, 2019
 

Fixed payments

         $ 33,495      $ 98,555  

Variable payments

           5,441        15,967  
        

 

 

    

 

 

 
         $ 38,936      $ 114,522  
        

 

 

    

 

 

 

 

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Future minimum lease payments to be received by the Company as of September 30, 2019 under non-cancellable operating leases for the next five years and thereafter are as follows (in thousands):

 

2019

   $ 31,253  

2020

     116,812  

2021

     106,709  

2022

     89,349  

2023

     71,209  

Thereafter

     161,614  
  

 

 

 
   $ 576,946  
  

 

 

 

The Company’s leases may include various provisions such as scheduled rent increases, renewal options and termination options. The majority of the Company’s leases include defined rent increase rather than variable payments based on an index or unknown rate. Seven state government tenants currently have the exercisable right to terminate their leases if the applicable state legislature does not appropriate rent in its annual budget. The Company has determined that the occurrence of any government tenant not being appropriated the rent in the applicable annual budget is a remote contingency and accordingly recognizes lease revenue on a straight-line basis over the respective lease term. These tenants represent approximately 7.9% of the Company’s total future minimum lease payments as of September 30, 2019.

Lessee Accounting

As a lessee, the Company has ground and office leases classified as operating leases and one office lease classified as a financing lease. Upon adoption of Topic 842, on January 1, 2019, the Company recognized right-of-use assets of $9.2 million and lease liabilities of $7.2 million. The difference between the recorded right-of-use assets and lease liabilities is mainly due to the reclassification of the below market ground lease intangible asset, which was included within the right-of-use assets recognized upon transition. As of September 30, 2019, these leases had remaining terms of 2 to 69 years and a weighted average remaining lease term of 56 years. Operating and financing right-of-use assets and lease liabilities have been included within other assets and other liabilities on the Company’s condensed consolidated balance sheet as follows (in thousands):

 

     As of
September 30,
2019
 

Right-of-use asset – operating leases

   $ 13,125  

Lease liability – operating leases

   $ 8,213  

Right-of-use asset – financing leases

   $ 85  

Lease liability – financing leases

   $ 84  

Lease liabilities are measured at the commencement date based on the present value of future lease payments. One of the Company’s operating ground leases includes rental payment increases over the lease term based on increases in the Consumer Price Index (“CPI”). Changes in the CPI were not estimated as part of the measurement of the operating lease liability. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The Company used a weighted average discount rate of 6.31% in determining its lease liabilities. The discount rates were derived from the Company’s assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments.

 

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Right-of-use assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.

Operating lease expense for the three and nine months ended September 30, 2019 was $0.2 million and $0.6 million, respectively. Financing lease expense for the three and nine months ended September 30, 2019 was nominal.

Future minimum lease payments to be paid by the Company as a lessee as of September 30, 2019 for the next five years and thereafter are as follows (in thousands):

 

     Operating
Leases
     Financing
Leases
 

2019

   $ 144      $ 6  

2020

     782        27  

2021

     781        27  

2022

     741        27  

2023

     659        4  

Thereafter

     27,277        —    
  

 

 

    

 

 

 

Total future minimum lease payments

     30,384        91  

Discount

     (22,170      (7
  

 

 

    

 

 

 

Total

   $ 8,214      $ 84  
  

 

 

    

 

 

 

9. Commitments and Contingencies

The Company is obligated under certain tenant leases to fund tenant improvements and the expansion of the underlying leased properties.

Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. As such, the Company may be potentially liable for costs associated with any potential environmental remediation at any of its formerly or currently owned properties.

The Company believes that it is in compliance in all material respects with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. Management is not aware of any environmental liability that it believes would have a material adverse impact on the Company’s financial position or results of operations. Management is unaware of any instances in which the Company would incur significant environmental costs if any or all properties were sold, disposed of or abandoned. However, there can be no assurance that any such non-compliance, liability, claim or expenditure will not arise in the future.

The Company is involved from time to time in lawsuits and other disputes which arise in the ordinary course of business. As of September 30, 2019, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Company’s financial position or results of operations.

10. Stockholders’ Equity

The Company and the Operating Partnership previously entered into the amended equity distribution agreements (collectively, the “EDAs”) with the sales agents named therein (collectively, the “Sales Agents”), pursuant to which the Company may issue and sell from time to time up to 8,000,000 shares of common stock and

 

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up to 1,000,000 shares of Series A Preferred Stock through the Sales Agents, acting as agents or principals (the “ATM Program”). Pursuant to the EDAs, the shares may be offered and sold through the Sales Agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the New York Stock Exchange or sales made to or through a market maker other than on an exchange or, with the prior consent of the Company, in privately negotiated transactions. The Sales Agents will be entitled to compensation of up to 2.0% of the gross proceeds of shares sold through the Sales Agents from time to time under the EDAs. The Company has no obligation to sell any of the shares under the EDAs and may at any time suspend solicitations and offers under, or terminate, the EDAs. During the nine month period ended September 30, 2019, the Company issued 8,000,000 shares of common stock under the ATM Program. The Company raised $106.5 million in aggregate gross proceeds, resulting in aggregate net proceeds to the Company of approximately $104.8 million after deducting sales commissions and offering expenses.

Common Stock and Common Unit Distributions

On September 16, 2019, the Company’s Board of Directors approved and the Company declared a cash dividend distribution of $0.235 per common share for the quarterly period ended September 30, 2019. The dividend was paid subsequent to quarter end on October 25, 2019 to common stockholders and common unitholders of record as of the close of business on October 11, 2019, resulting in an aggregate payment of $11.2 million.

Preferred Stock Distributions

On September 16, 2019, the Company’s Board of Directors approved and the Company declared a cash dividend of $0.4140625 per preferred share for the quarterly period ended September 30, 2019. The dividend was paid subsequent to quarter end on October 25, 2019 to preferred stockholders of record as of the close of business on October 11, 2019, resulting in an aggregate payment of $1.9 million.

Restricted Stock Units

The Company has an equity incentive plan (“Equity Incentive Plan”) for executive officers, directors and certain non-executive employees, and with approval of the Board of Directors, for subsidiaries and their respective affiliates. The Equity Incentive Plan provides for grants of restricted common stock, restricted stock units, phantom shares, stock options, dividend equivalent rights and other equity-based awards (including LTIP Units), subject to the total number of shares available for issuance under the plan. The Equity Incentive Plan is administered by the compensation committee of the Board of Directors (the “Plan Administrator”).

On May 2, 2019, the Company’s stockholders approved an amendment to the Equity Incentive Plan increasing the maximum number of shares of common stock that may be issued under the Equity Incentive Plan from 1,263,580 shares to 2,263,580 shares. To the extent an award granted under the Equity Incentive Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards.

During the nine months ended September 30, 2019, 162,500 restricted stock units (“RSUs”) were granted to executive officers, directors and certain non-executive employees with a fair value of $1.8 million. The awards will vest in three equal, annual installments on each of the first three anniversaries of the date of grant. For the three and nine months ended September 30, 2019, the Company recognized net compensation expense of $0.4 million and $1.3 million, respectively, related to the RSUs. For the three and nine months ended September 30, 2018 the Company recognized net compensation expense of $0.4 million and $1.1 million, respectively, related to the RSUs.

A RSU award represents the right to receive shares of the Company’s common stock in the future, after the applicable vesting criteria, determined by the Plan Administrator, has been satisfied. The holder of an award of RSU has no rights as a stockholder until shares of common stock are issued in settlement of vested RSUs. The Plan Administrator may provide for a grant of dividend equivalent rights in connection with the grant of RSU; provided, however, that if the RSUs do not vest solely upon satisfaction of continued employment or service, any payment in respect to the related dividend equivalent rights will be held by the Company and paid when, and only to the extent that, the related RSU vests.

 

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11. Subsequent Events

On October 7, 2019, the Company completed a public offering pursuant to which the Company sold 6,900,000 shares of its common stock, inclusive of the overallotment option, for aggregate gross proceeds of $95.6 million.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is based on, and should be read in conjunction with, the condensed, consolidated financial statements and the related notes thereto of the City Office REIT, Inc. contained in this Quarterly Report on Form 10-Q.

As used in this section, unless the context otherwise requires, references to “we,” “our,” “us,” and “our company” refer to City Office REIT, Inc., a Maryland corporation, together with our consolidated subsidiaries, including City Office REIT Operating Partnership L.P., a Maryland limited partnership, of which we are the sole general partner and which we refer to in this section as our Operating Partnership, except where it is clear from the context that the term only means City Office REIT, Inc.

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report on Form 10-Q, including “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition,” contains both historical and forward-looking statements. All statements, other than statements of historical fact are, or may be deemed to be, forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements are not based on historical facts, but rather reflect our current expectations and projections about our future results, performance, prospects and opportunities. These forward looking statements may be identified by the use of words including “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar terms and phrases. These forward looking statements are subject to a number of known and unknown risks, uncertainties and other factors that are difficult to predict and which could cause our actual future results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward looking statements. These risks, uncertainties and other factors include, among others:

 

   

adverse economic or real estate developments in the office sector or the markets in which we operate;

 

   

changes in local, regional, national and international economic conditions;

 

   

our inability to compete effectively;

 

   

our inability to collect rent from tenants or renew tenants’ leases on attractive terms if at all;

 

   

demand for and market acceptance of our properties for rental purposes;

 

   

defaults on or non-renewal of leases by tenants;

 

   

increased interest rates and any resulting increase in financing or operating costs;

 

   

decreased rental rates or increased vacancy rates;

 

   

our failure to obtain necessary financing or access the capital markets on favorable terms or at all;

 

   

changes in the availability of acquisition opportunities;

 

   

availability of qualified personnel;

 

   

our inability to successfully complete real estate acquisitions or dispositions on the terms and timing we expect, or at all;

 

   

our failure to successfully operate acquired properties and operations;

 

   

changes in our business, financing or investment strategy or the markets in which we operate;

 

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our failure to generate sufficient cash flows to service our outstanding indebtedness;

 

   

environmental uncertainties and risks related to adverse weather conditions and natural disasters;

 

   

our failure to qualify and maintain our status as a real estate investment trust (“REIT”);

 

   

government approvals, actions and initiatives, including the need for compliance with environmental requirements;

 

   

outcome of claims and litigation involving or affecting us;

 

   

financial market fluctuations;

 

   

changes in real estate, taxation and zoning laws and other legislation and government activity and changes to real property tax rates and the taxation of REITs in general;

 

   

uncertainty regarding the Company’s obligations under its floating rate debt instruments upon discontinuation of LIBOR;

 

   

a material increase in institutional ownership of real estate in secondary markets that could result in, among others, compression of cap rates and fewer acquisition opportunities being available to the Company; and

 

   

other factors described in our news releases and filings with the United States Securities and Exchange Commission (the “SEC”), including but not limited to those described in our Annual Report on Form 10-K for the year ended December 31, 2018 under the heading “Risk Factors” and in our subsequent reports filed with the SEC.

The forward looking statements included in this report are made only as of the date of this report, and except as otherwise required by federal securities law, we do not have any obligation to publicly update or revise any forward looking statements to reflect subsequent events or circumstances.

Overview

Company

We were formed as a Maryland corporation on November 26, 2013. On April 21, 2014, we completed our initial public offering (“IPO”) of shares of common stock. We contributed the net proceeds of the IPO to our Operating Partnership in exchange for common units in our Operating Partnership. Both we and our Operating Partnership commenced operations upon completion of the IPO and certain related formation transactions.

Revenue Base

As of September 30, 2019, we owned 28 properties comprised of 66 office buildings with a total of approximately 5.9 million square feet of net rentable area (“NRA”). As of September 30, 2019, our properties were approximately 91.2% leased.

Office Leases

Historically, most leases for our properties were on a full-service gross or net lease basis, and we expect to continue to use such leases in the future. A full-service gross lease generally has a base year expense “stop”, whereby we pay a stated amount of expenses as part of the rent payment while future increases (above the base year stop) in property operating expenses are billed to the tenant based on such tenant’s proportionate square footage in the property. The property operating expenses are reflected in operating expenses; however, only the increased property operating expenses above the base year stop recovered from tenants are reflected as tenant recoveries in our statements of operations. In a triple net lease, the tenant is typically responsible for all property taxes and operating expenses. As such, the base rent payment does not include any operating expenses, but rather all such expenses are

 

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billed to or paid by the tenant. The full amount of the expenses for this lease type is reflected in operating expenses, and the reimbursement is reflected in tenant recoveries. All tenants in our Lake Vista Pointe, 2525 McKinnon, Sorrento Mesa, and Canyon Park properties have triple net leases. Certain tenants at AmberGlen, Superior Pointe, Florida Research Park, Circle Point, The Quad, Cascade Station, and Denver Tech have leases on a triple net basis. We are also a lessor for a fee simple ground lease at the AmberGlen property. All of our remaining leases are full-service gross leases.

Factors That May Influence Our Operating Results and Financial Condition

Business and Strategy

We focus on owning and acquiring office properties in our target markets. Our target markets generally possess what we believe are favorable economic growth trends, growing populations with above-average employment growth forecasts, a large number of government offices, large international, national and regional employers across diversified industries, are generally low-cost centers for business operations, and exhibit favorable occupancy trends. We utilize our management’s market-specific knowledge and relationships as well as the expertise of local real estate operators and our investment partners to identify acquisition opportunities that we believe will offer cash flow stability and long-term value appreciation. Our target markets are attractive, among other reasons, because we believe that ownership is often concentrated among local real estate operators that typically do not benefit from the same access to capital as public REITs and there is a relatively low level of participation of large institutional investors. We believe that these factors result in attractive pricing levels and risk-adjusted returns.

Rental Revenue and Tenant Recoveries

The amount of net rental revenue generated by our properties will depend principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space that becomes available from lease terminations. The amount of rental revenue generated also depends on our ability to maintain or increase rental rates at our properties. We believe that the average rental rates for our portfolio of properties are generally in-line or slightly below the current average quoted market rates. Negative trends in one or more of these factors could adversely affect our rental revenue in future periods. Future economic downturns or regional downturns affecting our markets or submarkets or downturns in our tenants’ industries that impair our ability to renew or re-let space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. In addition, growth in rental revenue will also partially depend on our ability to acquire additional properties that meet our investment criteria.

 

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Our Properties

As of September 30, 2019, we owned 28 office complexes comprised of 66 office buildings with a total of approximately 5.9 million square feet of NRA in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, San Diego, Seattle and Tampa. The following table presents an overview of our portfolio as of September 30, 2019 (properties listed by descending NRA by market).

 

Metropolitan Area

 

                    Property                     

  Economic
Interest
    NRA
(000s Square
Feet)
    In Place
Occupancy
    Annualized Base
Rent per Square
Foot
    Annualized
Gross Rent per
Square Foot(1)
    Annualized Base
Rent(2)

($000s)
 

Phoenix, AZ

(20.6% of NRA)

 

Pima Center

    100.0     272       87.0   $ 27.19     $ 27.19     $ 6,431  
 

SanTan

    100.0     267       91.7   $ 27.85     $ 27.85     $ 6,807  
 

5090 N 40th St

    100.0     175       95.8   $ 29.03     $ 29.03     $ 4,861  
 

Camelback Square

    100.0     173       67.1   $ 29.89     $ 29.89     $ 3,472  
 

The Quad

    100.0     163       100.0   $ 28.66     $ 28.91     $ 4,672  
 

Papago Tech

    100.0     163       86.7   $ 21.78     $ 21.78     $ 3,072  

Denver, CO

(19.7%)

 

Cherry Creek

    100.0     356       100.0   $ 18.59     $ 18.59     $ 6,612  
 

Circle Point

    100.0     272       94.3   $ 17.58     $ 30.47     $ 4,506  
 

Denver Tech (4)

    100.0     380       66.9   $ 22.86     $ 27.69     $ 5,646  
 

Superior Pointe

    100.0     151       96.5   $ 17.66     $ 29.17     $ 2,579  

Tampa, FL

(17.6%)

 

Park Tower

    94.8     471       92.4   $ 24.58     $ 24.58     $ 10,696  
 

City Center

    95.0     241       91.8   $ 25.49     $ 25.49     $ 5,652  
 

Intellicenter

    100.0     204       100.0   $ 23.99     $ 23.99     $ 4,881  
 

Carillon Point

    100.0     124       100.0   $ 28.16     $ 28.16     $ 3,498  

Orlando, FL

(12.2%)

 

Florida Research Park (5)

    96.6     397       89.4   $ 23.44     $ 27.25     $ 8,262  
 

Central Fairwinds

    97.0     168       92.1   $ 25.32     $ 25.32     $ 3,921  
 

Greenwood Blvd

    100.0     155       100.0   $ 22.75     $ 22.75     $ 3,527  

San Diego, CA

(9.9%)

 

Sorrento Mesa

    100.0     296       85.3   $ 25.27     $ 31.27     $ 6,380  
 

Mission City

    100.0     286       96.9   $ 35.01     $ 35.01     $ 9,703  

Dallas, TX

(9.8%)

 

190 Office Center

    100.0     303       89.5   $ 25.64     $ 25.64     $ 6,960  
 

Lake Vista Pointe

    100.0     163       100.0   $ 16.00     $ 24.00     $ 2,613  
 

2525 McKinnon

    100.0     111       92.5   $ 27.41     $ 44.41     $ 2,823  

Portland, OR

(5.6%)

 

AmberGlen

    76.0     201       96.9   $ 21.30     $ 23.89     $ 4,151  
 

Cascade Station

    100.0     128       100.0   $ 26.45     $ 32.45     $ 3,372  

Seattle, WA

(3.4%)

 

Canyon Park

    100.0     207       100.0   $ 21.20     $ 29.20     $ 4,384  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total / Weighted Average – Excluding Assets Held For Sale (3)

 

    5,827       91.4   $ 24.35     $ 27.18     $ 129,481  

Denver, CO

(1.2%)

 

Logan Tower

    100.0     72       69.8   $ 21.60     $ 21.60     $ 1,084  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total / Weighted Average – September 30, 2019 (3)

 

    5,899       91.2   $ 24.32     $ 27.13     $ 130,565  
     

 

 

         

 

 

 

 

(1)

Lake Vista Pointe, 2525 McKinnon, Sorrento Mesa, and Canyon Park the annualized base rent per square foot on a triple net basis was increased by $8, $17, $6, and $8 respectively, to estimate a gross equivalent base rent. AmberGlen has a net lease for one tenant which has been grossed up by $7 on a pro rata basis. Superior Pointe has net leases for eight tenants which have been grossed up by $12 on a pro-rata basis. Florida Research Park has net leases for six tenants which have been grossed up by $8 on a pro-rata basis. Circle Point has net leases for twelve tenants which have been grossed up by $13 on a pro-rata basis. The Quad has one tenant with a net lease, which has been grossed up by $8 on a pro-rata basis. Cascade Station has net leases for six tenants which have been grossed up by $7 on a pro-rata basis. Denver Tech has a net lease for one tenant which has been grossed up by $12 on a pro-rata basis.

(2)

Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month ended September 30, 2019 by (ii) 12.

(3)

Averages weighted based on the property’s NRA, adjusted for occupancy

(4)

Denver Tech comprises of 7601 Tech, which was acquired during the third quarter of 2019, and 7595 Tech (formerly “DTC Crossroads”).

(5)

Florida Research Park comprises of FRP Collection and FRP Ingenuity Drive.

 

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Operating Expenses

Our operating expenses generally consist of utilities, property and ad valorem taxes, insurance and site maintenance costs. Increases in these expenses over tenants’ base years (until the base year is reset at expiration) are generally passed along to tenants in our full-service gross leased properties and are generally paid in full by tenants in our net leased properties.

Conditions in Our Markets

Positive or negative changes in economic or other conditions in the markets we operate in, including state budgetary shortfalls, employment rates, natural hazards and other factors, may impact our overall performance.

Summary of Significant Accounting Policies

The interim condensed consolidated financial statements follow the same policies and procedures as outlined in the audited consolidated financial statements for the year ended December 31, 2018 included in our Annual Report on Form 10-K for the year ended December 31, 2018 except for the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) as outlined in Note 2 of the condensed consolidated financial statements.

Results of Operations

Comparison of Three Months Ended September 30, 2019 to Three Months Ended September 30, 2018

Rental and Other Revenues. Revenue includes net rental income, including parking, signage and other income, as well as the recovery of operating costs and property taxes from tenants. Rental and other revenues increased $5.4 million, or 16%, to $38.9 million for the three months ended September 30, 2019 compared to $33.5 million for the three months ended September 30, 2018. Of this increase, $0.4 million was from the acquisition of Circle Point in July 2018, $0.6 million was from the acquisition of The Quad in July 2018, $1.1 million was from the acquisition of Greenwood Blvd in December 2018, $1.1 million was from the acquisition of Camelback Square in December 2018, $1.3 million was from the acquisition of Canyon Park in February 2019, $0.9 million was from the acquisition of Cascade Station in June 2019 and $0.3 million was from the acquisition of 7601 Tech in September 2019. Revenue from Park Tower, Mission City and FRP Collection also increased by $0.2 million, $0.2 million, and $0.2 million, respectively, as a result of increased average occupancy over the prior-year period. Partially offsetting these increases, Plaza 25 decreased by $0.7 million due to the sale of the property in February 2019. The remaining properties’ revenues were relatively unchanged in comparison to the prior-year period.

Operating Expenses

Total Operating Expenses. Total operating expenses consist of property operating expenses, general and administrative expenses and depreciation and amortization. Total operating expenses increased by $3.7 million, or 13%, to $32.2 million for the three months ended September 30, 2019, from $28.5 million for the three months ended September 30, 2018, primarily due to the acquisitions described above. Total operating expenses increased by $0.2 million, $0.7 million, $1.3 million, $0.6 million, $0.6 million and $0.3 million, respectively, from the acquisitions of The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech properties. Plaza 25 operating expenses decreased by $0.8 million due to its sale in February 2019. General and Administrative Expenses increased by approximately $0.8 million, related to higher payroll costs. The remaining operating expenses were relatively unchanged in comparison to the prior-year period.

Property Operating Expenses. Property operating expenses are comprised mainly of building common area and maintenance expenses, insurance, property taxes, property management fees, as well as certain expenses that are not recoverable from tenants, the majority of which are related to costs necessary to maintain the appearance and marketability of vacant space. In the normal course of business, property expenses fluctuate and are impacted by various factors including, but not limited to, occupancy levels, weather, utility costs, repairs, maintenance and re-leasing costs. Property operating expenses increased $1.1 million, or 9%, to $14.4 million for the three months ended September 30, 2019 from $13.3 million for the three months ended September 30, 2018. The increase in

 

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property operating expenses was primarily due to the acquisitions described above. The acquisition of the The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech contributed an additional $0.3 million, $0.4 million, $0.4 million, $0.1 million, $0.2 million and $0.1 million, respectively, in additional property operating expenses. Plaza 25 decreased by $0.5 million due to the sale of that property in February 2019. The remaining property operating expenses aggregate to a net $0.1 million increase in comparison to the prior-year period.

General and Administrative. General and administrative expenses are comprised of public company reporting costs and the compensation of our management team and board of directors as well as non-cash stock-based compensation expenses. General and administrative expenses increased $0.9 million, or 50%, to $2.8 million for the three months ended September 30, 2019 compared to $1.9 million for the three months ended September 30, 2018. The increase is primarily attributable to higher payroll costs.

Depreciation and Amortization. Depreciation and amortization increased $1.6 million, or 12%, to $15.0 million for the three months ended September 30, 2019 compared to $13.4 million for the three months ended September 30, 2018, primarily due to the addition of the The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech properties partially offset by a decrease at Plaza 25 due to the sale of the property.

Other Expense (Income)

Interest Expense. Interest expense increased $1.5 million, or 24%, to $7.7 million for the three months ended September 30, 2019, compared to $6.2 million for the three months ended September 30, 2018. The increase was primarily due to interest expense related to acquisitions. Interest expense for the Circle Point, The Quad, Greenwood Blvd, Canyon Park and Cascade Station property level debt increased by $0.2 million, $0.2 million, $0.2 million, $0.5 million and $0.2 million, respectively, and the interest on the line of credit increased by $0.3 million as a result of acquisitions funded by our $250 million Unsecured Credit Facility (as defined below). These increases were partially offset by a $0.2 million decrease in the Plaza 25 debt as a result of its sale and the extinguishment of its property level debt.

Comparison of Nine Months Ended September 30, 2019 to Nine Months Ended September 30, 2018

Rental and Other Revenues. Revenue includes net rental income, including parking, signage and other income, as well as the recovery of operating costs and property taxes from tenants. Rental and other revenues increased $21.9 million, or 23%, to $117.2 million for the nine months ended September 30, 2019 compared to $95.3 million for the nine months ended September 30, 2018. Of this increase, $1.8 million was attributable to the acquisition of Pima Center in April 2018, $4.5 million from the acquisition of Circle Point in July 2018, $3.3 million from the acquisition of The Quad in July 2018, $3.4 million from the acquisition of Greenwood Blvd in December 2018, $3.5 million from the acquisition of Camelback Square in December 2018, $3.3 million from the acquisition of Canyon Park in February 2019, $1.1 million from the acquisition of Cascade Station in June 2019 and $0.3 million from the acquisition of 7601 Tech in September 2019. Revenue from Central Fairwinds, Park Tower, Mission City and FRP Collection also increased by $0.4 million, $0.8 million, $0.6 million and $0.5 million, respectively, as a result of increased average occupancy over the prior year. Partially offsetting these increases, Washington Group Plaza decreased by $1.7 million due to the sale of the property in March 2018 and Plaza 25 decreased by $1.7 million due to the sale of the property in February 2019. Revenue from 7595 Tech (formerly “DTC Crossroads”) decreased $0.6 million as a result of decreased occupancy over the prior year and Sorrento Mesa also decreased by $1.3 million as a result of the termination fee payment received in the prior year. The remaining properties’ revenues were modestly higher in comparison to the prior year primarily as a result of modest mark-to-market increases in rents upon renewal. Other Revenues benefited from a one-time payment of $2.6 million received as consideration for the assignment of a purchase contract. The assignment fee originated through our administrative services relationship. Upon adoption of Topic 842, prior year amounts disclosed in rental income, expense reimbursement, and other have been combined into a single line to conform to current period presentation.

Operating Expenses

Total Operating Expenses. Total operating expenses consist of property operating expenses, general and administrative expenses and depreciation and amortization. Total operating expenses increased by $15.7 million, or

 

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20%, to $95.2 million for the nine months ended September 30, 2019, from $79.5 million for the nine months ended September 30, 2018, primarily due to the acquisitions described above. Total operating expenses increased by $1.8 million, $4.0 million, $2.1 million, $2.2 million, $3.4 million, $1.6 million, $0.8 million and $0.3 million, respectively, from the acquisitions of Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech properties. Park Tower operating expenses also increased by $0.6 million due to the higher occupancy at that property. Washington Group Plaza operating expenses decreased by $0.8 million due to its sale in March 2018 and Plaza 25 operating expenses decreased by $2.1 million due to its sale in February 2019. Sorrento Mesa decreased by $1.5 million due to the sale of the 10455 Pacific Center building of the Sorrento Mesa property in May 2019. General and Administrative Expenses increased by approximately $2.4 million, of which $1.1 million was the result of one-time expenses and accruals incurred as a result of the assignment fee income earned during the nine months ended September 30, 2019 and the balance related to higher payroll costs. The remaining operating expenses were modestly higher in comparison to the prior-year period primarily due to higher occupancy at the properties.

Property Operating Expenses. Property operating expenses are comprised mainly of building common area and maintenance expenses, insurance, property taxes, property management fees, as well as certain expenses that are not recoverable from tenants, the majority of which are related to costs necessary to maintain the appearance and marketability of vacant space. In the normal course of business, property expenses fluctuate and are impacted by various factors including, but not limited to, occupancy levels, weather, utility costs, repairs, maintenance and re-leasing costs. Property operating expenses increased $6.2 million, or 17%, to $42.8 million for the nine months ended September 30, 2019 from $36.6 million for the nine months ended September 30, 2018. The increase in property operating expenses was primarily due to the acquisitions described above. The acquisition of the Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech contributed an additional $0.7 million, $2.0 million, $1.0 million, $1.2 million, $1.1 million, $0.4 million, $0.3 million and $0.1 million, respectively, in additional property operating expenses. Park Tower operating expenses also increased by $0.2 million due to the higher occupancy at that property. Washington Group Plaza decreased by $0.8 million due to the sale of that property in March 2018 and Plaza 25 decreased by $1.1 million due to the sale of that property in February 2019. The remaining property operating expenses aggregate to an overall $1.1 million increase in comparison to the prior-year period.

General and Administrative. General and administrative expenses are comprised of public company reporting costs and the compensation of our management team and board of directors as well as non-cash stock-based compensation expenses. General and administrative expenses increased $2.6 million, or 46%, to $8.4 million for the nine months ended September 30, 2019 compared to $5.8 million for the nine months ended September 30, 2018. Of this increase, $1.1 million can be attributed to the one-time expenses and accruals incurred as a result of the assignment fee income earned during the nine months ended September 30, 2019 as described above and the balance of the increase was primarily attributable to higher payroll costs.

Depreciation and Amortization. Depreciation and amortization increased $7.1 million, or 19%, to $44.1 million for the nine months ended September 30, 2019 compared to $37.0 million for the nine months ended September 30, 2018, primarily due to the addition of the Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech properties. These increases were partially offset by a decrease at Washington Group Plaza, Plaza 25, and the 10455 Pacific Center building of the Sorrento Mesa property due to the sale of those properties.

Other Expense (Income)

Interest Expense. Interest expense increased $5.5 million, or 32%, to $23.0 million for the nine months ended September 30, 2019, compared to $17.5 million for the nine months ended September 30, 2018. The increase was primarily due to interest expense related to acquisitions. Interest expense for the Circle Point, The Quad, Greenwood Blvd, Canyon Park and Cascade Station property level debt increased by $1.2 million, $0.9 million, $0.8 million, $1.0 million and $0.3 million, respectively, and the interest on the line of credit increased by $2.3 million as a result of acquisitions funded by our $250 million Unsecured Credit Facility. These increases were partially offset by a $0.2 million and $0.5 million, respective decrease in the Washington Group Plaza and Plaza 25 debt as a result of the sale of those properties and the extinguishment of its property level debt.

 

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Cash Flows

Comparison of Nine Months Ended September 30, 2019 to Nine Months Ended September 30, 2018

Cash, cash equivalents and restricted cash were $32.5 million and $33.8 million as of September 30, 2019 and September 30, 2018, respectively.

Cash flow from operating activities. Net cash provided by operating activities increased by $7.2 million to $37.3 million for the nine months ended September 30, 2019 compared to $30.1 million for the nine months ended September 30, 2018. The increase was primarily attributable to increased operating cash flows from acquired properties.

Cash flow to investing activities. Net cash used in investing activities decreased by $5.9 million to $90.7 million for the nine months ended September 30, 2019 compared to $96.6 million used in investing activities for the nine months ended September 30, 2018. The decrease in cash used in investing activities was primarily due to lower cost of acquisitions of real estate in 2019 compared to 2018. Additionally, we realized lower proceeds from the sale of real estate in 2019 compared to 2018 which included proceeds from the sale of Washington Group Plaza in 2018.

Cash flow from financing activities. Net cash provided by financing activities decreased by $12.5 million to $52.9 million for the nine months ended September 30, 2019 compared to $65.4 million used in financing activities in the nine months ended September 30, 2018. Cash flow provided by financing activities decreased primarily due to lower net proceeds from borrowings compared to 2018. The decrease was partially offset by higher proceeds from sales of common stock in 2019 compared to 2018.

Liquidity and Capital Resources

Analysis of Liquidity and Capital Resources

We had approximately $12.3 million of cash and cash equivalents and $20.2 million of restricted cash as of September 30, 2019.

On March 15, 2018 the Company entered into a $250 million unsecured credit facility, which includes an accordion feature that allows the Company to borrow up to $500 million, subject to customary terms and conditions (the “Unsecured Credit Facility”). The Company’s previous secured credit facility was replaced and repaid in full from the proceeds of our Unsecured Credit Facility. Our Unsecured Credit Facility matures in March 2022, and may be extended to March 2023 at the Company’s option upon meeting certain conditions. Borrowings under our Unsecured Credit Facility bear an interest at a rate equal to the LIBOR rate plus a margin of between 140 to 225 basis points depending upon the Company’s consolidated leverage ratio. As of September 30, 2019, we had approximately $43.3 million outstanding under our Unsecured Credit Facility and $7.0 million of letters of credit to satisfy escrow requirements for mortgage lenders.

In September 2019, the Company executed a third amendment to the Unsecured Credit Facility. The amendment increased the commitment under the facility from $250 million to $300 million by issuing a new tranche of term loan commitments in the principal amount of $50 million (the “Term Loan”). The five-year Term Loan bears interest at a rate of LIBOR plus a spread of 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the Company entered into a pay-fixed receive-variable interest rate swap with a notional amount of $50 million, effectively fixing the LIBOR component of the borrowing rate at approximately 1.27% (the “Interest Rate Swap”). Both the Term Loan and Interest Rate Swap mature in September 2024.

The Company and the Operating Partnership previously entered into the amended equity distribution agreements (collectively, the “EDAs”) with the sales agents named therein (collectively, the “Sales Agents”), pursuant to which the Company may issue and sell from time to time up to 8,000,000 shares of common stock and up to 1,000,000 shares of Series A Preferred Stock through the Sales Agents, acting as agents or principals (the “ATM Program”). Pursuant to the EDAs, the shares may be offered and sold through the Sales Agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the New York Stock Exchange or sales made to or through a market maker other than on an exchange or, with the prior consent of the Company, in privately negotiated transactions. The Sales Agents will be entitled to compensation of up to 2.0% of the gross proceeds of shares sold through the Sales Agents

 

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from time to time under the EDAs. The Company has no obligation to sell any of the shares under the EDAs and may at any time suspend solicitations and offers under, or terminate, the EDAs. During the nine month period ended September 30, 2019, the Company issued 8,000,000 shares of common stock under the ATM Program. The Company raised $106.5 million in aggregate gross proceeds, resulting in aggregate net proceeds to the Company of approximately $104.8 million after deducting sales commissions and offering expenses.

Our short-term liquidity requirements primarily consist of operating expenses and other expenditures associated with our properties, distributions to our limited partners and distributions to our stockholders required to qualify for REIT status, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash, proceeds from our public offerings, including under our at the market issuance program, and borrowings under our mortgage loans and our Unsecured Credit Facility.

Our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at maturity, property acquisitions and non-recurring capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness and the issuance of equity and debt securities. We also may fund property acquisitions and non-recurring capital improvements using our Unsecured Credit Facility pending longer term financing.

We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity securities. However, we cannot assure you that this is or will continue to be the case. Our ability to incur additional debt is dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets is dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us.

Contractual Obligations and Other Long-Term Liabilities

The following table provides information with respect to our commitments as of September 30, 2019, including any guaranteed or minimum commitments under contractual obligations. The table does not reflect available debt extension options.

 

     Payments Due by Period (in thousands)  

Contractual Obligations

   Total      2019      2020-2021      2022-2023      More than
5 years
 

Principal payments on mortgage loans

   $ 657,054      $ 1,400      $ 95,642      $ 98,381      $ 461,631  

Interest payments (1)

     146,206        6,567        49,921        40,737        48,981  

Tenant-related commitments

     11,885        6,304        4,982        599        —    

Operating and financing lease obligations

     30,475        150        1,617        1,431        27,277  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 845,620      $ 14,421      $ 152,162      $ 141,148      $ 537,889  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Contracted interest on the floating rate Unsecured Credit Facility was calculated based on balance and interest rate at September 30, 2019. Contracted interest on the Term Loan was calculated based on the Interest Rate Swap rate fixing the LIBOR component of the borrowing rate to approximately 1.27%.

Off-Balance Sheet Arrangements

As of September 30, 2019, we had $7.0 million of letters of credit outstanding under our Unsecured Credit Facility to satisfy escrow requirements for mortgage lenders.

Inflation

Substantially all of our office leases provide for real estate tax and operating expense escalations. In addition, most of the leases provide for fixed annual rent increases. We believe that inflationary increases may be at least partially offset by these contractual rent increases and expense escalations.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We use derivative financial instruments to manage or hedge interest rate risks related to borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based upon their credit rating and other factors. We have entered, and we will only enter into, contracts with major financial institutions based on their credit rating and other factors. See Note 6 to our consolidated financial statements in Item 1 of this Report for more information regarding our derivatives.

The primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure is LIBOR. We primarily use fixed interest rate financing to manage our exposure to fluctuations in interest rates. We consider our interest rate exposure to be minimal, because as of September 30, 2019, approximately $563.7 million, or 85.8%, of our debt had fixed interest rates and approximately $93.3 million, or 14.2%, had variable interest rates. Of the $93.3 million variable rate debt, $50 million relates to the Term Loan against which we have applied the Interest Rate Swap. The Interest Rate Swap effectively fixes the 30 day LIBOR rate at approximately 1.27% until maturity of the Term Loan. When factoring in the Term Loan as fixed rate debt through the Interest Rate Swap, approximately 93.4% of our debt had fixed rate debt and 6.6% had variable rate debt as of September 30, 2019. A 10% increase in LIBOR would increase our annual interest costs by approximately $0.2 million on debt outstanding as of September 30, 2019, and would decrease the fair value of our outstanding debt, as well as increase interest costs associated with future debt issuances or borrowings under our Unsecured Credit Facility. A 10% decrease in LIBOR would decrease our annual interest costs by approximately $0.2 million on debt outstanding as of September 30, 2019 and would increase the fair value of our outstanding debt, as well as decrease interest costs associated with future debt issuances or borrowings under our Unsecured Credit Facility.

Interest rate risk amounts are our management’s estimates based on our Company’s capital structure and were determined by considering the effect of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. We may take actions to further mitigate our exposure to changes in interest rates. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our Company’s financial structure.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on the most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer determined that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) were effective as of September 30, 2019.

Management’s Report on Internal Control Over Financial Reporting

There have been no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of business. As of September 30, 2019, management does not believe that any such litigation will have a material adverse effect, individually or in the aggregate, on our financial position or results of operations.

Item 1A. Risk Factors

The following risk factor replaces the risk factor disclosed under a similar heading in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018. Except as presented below, there have been no material changes from the risk factors set forth in such Annual Report.

Our commitments to Second City Real Estate II Corporation (“Second City”), Clarity Real Estate III GP, Limited Partnership (“Clarity RE”), Clarity Real Estate Ventures GP, Limited Partnership (together with Clarity RE, “Clarity”), and their respective affiliates may give rise to various conflicts of interest.

We are subject to conflicts of interest arising out of our relationship with Second City and Clarity. As a result of the internalization of our former external advisor on February  1, 2016, we agreed to allow our management to continue to provide services to Second City under the terms of an administrative services agreement. In addition, the terms of the administrative services agreement and the employment agreements we entered into with each of our executive officers permit, under certain circumstances and subject to the oversight of our Board of Directors, our executive officers to advise or oversee new or additional funds in the future. On July  31, 2019, we, through an indirect, wholly-owned subsidiary, entered into a separate administrative services agreement with Clarity to provide administrative services to Clarity similar to those provided to Second City. These arrangements with Second City and Clarity may create potential conflicts of interests, including competition for the time and services of personnel that work for us and our affiliates.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

Exhibit
Number

  

Description

    3.1    Articles of Amendment and Restatement of City Office REIT, Inc., as amended and supplemented (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on March 1, 2018).
    3.2    Second Amended and Restated Bylaws of City Office REIT, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 14, 2017).
    4.1    Certificate of Common Stock of City Office REIT, Inc. (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-11/A filed with the Commission on February 18, 2014).

 

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Exhibit
Number

  

Description

    4.2    Form of certificate representing the 6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Commission on September 30, 2016).
  10.1    Amendment No.  1 to the City Officer REIT, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 6, 2019).
  10.2    Administrative Services Agreement, dated July  31, 2019, by and among CIO Administrative Services, LLC, Clarity Real Estate III GP, Limited Partnership and Clarity Real Estate Ventures GP, Limited Partnership. (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019).
  10.3    Amendment No. 1 to Executive Employment Agreement, dated as of July  31, 2019, by and between City Office Management Ltd. and James Farrar.* (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019).
  10.4    Amendment No. 1 to Executive Employment Agreement, dated as of July  31, 2019, by and between City Office Management Ltd. and Gregory Tylee.* (Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019).
  10.5    Amendment No. 1 to Executive Employment Agreement, dated as of July  31, 2019, by and between City Office Management Ltd. and Anthony Maretic.* (Incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019).
  31.1    Certification by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †
  31.2    Certification by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †
  32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
  32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
101.INS    INSTANCE DOCUMENT**
101.SCH    SCHEMA DOCUMENT**
101.CAL    CALCULATION LINKBASE DOCUMENT**
101.LAB    LABELS LINKBASE DOCUMENT**
101.PRE    PRESENTATION LINKBASE DOCUMENT**
101.DEF    DEFINITION LINKBASE DOCUMENT**

 

Filed herewith.

*

Compensatory Plan or arrangement

**

Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CITY OFFICE REIT, INC.

 

Date: November 1, 2019      
    By:  

/s/ James Farrar

      James Farrar
      Chief Executive Officer and Director
      (Principal Executive Officer)
Date: November 1, 2019      
    By:  

/s/ Anthony Maretic

      Anthony Maretic
      Chief Financial Officer, Secretary and Treasurer
      (Principal Financial Officer and Principal Accounting Officer)

 

32

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Section 2: EX-31.1 (EX-31.1)

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14(a) OF THE EXCHANGE ACT, AS AMENDED,

AS ADOPTED PURSUANT TO SECCTION 302 FO THE SARBANES-OXLEY ACT OF 2002

I, James Farrar, certify that:

 

  1.

I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2019 of City Office REIT, Inc.;

 

  2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

 

  a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 1, 2019

 

/s/ James Farrar

Date

 

James Farrar

Chief Executive Officer and Director

(Principal Executive Officer)

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Section 3: EX-31.2 (EX-31.2)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULE 13a-14(a) OF THE EXCHANGE ACT, AS AMENDED,

AS ADOPTED PURSUANT TO SECCTION 302 FO THE SARBANES-OXLEY ACT OF 2002

I, Anthony Maretic, certify that:

 

  1.

I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2019 of City Office REIT, Inc.;

 

  2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

 

  a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 1, 2019  

/s/ Anthony Maretic

Date  

Anthony Maretic

Chief Financial Officer, Secretary and Treasurer

(Principal Financial Officer and Principal Accounting Officer)

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Section 4: EX-32.1 (EX-32.1)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q for the period ended September 30, 2019 of City Office REIT, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James Farrar, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1.     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

November 1, 2019  

/s/ James Farrar

Date  

James Farrar

Chief Executive Officer and Director

(Principal Executive Officer)

This written report is being furnished to the Securities and Exchange Commission as an exhibit to the Report. A signed original of this written statement required by Section 906 has been provided to City Office REIT, Inc. and will be retained by City Office REIT, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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Section 5: EX-32.2 (EX-32.2)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q for the period ended September 30, 2019 of City Office REIT, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony Maretic, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1.    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

November 1, 2019  

/s/ Anthony Maretic

Date  

Anthony Maretic

Chief Financial Officer, Secretary and Treasurer

(Principal Financial Officer and Principal Accounting Officer)

This written report is being furnished to the Securities and Exchange Commission as an exhibit to the Report. A signed original of this written statement required by Section 906 has been provided to City Office REIT, Inc. and will be retained by City Office REIT, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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