Good morning. And welcome to the City Office REIT, Inc. Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer section will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded.

[Operator Instructions] It is now my pleasure to introduce you to Tony Maretic, the company’s Chief Financial Officer, Treasurer and Corporate Secretary. Thank you, Mr. Maretic. You may begin..

Good morning. Before we begin, I would like to direct you to our website at cioreit.com, where you can view our third quarter earnings press release and supplemental information package.

The earnings release and supplemental package both include a reconciliation of non-GAAP measures that will be discussed today to their most directly comparable GAAP financial measures.

Certain statements made today that discuss the company’s beliefs or expectations, or that are not based on historical fact, may constitute forward-looking statements within the meaning of the federal securities law.

While the company believes that these expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved.

Please see the forward-looking statements disclaimer in our third quarter earnings press release and the company’s filings with the SEC for factors that could cause material differences between forward-looking statements and actual results.

The company undertakes no obligation to update any forward-looking statements that may be made in the course of this call. I’ll review our financial results after Jamie Farrar, our Chief Executive Officer, discusses some of the quarter’s operational highlights. I’ll now turn the call over to Jamie..

Good morning. Throughout 2024, we’ve been highlighting the improving sentiment and leasing dynamics for the office industry. These trends continue to gather momentum in the third quarter. The total amount of office space available nationally declined in the third quarter. This was the first quarterly decline in available space since 2019.

One of the significant drivers is the sharp reduction in new supply of office buildings. This has been coupled with four years of record-setting office building conversion, demolitions and redevelopment. Over the four-year period since 2021, over 100 million square feet of office buildings have been removed from inventory, according to JLL.

While more is ultimately needed, these are favorable trends. Leasing conditions also continue to improve. The leasing activity nationally remains approximately 20% below pre-pandemic levels. The second and third quarters of 2024 were two of the best leasing quarters over the last five years.

This has been aided by executives focusing on bringing employees back to the office on a more consistent basis. In JLL’s third quarter office market report, they highlighted that the Sun Belt has experienced an outsized leasing recovery.

This has been driven by corporate relocations and the lower cost and higher quality of life that Sun Belt markets offer. Office capital markets activity continues to be suppressed, largely driven by limited debt availability for the sector. However, we’ve started to see signs of improvement for quality and well-leased properties.

Turning to our portfolio, we achieved healthy leasing activity during the quarter with 141,000 square feet of total leasing. Of this amount, 78,000 square feet represented new leases. After quarter end, we completed a full floor lease extension at our Block 83 property in Raleigh that was set to expire on November 1st of this year.

We previously communicated that we were taking back one of WeWork’s full floor spaces at Block 83, representing 28,000 square feet. A high profile enterprise client of WeWork that has been using the space requested to continue their occupancy through the end of calendar 2026.

As a result, we extended WeWork on this floor for 26 months and increased the starting rent by approximately 6% to $42.50. We see this as a positive outcome and will result in the office component of Block 83 being 98% leased when including signed leases that commence later in 2024.

At Pima Center in Phoenix, we also signed two new leases for 26,000 square feet during the quarter, which will increase occupancy by 10% upon commencement. The renovations at Pima are now complete. The property has been transformed and it is resulting in very good leasing traction on our remaining vacancies.

Beyond Pima, we’re also completing renovation projects at three other properties. These projects at 5090 in Phoenix, City Center in St. Petersburg and 2525 McKinnon in Dallas should be concluded over the next few months.

In total, we expect to spend approximately $10 million on these four renovations, with approximately $6.4 million spent through September 30. In addition to the renovations, we’re evaluating a few other value enhancing opportunities within our portfolio.

One opportunity we touched on last quarter is the potential redevelopment of our parking garage at City Center in Downtown St. Petersburg into a residential and mixed-use condo tower. In our October investor presentation, we’ve included some renderings of the condo building design from our recent site plan application.

This potential redevelopment continues to advance through an approval process with the City of St. Petersburg. We are also advancing agreements with a very experienced developer to lead the project’s execution. A redevelopment of City Center remains subject to a number of conditions, some of which are beyond our control.

We’ll provide further updates on our progress on future calls. We are also pleased to report that our Florida portfolio weathered the two recent hurricanes extremely well. We have incredible operators on the ground in Florida and they quickly had our buildings back online after the storms.

We sincerely thank them for their dedication and how well they look after our tenants. Lastly, we updated our guidance expectation ranges. Specifically, we narrowed several ranges and increased both our expected year-end occupancy and same-store cash NOI change due to strong leasing results year-to-date.

These developments will not only benefit our 2024 results, but are favorable tailwinds for 2025 and beyond. With that, I will turn the call over to Tony to discuss our financial results in more detail..

Thanks, Jamie. Our net operating income in the third quarter was $24.6 million, which is $300,000 lower than the amount we reported in the second quarter. NOI was marginally lower in Q3 than in Q2, primarily a result of the disposition of Cascade Station during the second quarter.

We reported core FFO of $11.1 million or $0.27 per share for the third quarter. Core FFO was $400,000 lower than the amount we reported in the second quarter, driven primarily by the net operating income decrease and marginally higher interest expense.

Our third quarter AFFO was $4.8 million or $0.12 per share, which resulted in continued dividend coverage this quarter. The largest impact AFFO was a $700,000 tenant improvement deduction related to a new lease [Technical Difficulty] we expect will take occupancy in November 2024.

The four significant property renovations which Jamie described resulted in a $1 million reduction to AFFO this quarter. We also spent $200,000 on spec suites and vacancy conditioning. Moving on to some of our operational metrics, our same-store cash NOI change returned to positive territory in the third quarter.

There was an increase of 0.2% or $55,000, as compared to the third quarter of 2023. We expect further improvement of this metric in the fourth quarter. Our portfolio occupancy ended the quarter at 83.4%, an increase from the prior quarter.

Including the 201,000 square feet of signed leases that have not yet commenced, our occupancy, inclusive of these leases was 87.0% as of quarter end. Our total debt as of September 30th was $648 million. Our net debt, including restricted cash to EBITDA was 7 times.

As of September 30th, we had approximately $42 million undrawn and authorized on our credit facility. We also had cash and restricted cash of $43 million as of quarter end. During the quarter, as planned, we drew $50 million on our line of credit to repay the $50 million term loan that matured in September.

We have no further debt maturities until October of 2025. We also have two properties of significant value, Block 83 in Raleigh and City Center in Tampa, that are unencumbered and we are exploring potential financing alternatives at Block 83. And lastly for me, as Jamie mentioned, we have made upward revisions to several guidance categories.

The significant number of signed leases that have or are expected to commence in the fourth quarter of 2024 are driving these revisions. That concludes our prepared remarks and we will open up the line for questions.

Operator?.

Thank you very much, Mr. Maretic. [Operator Instructions] We have our first question from Upal Rana with KeyBanc Capital Markets. Your line is open. Please go ahead..

Great. Thank you. Good morning out there.

Jamie, could you walk us through how the renewal with WeWork and Block 83 came to fruition, and do you have any plans or expectations after the lease expires in 2026?.

So, we were to get back one of our three floors in Raleigh as of November 1st, and there is an enterprise tenant that had been using that space and quite happy, and they decided they wanted to push out their usage until the end of 2026.

So, we had a dialogue with them and we were happy to keep them there in the project, and we were happy with the economics of effectively no TI and moving the starting rent about 6%..

Okay. Great.

And then, regarding occupancy, what are some of the moving pieces that get you to that 85.5% midpoint of your guidance? And I know I’m sure WeWork isn’t a big driver of that, but is there anything else there that’s included in your assumption?.

Sure. So, I’ll start here, it’s Jamie. The signed leases that haven’t commenced, a significant portion of them will be commencing in Q4.

So, when you look at where some of our impactful current vacancy is, we’ve got about 74,000 feet of leases that will commence in Phoenix, 33,000 in Raleigh, about 50,000 in Orlando, and so those are signed that are being completed as we speak and we’ll start in Q4..

The single biggest tenant that’s moving in in Q4, Upal, is at our Ingenuity Drive property, which is part of the FRP Collection Complex. That property had a vacancy. It’ll go to 100%. The tenant has moved in in October with 42,000 square feet. So, that’s the single biggest component to that.

With WeWork renewing, obviously there’s less to drag from that and then the rest of the kind of tenants are kind of smaller to medium size..

Okay. Great. That was helpful. And then last one from me, you mentioned on prior call that you started to see interest from relatively larger tenants.

Is that still the case or what sort of tenant demographics are you seeing in regards to leasing demand today?.

So, that is probably one of the most favorable things that we’re seeing is, this time last year you were starting to see some larger tenants explore, and I’d say, that’s picked up significantly, and it’s tied back to more of a trend of employers wanting the employees back in the office and what used to be kind of short-term extensions and larger tenants trying to avoid doing longer leases, that’s really turned.

The other trend that kind of ties to that is the best space, the newest, the most modern, amenitized, as well as renovated spaces in those same submarkets are what is in demand and we’re seeing that in our own leasing pipeline. So, bigger users wanting to commit and willing to commit longer term, which is fantastic for our industry..

Okay. Great. Thank you..

Thank you..

Thanks for the question..

Thank you. The next question is from Barry Oxford with Colliers. Your line is open. Please go ahead..

Great. Thanks, guys.

Jamie, when you’re looking and signing leases, what are you seeing today, like maybe versus a year ago, when it comes to concessions and free rent? Are you having to kind of give more to get deals done or are you holding the line and actually doing better?.

So it’s a good question, Barry. A year ago, construction costs were moving very rapidly. I’d say that has come in check. It’s still at a high cost, but we’re not seeing the inflation that we were. Rents, the actual face rents we’re signing are very healthy, continue to grow, again, for good properties.

And the concessions on free rent, I’d say, are about the same as where they were on new leases, typically one month per year of term. So that’s kind of stabilized as well. So, all in all, I’d say we’re much happier than where we were a year ago..

Okay. Great. Great.

And then, Tony, I know you don’t have a lot of expirations, but as you work into 2025 and the later half of 2025, do you anticipate the banks giving you a lot of pushback on refinancing or, look, I’m in conversations with them, Barry, and right now, I don’t think we’re going to have difficulty?.

Yeah. Hey, Barry. It’s a good question..

Yeah..

You highlight the fact that we need to we do not have any pending debt maturities over the next four quarters. We do have two debt maturities in Q4 2025. And to be honest, those conversations really have not begun in earnest. I expect those discussions will really gain traction starting soon and certainly by early 2025.

So it’s a little too early to tell. It’ll obviously depend on the state of those properties and where that will go. So I expect those conversations to begin in early 2025 and it’s probably too early to tell, as I sit here today, but we have some time..

Great. Thanks for the call, guys..

Thanks, Barry..

Thank you. [Operator Instructions] The next question is from Craig Kucera with Lucid Capital Markets. Your line is open. Please go ahead..

Yeah. Hey. Good morning, guys. It looks like the bulk of occupancy gains are occurring here in the fourth quarter.

Can you give us some color on when the remaining, call it, 100 basis points to 150 basis points are expected to take occupancy and start paying rent in 2025?.

Hey. Good morning, Craig. Yeah. So we have a number of move-ins in Q4. The rest of the balance will happen early in 2025. Obviously, construction schedules will dictate exactly when that falls in, but early 2025 for the balance..

Okay. Great. Changing gears, I’d like to talk about the City Center redevelopment.

How would City Office monetize that? I mean, most likely I would think maybe a sale to the developer might make sense, but could it be a ground lease or maybe some sort of revenue sharing agreement? Any color that would be appreciated?.

Sure. So we can’t get into too many details right now. Where we’re at is we’ve submitted a site plan application with the city of St. Petersburg. That’s ongoing. As we expect to conclude the public elements over the next like 30-ish days and by early 2025, if all goes well, have our approvals in place.

The way we’ve been approaching it is, we’re huge believers in that market. We’d like to stay involved in that market.

The way we’ve approached it is contributing the significant land value that we have into a partnership with a very experienced developer and ideally aren’t contributing additional cash beyond that, but we benefit as the project is developed and the condos are sold off..

Got it. Okay. And just one more for me.

[Technical Difficulty] I know they’re all in the fourth quarter of next year, but are you giving some thought to how you anticipate handling them after using a lot of liquidity here in the third quarter with the line of credit, maybe exploring using Block 83 as a source of liquidity or other sources?.

Yeah. I think it’s a good question, Craig. As I mentioned in my earlier remarks, we are exploring financing options for Block 83. I mean, the CMBS market appears to be improving and is open. Block 83 is a type of trophy asset that appears to be getting done. So it’s a little too early to speculate. But certainly, Block 83 is our most valuable property.

There’s two separate towers there and City Centre is also unencumbered. So we have some unencumbered assets. We have some chess pieces we can move around the Board and we’ve got a little bit of time before we decide what move we’re going to make..

And just for clarity, we have two property loans that mature in the fourth quarter. We also have our operating line. We do have a one-year extension option, which we believe we’re going to be able to trigger. So it really is the two property loans that were discussed earlier..

Okay. Great. Appreciate the telecast. Thanks..

Great. Thank you..

Thank you..

Thank you. As there are no additional questions, I will turn the call back over to Mr. Farrar to conclude..

Thank you for joining today. Please reach out if you have any further questions. Good-bye..

Thank you. This concludes today’s call. Thank you all for joining. You may now disconnect your lines..