Tony Maretic - Chief Financial Officer, Secretary and Treasurer Jamie Farrar - Chief Executive Officer and Director Greg Tylee - President and Chief Operating Officer.

Rob Stevenson - Janney Craig Kucera - Wunderlich Securities Wilkes Graham - Compass Point Barry Oxford - D.A. Davidson.

Good morning, and welcome to the City Office REIT Inc. Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session 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 cityofficereit.com, where you can download our second quarter earnings press release and a supplemental information package.

Certain statements made today to discuss the Company’s expectations are not based on historical facts may constitute forward-looking statements within the meaning of the federal securities laws.

Although, 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 statement disclaimer in our first 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 duty to update any forward-looking statements that may be made in the course of this call. 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.

I will review our financial results, after Jamie Farrar, our Chief Executive Officer discusses some of the quarter’s operational highlights. I will now turn the meeting over to Jamie..

Good morning. I am pleased to report substantial positive results for the second quarter. Our markets have continued to perform well and we are seeing strengthening in rental rates, increased leasing opportunities and tighter landlord incentives.

We are capitalizing on this environment making significant progress on a number of our stated objectives including completing 380,000 square feet of new and renewal leases. This helped to drive our in-place and committed occupancy to over 95%, the fifth consecutive quarter of higher reported results.

In addition to strong operating performance, we closed on two attractive opportunities representing over $60 million of purchases. Of particular importance is the high-quality nature of these properties which we believe will position them for a long-term cash flow growth.

Both the Superior Point and the DTC Crossroads acquisitions are Class-A properties located in driving Denver sub-markets. Each possesses a combination of solid tenancy, attractive purchase price metrics, and we expect them to deliver steady cash flow growth over time.

Our momentum carried over to the third quarter and we announced this morning that Granite 190 is under contract at Dallas, Texas. Granite 190 is a 3700 square foot Class-A multi-tenant property that we will acquire for $54.4 million before closing cost, or $177 per square foot and it’s currently 97% leased.

Consistent with our prior acquisitions, it has a great location in the growing Richardson/Plano submarket with highway frontage on President George Bush Turnpike. Granite 190 is a two-building property that was built in 2001 and 2008 and its design, construction quality and amenities make it a leading building in the submarket.

The purchase price is anticipated to generate a full year cash net operating income deal of approximately 7.5% after adding back some remaining free rent credits that are being funded by the seller. We anticipate closing in late August, with a long-term fixed rate mortgage.

Upon completion of this purchase, our total acquisitions during 2015 will increase to $125.7 million. This is on track with our prior guidance of at least $150 million to $200 million annually.

Moving to our operating performance, we have concluded the quarter with impressive results, specifically, we executed 380,000 square feet of leasing transactions during the second quarter. We have converted two of our arguably highest risks across our portfolio into exceptional long-term leases with very strong covenants.

One of these leases replaced an existing large tenant in Boise that had a lease expiration on December 31 of this year. As recently reported, we executed a 10-year deal for the space with St. Luke’s Health System, the largest employer of Boise. Further, we completed an early renewal in Allentown with Dun & Bradstreet on a 10-year lease term as well.

During this renewal, we also substituted the subsidiary tenant with its very strong parent the Dun & Bradstreet Corporation. Securing this long-term lease with an investment grade tenant has substantially increased the value of this asset and has opened the door to various attractive alternatives.

These include maintaining it as a long-term low-risk hold, a potential sale, refinancing or recapitalization. We will conclude an extensive review of our options during the upcoming quarter.

While we believe that these two leasing transactions have been transformative at the respective properties, our operating performance has been impressive across our entire portfolio. For example, our 241,000 square foot City Center property in the Tampa market achieved a 100% occupancy level at June 30.

We don’t anticipate that it will remain fully occupied over the long-term, but it’s a remarkable achievement for a diversified multi-tenanted property. As another example, the Central Fairwinds building in downtown Orlando achieved a committed and in-place occupancy of 87.5% at June 30. This was up from 72% a year ago.

We continue to be focused on last remaining major lease expiration in 2015. As previously reported, we have a known vacate on December 31 of this year at our Amberglen property in Portland for approximately 6500 square feet.

We do not give the space back until the end of the year, but we’ve recently entered into a letter of intent with a credit tenant to take approximately half of the building on a 10-year term. While there can be no certainty that we will conclude a lease on acceptable terms, we are pleased with the high-level of interest at this property.

Our leasing success during the quarter naturally leads us to paying out commissions and commits to tenant improvements over the coming months. During the quarter, we paid $3.2 million in total capital expenditures. The vast majority of this relates to our new lease with St. Luke’s and the Dun & Bradstreet renewal.

It is important to remember that these two leases represent approximately 12% of our total square footage have a weighted average lease term of over 10 years and do not represent our typical leases. While they require significant capital to complete, there were less capital-intensive options that we could have pursued.

However, based on our analysis, we believe that both transactions created significant value for our shareholders at the asset and portfolio levels. Tony will provide more detail on how these TI and leasing commissions will impact the reported numbers in the coming quarters.

Overall, the combination of the operating environment, as well as our portfolio’s strong results has led us to increase our projected net operating income guidance for calendar 2015.

Tony will discuss further in a minute, but these results are a testament to the strength of sourcing great real estate in vibrant submarkets and managing it for long-term cash flow growth. I will now turn the call over to Tony Maretic, to discuss our financial results..

On a GAAP basis, our Net Operating Income was $7.5 million this quarter versus $7.1 million in the first quarter. Half of the $360,000 increase is attributable to the additional NOI contributed by the Superior Point acquisition late in the quarter and having a full quarter of operations for Logan Tower.

The remaining increase was due to improved operating performance from the properties that we owned at December 31. These properties are tracking slightly ahead of budget, partly due to lower operating expenses and marginal improvements in occupancy.

As a result of this, and the increased occupancy expected in the third and fourth quarter, we are increasing our 2015 NOI outlook range to a range of $28.0 million to $28.4 million on a GAAP basis and $28.7 million to $29.1 million on a cash basis. Obviously, we are extremely pleased with the operating performance from our portfolio.

Our G&A continues to track our budgets with a small variation in this quarter due to the timing of expenses related to our Annual Meeting occurred in Q2. We reported core FFO of $4.2 million or $0.27 per share.

Our core FFO adjusts NAREIT-defined FFO for acquisition fees and expenses, change in the fair value of the earn out and the amortization of stock-based compensation.

Our core FFO is tracking our budget and we ended the quarter $150,000 higher than Q1 on a sequential basis as the increase in NOI was offset by the increase in the aforementioned G&A and the slight increase in interest expense as a result of the acquisitions in the quarter. Our second quarter AFFO is $3.3 million or $0.21 per share.

This was essentially flat with the prior quarter as the increase in FFO was offset by the leasing commissions for D&B lease and the increased re-occurring CapEx due to the chiller replacement at Central Fairwinds, which was discussed on our last call.

Adding back the recent commissions for the D&B lease results in a normalized AFFO of $4.1 million or $0.26 per fully diluted share. As Jamie mentioned, our leasing activity during the quarter required substantial capital improvements on our part.

Our leasing activity and capital expenditures are clearly laid out on pages 17 and 19 of the supplemental package. Consistent with our definition of AFFO, the nature of the major repositioning of Plaza I, an industry practice for first generation leases, the capital cost for the St.

Luke’s repositioning will not flow through AFFO, but instead are disclosed on page 19 under non-reoccurring capital expenditures. As a result of our leasing success during the quarter, we increased the earn out liability at Central Fairwinds.

As you may recall, as part of the IPO formation transaction, the Central Fairwinds property in downtown Orlando included a future earn out liability linked to achieving leasing and cash flow milestones.

As a result of the faster than anticipated leasing results, the company increased the expected value of the earn out liability by $600,000 to $8.6 million at June 30.

Also during the quarter, the 70% occupancy threshold was achieved and $3.2 million of earn out consideration will be paid in common stock and operating partnership units during the third quarter of 2015.

These awards are subject to a call back if any of the new tenants move out or if the property fails to achieve an annual 2% NOI growth rate excluding the impact of the rents from the new tenants.

Subsequent to the end of the second quarter, we expanded and extended the revolving credit facility to $75 million with an initial rate of LIBOR plus 2.25% representing a 50 basis point reduction. We also put 10-year long-term financing on our Plaza 25 property at a fixed rate of 4.1%.

From a liquidity standpoint, we had cash of about $11.3 million at June 30 and approximately $40 million remaining undrawn and authorized under our current $75 million credit facility, which provides us ample liquidity to fund our acquisition strategy.

Additionally, we have $10.1 million of restricted cash that is available to fund future TIs, LCs and capital projects. Our total debt at June 30 was $241.1 million or $233.8 million when deducting the non-controlling interest share of certain debt. Our net debt to enterprise value was 54% based on our share price at June 30.

Using our internal estimate of asset value based on acquisition price and the contribution at the IPO, our net debt to asset value remains below 50%. Our conservative strategy to build a stable portfolio with predictable growing cash flows extends to our capital structure.

The majority of our debt is fixed rate with a weighted average interest rate of 4.0% and a weighted average maturity of 5.6 years. That concludes our prepared remarks and we will open up the line for any questions.

Operator?.

Thank you. [Operator Instructions] And the first question comes from Rob Stevenson from Janney Capital..

Is there any additional earn outs available at Central Fairwinds or does the – this quarter or sort of max it out?.

Hey Rob, it’s Tony here. With respect to the earn out payment, the total liability we’ve recorded in $8.6 million. We are paying out $3.2 million this quarter. The $8.6 million is an estimate, just important to recognize that the earn out will only be paid if the future lease up occurs and the NOI increase at the property level.

Currently, we’ve estimated that the $8.6 million is based on achieving occupancy of 89%. So in theory, it could edge a little bit higher than the $8.6 million or it could come down if we don’t actually ever achieve that level. .

Okay, and then, Jamie, you talked about the 2015 lease expirations, when you are looking at 2016 in terms of major expirations there and conversations, can you give us a little flavor of what’s going on there?.

Sure, so with respect to 2016, the big one we just dealt with Dun & Bradstreet. So beyond that, if you look at our rent rolls, the next largest would be Fairwinds Credit Union that rules mid-2016 is about 40,000 feet. So that one they still have a fair bit of time on its one of their key banking branches and their corporate headquarters.

We’ve got terrific space, arguably, some of the best signage in the city. So, we are confident in renewing them but it’s still early days. Beyond that, it starts to get fairly small and diversified. .

Okay, and then, just lastly, can you talk a little bit about once you close the Dallas acquisition, what you have in terms of financing liquidity to be able to execute additional acquisitions? I mean, obviously, you can issue more stock, but down at a $11.90 day is it’s well below NAV et cetera.

Can you just talk a little bit about that?.

Yes, sure, it’s Tony again here Rob. So, as we announced at June 30, we had about $11 million in cash. We have $40 million authorized and undrawn under expanded facility. So, in terms of liquidity we are sort of in good position to finance the acquisitions.

Our intention with the Granite acquisition is that we are likely to putting to be slightly higher, loan-to-value on that property, we are looking at about a 75% loan-to-value and there will priced in somewhere around, right around 4.5% to 4.6%.

So that would put us in a position to actually do one more acquisition within our served target size and range if we wanted to. Just in terms of our metrics, I mean, from a net debt to asset value test and obviously, given our stock price which you mentioned on a net debt-to-enterprise value, what we are showing that we are already above 50%.

But, when we look at it from a net debt-to-asset value and asset value we define as being the purchase price of what we paid for the asset, where we’ve been through the asset at the IPO, we are still below 50% with the Granite acquisition, we will be right on that 50% level and we’ve said in the past that that’s our target range in the short-term and we could tick a little bit higher.

So, I think, we still have – in short, we have the ability to close on Granite and potentially do one more acquisition if there is a very attractive opportunity out there. .

I think, kind of elaborate on that a bit further, Rob, I guess, our belief is, our shares are mis-priced, based on where we believe the value of our real estate is in the private markets.

So, we are looking at a number of alternatives in that respect very near term as Tony mentioned having slightly higher property level of debt using our corporate facility to grow a little bit further. But, once we hit that point, the real focus is going to be on NOI growth executing at the property level.

There is quite a bit of capital out in the market, in the private markets and there are opportunities there. We’ve had a number of dialogues in that regard. So, we do believe and are confident without raising equity at this price, which we are very much against. We’ve got the ability to grow outside of just internal growth. .

Okay, and then, just lastly, in terms of the opportunity, I mean, beyond the Dallas acquisition, I mean, how significant are opportunities of assets that you would buy that would be acceptable returns, acceptable quality, et cetera out there in your core markets these days, that if you had currency that was $13, $13.50, $14 stock price that should be pulling the trigger on.

How big is that pipeline and sort of what is it been whittle down to given your – the financial constraints right now?.

Yes, so, as far as, kind of we are looking at our pipeline, we are being really cautious right now that not too far ahead of ourselves. But also, keep that pipeline in check, so we know we can execute on it. So, with Granite, we look close to about $125 million to-date, this year.

Our markets are still performing really well, in particular, we are focused on Dallas, Tampa, Orlando, Phoenix. We also have a few transactions we are working on in Seattle right now. So, those are the top of the list at where we are spending the time.

Houston being at the absolute bottom, just given the unknown impact on tenants in that particular marketplace. Pipeline, is at various stages, top of the pipeline in those markets is well over $200 million and if you include channel where transactions we know were available, it’s a multiple of that.

So, there are the opportunities for sure for us to grow. One transaction in particular we are working on right now that’s in an advanced stage, it’s in the Tampa market.

We are comfortably completed with our own resources as Tony indicated, the leverage levels that we’re comfortable with and it’s perfectly with our overall strategy, stable predictable cash flow, great tenancy, high quality newer construction, attractive metrics.

So that would be at the very top of our pipeline and beyond that, we are slowing down, but keeping it warm, based on raising additional capital in some form outside a stock price issuance at today’s levels. .

Okay, thanks guys. I appreciate it. .

You are welcome. .

Thank you. And the next question comes from Craig Kucera from Wunderlich Securities..

Hi, good morning guys. .

Hey, Craig. .

I am sorry, I hopped on the call late, so I might have missed this. But with the earn out is there, I know you mentioned you are planning $3.2 million this quarter in OP units stock.

Will that be struck at the IPO price or is that a sort of a volume-weighted current price?.

It’s the latter, so, it’s based on the 20-day volume-weighted price and the final price is actually $12.31. .

Okay, got it.

And then, with the new acquisition you announced this morning, can you give us a little bit more color on maybe the largest kind of your types of tenants that maybe how you see the rent there relative to market and maybe just a little bit of detail and I apologize if you already gave some of this?.

Yes, we haven’t disclosed the tenant check Craig. So, we will provide some data once we’ve closed, which is what we typically do, but, when you look at the tenancy, very strong investment grade tenants. It’s very complementary to our overall lease maturity profile. So it fits nicely diversifies and we see upside in the rents over time as well. .

And do you see as far as rent escalators? Any ballpark figure?.

Yes, that’d be standard. The leases are all a little different, but generally, this market is in the 2% to 3% range annually..

Got it. Okay, great. Thanks. .

Welcome..

Thank you. And the next question comes from Wilkes Graham with Compass Point..

Hi, good morning. On the earn outs just maybe one last question on that.

The $3.2 million that’s going to get paid out in stock in the third quarter, is that going to be a sort of a one-time charge in the quarter? Is that going to get amortized over a certain period?.

It will be a one-time charge. So what you’ll see is, right now, we have a liability on our balance sheet of $8.6 million and what you’ll see is, you’ll see a reduction of that liability from $8.6 million by the $3.2 million. .

Okay. Two other questions, on the CapEx obviously, the CapEx was affected by the additional leasing you did during the quarter.

Can you sort of talk about what a more normalized level of CapEx is or, is there a way we can think about that?.

Yes, I think, the guidance we have given, Wilkes, once the IPO which I don’t think has changed at all in terms of total CapEx as a percentage of NOI, we’ve guided 14% or 11.5% for TI and LCs in effect, that would be a sort of a more normalized level.

Obviously this quarter with the very two large leases at represented 12% of our portfolio if skew things, but that would be a more normalized level. .

Okay, and then just last, as you talked about, it doesn’t makes sense to raise capital on these levels, I am curious, good to know that you’ve got runway for one more asset if you were to lever up Granite, but I am curious if you have any non-core assets that you might be interested in selling to free up additional equity and potentially show a signal to the market of what the market cap rates are for your assets?.

I think that’s a great point, Wilkes, so, we mentioned on the call, the corporate power play asset that we now have over 11 years of term left on. When you step back and look at this it went from one of our biggest risks to an incredible low-risk asset.

So, as far as positioning that, it’s great asset, good condition, good office park, it’s a key location for Dun & Bradstreet globally. So, triple net lease market, it’s extremely strong right now. This is an ideal property.

So, we have engaged an initial exploration of alternatives for that one and it would be at a materially lower cap rate than where our portfolio is trading..

Great. Thank you..

Thank you. And the next question comes from Barry Oxford with D.A. Davidson..

Great, hey guys. Thanks so much.

When I think about the downtime leasing in the Boise asset, and the $1.2 million, should I divide that 600 by the quarters? I mean, how is that going to work as far as and will that cash flow start picking up July the 1st?.

Yes, that’s exactly right. We are estimating six months of downtime for the repositioning for the move out of ACom and the St. Luke’s. So, July 1 is our estimate of when they’ll be in and paying rents. .

Great, thanks guys. The rest of my questions have been answered. .

Thanks, Barry. .

Thank you. [Operator Instructions] All right, there are no more questions at the present time. So I would like to turn the call back over to Mr. Farrar for any closing comments..

Thanks for joining today. We are really pleased overall with our performance during the quarter and we are confident we can continue to execute well against our plan in the coming quarters. .

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..