Tony Maretic - CFO, Treasurer & Corporate Secretary Jamie Farrar - CEO.

Rob Stevenson - Janney Craig Kucera - Wunderlich Wilkes Graham - Compass Point.

Good morning, and welcome to the City Office REIT Incorporated Third 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 to you, Mr. 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 third 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 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 duty to update any forward-looking statements that may be made in the course of this call. The earnings release and the 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..

Thanks, Tony. Before we review the results from the quarter, I would like to briefly discuss what we have accomplished over a relatively short period of time.

When we made the decision to go public in April 2014, we had a vision of taking a relatively small base of quality assets and building upon it to create scale, diversification, and exposure to a number of incredible markets that many investors were overlooking.

We believe this would allow us to acquire well located properties in markets with exceptional growth characteristics and create a company that would generate rising cash flow per share over the long-term. During the last year-and-a-half, we've made great progress on implementing this plan.

We've acquired properties in leading submarkets that are positioned favorably, increase the inherent value of our assets through specific leasing initiatives, and diversified our holdings across a number of markets and tenants. These results can be highlighted by reviewing a few key statistics.

Over this time, we purchased $250 million of property and increased our footprint from 1.85 million square feet to 3.3 million today. We've significantly de-risked our portfolio and we've completed or extended 680,000 square feet of newer renewal leases with our tenants predominantly on a long-term basis.

The markets that we've chosen to target have performed very well and we're seeing rising rents in almost all cases. This has put us in the enviable position of having a strong portfolio with a high percentage of credit tenants, built in annual rental rate step-ups and rising market rents.

We expect that these characteristics will position us to continue to grow our net operating income at attractive rates over the long-term. As part of the growth of our company, earlier this week, we announced that City Office has entered into definitive agreements to internalize management on February 1, 2016.

We believe this will be a very important milestone for the company. The transaction provides that our entire team will become City Office employees. We're fortunate to have built such a strong team that possess energy drive and optimism and this transaction will only enhance our capabilities.

Overall, we believe that the internalization will result in economies of scale as we grow and it creates a stronger alignment between management, our Board of Directors, and shareholders.

Furthermore, we've been mindful of mitigating our G&A costs and as a part of the internalization we've entered into an administrative services contract that will result in City Office receiving $3.25 million of payments over the next three years.

This helps us to maintain a strong team with offices in both Vancouver and Dallas, but in an economical manner. You can find more details in our November 2, press release as well as a presentation that's posted on our website under the Investor Relations section. Turning to our quarter's results.

We're reporting our best quarter yet as a public company. Our per share operating metrics and occupancy levels are the highest they've been since becoming a public company. As mentioned on our last call, our Q2 numbers had very little benefit from the acquisition that closed late in the quarter.

During the third quarter, our results reflect a full quarter for both the Superior Point and Crossroads acquisitions. Furthermore in September, we closed upon our two most recent acquisitions 190 Office Center and Intellicenter which I'll speak to in a moment.

Like the second quarter, we have less than 30 days of results from these two properties this quarter and will receive the full benefit in the fourth quarter. These purchases, in conjunction with strong operating performance across our portfolio, resulted in healthy dividend coverage for both core FFO as well as AFFO.

Tony will elaborate further in a few minutes. In terms of leasing, we have continued to achieve higher occupancy at our properties and we ended the quarter at a healthy 95.4% occupied including signed leases not commenced.

Of note, we previously mentioned that our AmberGlen property has approximately 65,000 square feet leased to Cascade Microtech, which is currently not being used and we'll be getting back on December 31 of this year.

During the quarter, we proactively completed a 10-year lease with Kaiser Foundation Health Plan; a strong credit profile tenant for approximately half of this space starting on April 1, 2016, after the build out is complete. The new rent is just over $23 a square foot on a gross basis which is in line with the expiring rent.

Turning to acquisitions and dispositions. During the third quarter, we closed the purchase of both the 190 Office Center acquisition in Dallas, as well the Intellicenter building in Tampa. Like all of our acquisitions, we posted a summary presentation under the Investor Relations section of our website.

These summary decks provide an overview of the asset as well as the rationale behind why we purchase that. We discussed the 190 Office Center acquisitions on our last call. It's a well located two building property that is in the Richardson/Plano market, one of the most established in Dallas.

The property combines a number of the attributes that we look for, a great location, quality tenancy with long-term leases, a discount to replacement cost, a strong in place yield, and below market rents that will enhance our cash flow over the long-term.

The purchase price is anticipated to generate a full year cash, net operating income yield of approximately 7.5% after adding back amounts that are being funded by the seller.

Approximately $4 million in TILC and free rent credits were funded to us in cash by the seller and are held in an escrow account related to two lease renewal and extensions which were signed prior towards closing.

Approximately $1.2 million of this cash relates to free rent credits which will be released to us over the first and second quarter of 2016 as if we received rent directly. But from an accounting standpoint, they will not be recognized as revenue next year creating a bit of an accounting anomaly but they will be normalized in our AFFO adjustments.

We also acquired the Intellicenter building in Tampa, Florida during the third quarter. This 204,000 square foot Class A property is a 100% lease to a variety of strong tenants. Similar to the 190 Office Center it possessed many of the same attributes.

The property has great tenancy and the average remaining lease term at acquisition was over 10 years with built-in annual rental rate increases. Intellicenter will benefit from very little capital required, the low market rents, and a healthy NOI yield that will escalate over time.

This will be further amplified as we fixed our interest rate on the purchase debt for the next 10 years. Our management team has also been proactive to consider disposition opportunities within our portfolio.

As mentioned on our last earnings call, we positioned our Corporate Parkway property very well by completing a 10-year lease extension with The Dun & Bradstreet Company. The property is desirable given its strong attributes; it's a Class A building in a premier office park with great retail amenities nearby.

Corporate Parkway has a globally recognized investment grade tenant and it's located at the interchange of an Interstate Highway approximately 90 minutes from New York City and 60 minutes from Philadelphia.

However, previously mentioned the location is not one of our target markets and the completion of the 10-year lease extension has encouraged us to consider options. To that end, in order to explore opportunities, we commenced the marketing of the property with CBRE last week.

Over the next few months we will determine our best course of action and should be in a position to provide greater visibility on our thinking in early 2016. I will now turn the call over to Tony Maretic to discuss our financial results..

On a GAAP basis, our net operating income was $9.1 million this quarter versus $7.5 million in the second quarter. The $1.6 million increase is attributable to the acquisitions in June, September as Jamie mentioned.

Superior Point and DTC Crossroads were acquired late in Q2 and we saw the full impact of those acquisitions in Q3 and approximately one month of operations from 190 Center and Intellicenter which were both acquired on September 30.

Our same-store sales NOI saw marginal decrease due to the timing of expenses at these properties but are still tracking to the updated guidance we provided last quarter. We reported core FFO of $5.1 million or $0.33 per share.

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

Our core FFO is tracking our budget and we ended the quarter $1 million higher than Q2 on a sequential basis as the increase in NOI was offset by the increase in interest expense as a result of the aforementioned acquisitions. Added back to core FFO are some costs associated with the internalization.

You will see this line item described as external advisor acquisition. These costs are comprised primarily the legal, and other advisor costs incurred September 30.

We expect a similar amount will be expensed in Q4 related to the work completed after September 30, and the purchase price will also be expensed in that same line item in Q1 next year after the closing date February 1. Our third quarter AFFO is $4.2 million or $0.26 per share.

AFFO similarly benefited from these acquisitions as we ended the quarter fully invested for the first time since the IPO. 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, we have excluded some first generation leasing cost and the capital cost to add our acquisitions for some of the most recently completed acquisitions. We have also excluded the cost associated with the major repositioning of Plaza 1 at Washington Group Plaza as we did in the prior quarter.

Further details are disclosed on Page 19 under non-recurring capital expenditures. From a liquidity standpoint, we had cash of about $10.5 million at September 30, and approximately $25 million remaining undrawn and authorized under our current $75 million credit facility.

Additionally, we have $17.4 million of restricted cash as available to fund future TIs, LTs, and capital projects.

The restricted cash balance increased over the prior quarter primarily as a result of the lender escrows set aside to fund future TIs, LTs, CapEx, and free rents entered into by the seller for the 190 Office Center in Dallas which Jamie described earlier.

Our total debt at September 30 was $344.9 million or $337.8 million when deducting the non-controlling interest share of certain debts. Our net debt to enterprise value was 64% based on our share price at September 30.

Any proceeds from the potential sale of Corporate Parkway will be used to first repay the term loan and other indebtedness including our secured credit facility. That concludes our prepared remarks and we will open the line for any questions.

Operator?.

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Rob Stevenson with Janney. Please go ahead..

Beyond the Dun & Bradstreet building, I mean is there any of the other assets at this point where you guys are contemplating, marketing, and seeing what you can get for as such?.

Hey Rob, it's Jamie. So we’re very pleased with the other assets and the positioning. So there is nothing contemplated today and for portfolio aside from D&B..

Okay.

And then I mean from right now I mean what are you guys seeing in terms of availability of potential acquisitions that would meet your underwriting criteria normally if you had capital per day, I mean, I guess the question sort of different way is it if you had plenty of capital today how abundant are the acquisition opportunities presented to you in your core markets or is it a situation where pricing has gotten a little bit robust and as not as much opportunity today as there it has been in the past?.

Yes, Rob we've still been very focused on building our pipeline. So today looking in kind of a key markets that we're focused on and in the ranges of what we're looking at can stabilize property, long-term leases, below markets, rents, ability to buy at a discount to replacement cost is still a very robust pipeline within the cap rate range.

It is tighter than where it was before but we're still in that seven to eight cap range generally. Pipeline today is north of $400 million from that standpoint. But we're being very cautious about not getting ahead of ourselves. So we're keeping a warm pipeline but we certainly don't want to get to the point where we have to raise capital..

Okay.

And then just lastly, what is next big lease exploration in the portfolio?.

If you move through we talked about the cash gate lease which is at the end of this year and because we've discussed that, so the next one really of size would be in Central Fairwinds, the Fairwinds Credit Union which is in June, and correct me Tony, it's above 40,000 feet..

Correct..

So that's one we're focused on from the grand scheme of our portfolio, it is huge Fairwinds has great space, they’ve gotten incredible signage in Downtown, Orlando. So we are focused on moving that one into long-term but we still have a fair bit of time before that one is going to be addressed..

The next question comes from Craig Kucera with Wunderlich. Please go ahead..

Yes, I appreciate the color on the Corporate Parkway -- sorry I think I dropped.

I appreciate the color on the Corporate Parkway marketing but as you think about pricing is the expectation that that would still be in the low to mid fixed cap range or do you have a feel for what that might price out?.

It’s very early in the sales process, Craig. We’re not providing specific guidance on cap rates obviously as we're in the process of selling it. If you look at our cap rate of our portfolio this asset would be, we think at a significantly lower cap rate than our portfolio as a whole.

And if you look at comparable trades, I think the range you quoted probably is roughly in line but it's early in our process before we assess where we're going to be..

Got it and I appreciate that.

The reason I ask is I mean with your stock trading in may be the mid to even high eight cap rate range in our estimation and you can sell sort of these non-core assets can you give us any thoughts on insider purchases and may be why you guys haven't necessarily been stepping up to buy the stock?.

I appreciate the question, Craig. So with the internalization discussions, they actually started at the very beginning of this calendar year. So we've been in a blackout period, our insiders' sense then. So this will actually be the first quarter where that's going to drop off after we release our results..

Got it.

And finally, in the past I know you discussed may be in addition to dispositions, possibly doing some joint ventures for capital is that still on the table or have you made any progress or thoughts in going that direction?.

Good question, something we’ve been really focused on. But our view the markets been really choppy since the summer so as far as considering alternatives to raise capital has not been an ideal time. We think there are a lot of options that are available to us and now with the markets have settled down somewhat, something that we can explore further.

Well our focus has been and I think you’ll see it in our results is really focusing on our portfolio and the results from that are higher per share operating metrics, we’ve increased our occupancy, we got the internalization agreements done.

So our focus has been trying to create value internally before having discussions where having a low stock price puts us at a disadvantage. There are for sure a number of opportunities that could be available if you wanted to choose them, convertible debt, preferred shares, JV equity.

We’ve had a lot of inbound calls but we’ve been really focused one internally and two trying to keep our story pretty simple on the go-forward..

[Operator Instructions]. The next question comes from Wilkes Graham with Compass Point. Please go ahead..

Hi, good morning.

Most of my questions were just asked by the previous two gentlemen, so may be Jamie can you may be talk about, what markets that are you’re seeing better acquisition opportunities?.

So if you kind of zero in on where we see attractive cap rates but really the fundamentals that are positioning to real estate well over the medium and long-term. Top of the list still Dallas, Tampa, Orlando, Phoenix, Portland, are looking at a few things there as well.

We actually are looking at a couple of transactions in Seattle that still fit very, very tough market to get into but you're finding a few interesting opportunities there.

So that's the very top of the list, Wilkes, to get Houston, we don’t want to cross it off our list given the uncertainty with energy pricing but it’s certainly not one we’re actively considering but remains on the list because if opportunities in the markets start turning it could be very attractive, it's just not in the foreseeable horizon for us right now..

Okay.

And I apologize if I missed this but I heard you talking with Craig about the idea of may be buying stock personally going forward I’m curious even though you’re interested in growing the market cap, if the stock price stays down at these levels how interested are you as a company in buying back stock?.

As a company, I think we want to really try and preserve our liquidity right now it's something that we haven't been actively considering that could change but I would say in the near-term buying back stock hasn't been a priority, it's been trying to grow and build our portfolio and build our shareholder base, individuals, directors and insiders are free to buy.

And I think generally the consensus as we see great value right now but we haven't been able to execute for the last nine months..

Well, I’ll say congratulations on covering the dividend with AFFO. I think the stock is not reflecting that currently and good luck on the coming months with the internalization and hopefully, the stock should get credit for that..

Appreciate it, Wilkes..

Thanks, Wilkes..

Thank you..

If there are no more questions, I will turn it back to Mr. Farrar to wrap up..

Thank you. We appreciate everybody joining today. Over the quarter we think we've made tremendous progress. We're continuing to take steps that will unlock value and create more value in our company for our shareholders. Look forward to updating you further in the coming quarters..

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