Jamie Farrar - Chief Executive Officer Tony Maretic - Chief Financial Officer, Treasurer and Corporate Secretary.

Vincent Chao - Deutsche Bank Craig Kucera - Wunderlich Rob Stevenson - Janney.

Good morning and welcome to the City Office REIT Inc. Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce to you 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 fourth quarter earnings press release and the 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 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 fourth quarter earnings press release and the company’s filings with the SEC for factors that could cause material differences between forward-looking statement and actual results.

The company undertakes no duty to update any forward-looking statements that maybe made in the course of this call. 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 for joining today. Before we focus on the results of this quarter, I want to take a moment to draw your attention to some of the progress we have made over the last year. 2016 was an exceptional year in terms of the acquisition volume and in December we surpassed $500 million in real estate investments since our IPO.

In achieving this milestone, we have maintained a disciplined return profile for our investments and have continued to focus on our non-gateway target markets in the Southern and Western U.S. We recognized that growing our company is only valuable insofar as we are able to make the high-quality investments and create value at the property level.

Our two dispositions to-date, one of which is under contract and will be discussed later, are expected to generate in excess of $55 million of gains. This was made possible by completing significant leasing transactions, building upgrades and implementing operational improvements that allowed us to position these properties at a premium valuation.

Importantly, we have coupled our growth and value creation at the property with the implementation of core best practices in line with what we believe to be in the best interest of our shareholders. In 2016, we internalized management, strengthened our balance sheet and materially reduced our overall leverage.

Relating to corporate initiatives, we are excited to welcome John Sweet to our Board as an Independent Director effective as of March 1. Most recently, John founded Physicians Realty Trust, a leading public healthcare REIT and served as its Chief Investment Officer from its IPO through his retirement from the company at the end of 2016.

During his tenure, Physicians Realty grew from $125 million in real estate investments to approximately $3 billion. John is highly regarded by his peers and brings over 40 years of experience in finance, real estate and public companies and we believe he will be a strong asset to City Office.

We also recently announced that Sam Belzberg has chosen the step down from our Board of Directors. Since our IPO, Sam has contributed greatly to our success and we sincerely thank him for his service. With these changes, the Board now consists of 7 directors, 6 of whom are independent.

During 2016 with the support of our shareholders and our improved access to capital, we were able to more than double our equity market capitalization. This significantly increased the liquidity of our common stock.

Furthermore, this expansion of our investor base has positioned City Office to potentially achieve other important milestones in 2017, including the potential addition to the RMZ Index and surpassing 1 billion in total real estate assets. With that, I would like to now turn to operations and portfolio performance for the fourth quarter.

Our total leasing activity for the quarter was 177,000 square feet comprised of 166,000 square feet of renewal leases and 11,000 square feet of new leases. Our weighted average portfolio occupancy at December 31 was a healthy 91%.

And approximately 54% of our base rental revenue from our properties was derived from tenants that are federal or state government agencies or investment grade tenants or the subsidiaries. The most significant leasing transaction in the fourth quarter was an early renewal with a 37,000 square foot tenants at our Cherry Creek property in Denver.

The tenant agreed to a 5-year renewal at a rate 12% higher than the existing rate and with $0.50 annual rental rate bumps. The lease will commence on July 1, 2017. Furthermore, subsequent to the end of the quarter, we secured a couple of significant early renewals, which will result in stronger cash flow over the next few years.

Specifically, we concluded an early lease extension with Microsoft at our DTC Crossroads property in Denver and extended their lease term from 2019 until 2025. In addition, we have concluded a renewal with ProBuild Holdings, also at our DTC Crossroads property.

This renewal was discussed on our last conference call and the final terms are similar to what we anticipated at that time. ProBuild’s current lease expires in November 2017 and we completed a 51,000 square foot extension.

34,000 square feet of this was extended on a 5-year term and approximately 17,000 square feet was extended on a 2-year term beyond 2017. As we expected, we will be getting back approximately 42,000 square feet of very marketable space in the fourth quarter.

On our last call, we also discussed plans to reposition Plaza 25 in Denver to improve leasing prospects following two negotiated early terminations. We have commenced the implementation of a $2.5 million plan to renovate the property and create more attractive spec suites and amenities.

With these improvements, the property will be positioned to participate in the submarkets recent positive net absorption and increasing rental rates. Relating to the leasing developments, we are experiencing good leasing momentum at our Central Fairwinds property in Downtown Orlando and we expect the occupancy will soon exceed 90%.

At the time of our IPO, occupancy was below 60%. And as you may recall as part of the IPO formation transactions, there was a future earn-out liability linked to achieving certain leasing and cash flow milestones.

As a result of the leasing activity, the company led by its independent board members negotiated an early termination of the earn-out agreement. As part of that agreement, a $2.4 million cash settlement was paid subsequent to quarter end, which releases the company from any future obligations under the previous arrangement.

We believe this transaction is a positive development for shareholders as it removes uncertainty around the timing and amount of future payments, which could have been materially higher given the strong leasing prospects.

Moving to our investment activity, we acquired over $180 million of real estate in the fourth quarter and have continued momentum into 2017. In November, we acquired Park Tower in Tampa, Florida. The purchase price was $79.8 million exclusive of closing costs and future renovation capital representing a 7.1 cap rate.

We are finalizing our renovation plans with renowned architect, Gensler. We are very pleased with the results of our planning and believe that we will create value by positioning the asset as a modernized premier Downtown Tampa property as we have done with several other re-positionings in Florida.

Also in November, we acquired 5090 North 40 Street, Phoenix, Arizona. The purchase price was $42.6 million, exclusive of closing costs, representing a 7.1 cap rate. Having undergone a recent renovation, the property is in great shape providing the opportunity to lease-up the remaining smaller available suites.

In mid-December, we acquired SanTan Corporate Center, the two-building office complex, well located in Phoenix’ technology-driven Chandler submarket, the purchase price was $58.5 million, exclusive of closing costs, representing a 7.7 cap rate.

SanTan is 55% leased to credit tenants and we expect to realize strong cash flow with limited near-term lease roll. In January, subsequent to quarter end, we acquired 2525 McKinnon, in a highly desirable uptown submarket of Dallas, Texas.

The property is surrounded by some of the highest quality office, hotel, high rise residential and retail properties from the State of Texas and was acquired for $46.8 million, exclusive of closing costs and future renovation capital representing a 6.1 cap rate.

In-place rents of the property are approximately 35% below market and we expect to increase cash flow as we roll rents up to market in conjunction with our planned upgrades to the property.

On the disposition front, on our last earnings call, we disclosed that we had entered into a contract to sell our Washington Group Plaza property in Boise, Idaho for $86.5 million to St. Luke’s. At that time St. Luke’s was conducting their property level due diligence. We are pleased to report that St.

Luke’s has completed their due diligence and made a $5 million non-refundable deposit. Closing is scheduled to occur in April 2018 in conjunction with the maturity of the property’s mortgage. However, either party has the right to accelerate closing by providing at least 120 days advance notice and paying the mortgage prepayment penalties.

Turning to our acquisition pipeline, we currently have over $400 million in attractive opportunities within our target markets that need our preliminary investment criteria. We continue to be very positive about the real estate fundamentals across our markets and believe that we can intelligently expand our portfolio with additional great properties.

Our best estimation around timing is that we will invest remaining dry powder in the second and third quarters. That concludes my remarks and I will turn the call over to Tony to discuss our financial results..

Thanks Jamie. On a GAAP basis, our net operating income in the fourth quarter was $12.8 million. This represents a $1.4 million increase over the $11.4 million achieved in the third quarter. The increase was primarily as a result of the acquisition activity.

As Jamie discussed, we acquired Park Tower, 5090 North 40th Street and SanTan, all in the fourth quarter. On a cash same-store basis, our net operating income increased by 5.1% over the same quarter in the prior year.

We have added a new schedule to our supplemental accounting package which provides further detail on our same-store results to demonstrate performance of our stabilized properties. Another change I wanted to briefly mention, beginning in Q4 we have combined general and administrative expenses with our stock based compensation expense.

Stock based compensation expense is a non-cash item that we previously disclosed on a separate line item on our income statement and which is excluded from our definition of core FFO.

We have combined the stock based compensation figures within general and administrative expenses on our income statement beginning this quarter to better confirm with industry practice and SEC rules, but we will continue to add it back to our definition of core FFO. We reported core FFO of $5.6 million or $0.23 per share.

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

Our core FFO ended the quarter $1.0 million lower than the Q3 primarily due to the $1.8 million in preferred stock distributions related to the preferred stock offering which closed in early October. This was offset by the increased NOI from the acquisition activity later in the quarter.

We expect a preferred offering to be accretive to core FFO on a run rate basis. As a result of leasing momentum, both during the quarter and subsequent to quarter end which Jamie described. We increased the earn-out liability at Central Fairwinds by $500,000 to $2.4 million, which represents a full and final settlement.

Our fourth quarter AFFO was $4.2 million or $0.17 per share. AFFO was negatively affected by unusually large charge for leasing commissions totaling $1.0 million paid in the quarter. Half of that total related to the Fairwinds credit union tenure extension.

The majority of the commission was due upon the expiry of the termination option in early October. Our leasing activity and capital expenditures are clearly laid out on Pages 20 and 22 of the supplemental package.

Consistent with our definition of AFFO, we have excluded some first generation leasing costs and the repositioning activities which have began at Plaza 25. Further details are disclosed on Page 22 under non-reoccurring capital expenditures.

From the liquidity standpoint, we closed on the $71.3 million common stock offering subsequent to our quarter end. At December 31, prior to that closing, we had cash of about $13.7 million and approximately $15.9 million in restricted cash.

During the quarter, we also expanded the authorized borrowing capacity under the secured credit facility from $75 million at September 30 to $100 million. Our total debt net of deferred financing costs at December 31 was $370.1 million or $361.6 million when deducting the non-controlling interest share of certain indebtedness.

Our net debt enterprise value was 44.7% based on our closing common stock price at December 31 as compared to 63% as of December 31, 2015. Lastly, we have provided full year 2017 guidance. We have assumed and in addition to the $46.8 million acquisition of 2525 McKinnon completed in Q1.

We expect to close an additional $165 million to $185 million of properties in 2017 with all of the acquisitions occurring in Q2 and Q3. Based on this assumption, we are estimating core FFO between $1.03 and $1.09 per share for the full year ending December 31, 2017.

Our assumptions assume no dispositions take place during this year including Washington Group Plaza, which is under contract for sale in 2018. This includes an increase in cash NOI from our same-store properties in the 4% to 6% range.

The actual timing of our acquisitions will impact our guidance estimates, but assuming these acquisitions close and once we are fully deployed, we are anticipating fourth quarter 2017 run rate core FFO in the range of approximately $0.29 to $0.31 per share.

Further details on how we arrived at our guidance including a more complete discussion of our assumptions can be found in our press release and the supplemental information package. That concludes our prepared remarks and I will open line up for questions.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Vincent Chao with Deutsche Bank. Please go ahead..

Hey guys, so just maybe just a big picture question, you mentioned the $400 million pipeline that you are looking at for acquisitions, just curious if you could just comment on post-election and so far this year, what if any impacts it had on the markets that you are looking at in terms of the investment markets?.

Sure. Thanks for the question, Vin. As a general comment, if you look at our past, we are most excited to be buying when there is some dislocation in the market and in the fall in the fourth quarter there were a lot of concerns both over rising interest rates as well as the election uncertainty.

And another factor was potential carried interest tax law changes, which really supported some private equity people who want to sell. So we saw a great buying dynamic in the fourth quarter, which allowed us to close we said over $180 million of properties at what we think were very attractive prices.

That momentum continued early in the first quarter with our closing of the Uptown Dallas transaction for $47 million, which is again another solid buy. I would say with the market improving as much as it did and the change in the expectations around job creation, early in 2017 we did see a lot more buyers actively pursuing properties in our markets.

And we actually opted to ball-out of the few transactions we were working on as the pricing started to move to the levels that were above where we were comfortable.

The irony is in some of these cases we think the chosen buyers were groups that didn’t actually have all their own funds to buy it, which started to look for capital while they are doing due diligence.

So our preference in that situation is to step aside, watch the transaction and see what happens and often some of our best buys are when sellers struggles to close the sale. So as of right now, I would say it’s was a bit of a slower start to ‘17. We have buildup a fairly deep pipeline of over $400 million.

We do have a number of pretty solid prospects in that. Guidance again, Tony gave midpoint is about $175 million of additional properties and we are very comfortable that we can close that between the second quarter and third quarter based on what we are seeing..

Got it. Thanks for that color.

And I guess it sounds like cap rates may have risen a little bit in the fourth quarter and then have come back in early part of ‘17, is that a fair characterization?.

That’s fair, I mean we are still in the 7 to 8 range, I would say we are trending towards the lower end of that range, but still the good pipeline in that range..

Okay. And just a question on guidance, thanks for the additional same-store disclosure this quarter.

It looks like about 66% of the portfolio is captured by same-store as of the fourth quarter, I was just curious is the same store pool set now for the rest of the year or is there going to be changes over the course of the year, so I guess today seems report same as about the 46% is based on?.

Yes, that’s fair comment. What you will see in 2017 as we are going to be providing information on a quarterly basis, so the acquisitions that occurred in ‘16 will start to hit your Q3 and Q4 numbers.

And the only other adjustment is in the prior year Washington Group Plaza was treated as a repositioning when we are totally remodeling one of the buildings, it was held as repositioning in Q1 and Q2. We still own the building. Washington Group Plaza in Q3 and Q4 that will also come into the numbers..

Got it, okay. I will jump back in queue. Thanks..

Thank you..

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

Hi, good morning guys.

Going to your guidance, can you talk about what you are thinking as far as new leasing and sort of embedded in that is there a pickup in occupancy or how should wee consider that?.

Good morning Craig, it’s Tony here. Generally if you look at occupancy we are projecting essentially flat occupancy in our number. The pickup is going to come from the lease renewals and the step-up in rents and hence the same-store guidance we gave in the range of 46%..

Got it. And I do appreciate the additional disclosure this quarter.

Can you comment on where leasing spreads were this quarter relative to your prior rents and where you see overall current rents relative to market?.

Sure. So in terms of just leasing spreads Q4, relatively small sample size in the numbers, 166,000 in renewals. The spreads on that were kind of in the same range of their same-store projections in the high end of that, they are kind of in the 6% range. And in terms of second part of your question was, remind me Craig..

Just where you see your current rent and the portfolio relative to our market rents is are we 5% below or some range below or are at market I guess?.

Yes. Consistent with what we said, it’s very similar to what we have guided before approximately 5% translated into just over $1 below market..

Got it, that’s it for me. I will jump back in the queue. Thank you..

Thank you, Craig..

[Operator Instructions] Your next question will come from Rob Stevenson with Janney. Please go ahead..

Good morning guys.

Jamie, you talked early in the call about the space coming back to you in Denver in the fourth quarter, when you take a look at the roughly 400,000 of lease expiration in ‘17 as a whole, what are you guys expecting to have to re-tenant versus percentage of that that’s likely to renew?.

Sure. Thanks Rob. So first off there is about 43,000 of that has been Nestlé [ph] lease in Park Tower and our expectation is we will get that back in May if that happens, we get $2 million of cash coming back which is close to $50 a foot for re-tenanting it, that’s our best expectation today. Based on remaining leases, it’s around 320,000 feet.

So far, we have either renewed or in advance discussions of lease renewal for about 140,000 [indiscernible] ‘17. In addition, we are far or longer renewed about another 50,000 relating to 2018. So we are seeing very good leasing activity.

Just coming on rates, renewal rates very healthy, they are in that guidance that we gave about 4% to 6% pickup, so nice pickup there. In terms of getting some space back we mentioned on the call the 42,000 feet at DTC Crossroads, which we get back at the end of November.

General Dynamics, we are going to get back later this month at our FRP collection as they did not renew the contract. We have got some good lease there that’s about 34,000 feet. Portland, we are going to get back about 19,000 feet from Delta Products on December 31. But aside from that, we are in very good shape.

So our own internal numbers when we are looking at renewals this year we are going to be in the 65% plus range on renewals, which has skewed a little lower than normal because of the pro-build space we are getting back..

Okay.

And then out of the – whatever you would like to call, I mean the sort of sub-optimally leased assets, the stuff that’s low-80s or below, where are you seeing the most leasing interest and traction of those properties like Plaza 25, is it Washington Group Plaza, etcetera, any of that sort of stuff, obviously Washington Group Plaza is going to say [indiscernible], but I mean of the other sort of low-80s assets, anything where if it sticks out from a demand perspective to share?.

It’s basically the biggest focus right now as we said on the call is Plaza 25 and that’s going to tick down a little bit lower in the low-50% range with the move-outs that we already announced and received the termination income for. We are in the process we said of doing a major repositioning there.

I think that’s going to make a huge difference and being able to lease that up over the balance of the year and into next year. So that’s where our main focus is Rob. And I think with our plans we have in place, we are well positioned to do that. Superior Point is one as well that we are focused on, good space there.

So we are hoping to push that up closer to the 90% range by the end of the year..

Okay.

And then just last one for Tony, where is the big probability for deltas in the $1.03 to $1.09 guidance, in other words, if you guys came in a couple of pennies below the low end or a couple of pennies below – above of the high end, what’s the things in the guidance that really would – that you think at this point would drive coming in outside of that range?.

Yes. Sure Rob, I think the biggest driver is just the timing of our acquisitions. We have assumed that they begin early Q2 and are completed by the middle of Q3, so that we are fully deployed. That’s the biggest driver. If we can accelerate those acquisitions, we can push above the range.

And if they are delayed, that will put at the bottom of the range..

Okay, prefect guys. I appreciate it..

Thanks Rob..

The next question is a follow-up from Vincent Chao of Deutsche Bank. Please go ahead..

Hey, guys. Just a quick follow-up just back to reconcile some stuff here, in the press release you guys talked about 144,000 square feet of leases signed that will have, will or have commenced subsequent to year end.

I am just trying to reconcile that with the disclosure in the supp, which I think comes out to like maybe 12,000 of signed, but not commenced?.

Yes. So, the stat we are giving in the press release consists of both either signed or commenced. And so in terms to reconciliation the two numbers I think 143,000, we put a little note at the bottom of the table that shows you what’s been – what commenced in Q1.

So, it’s really a combination of the numbers of both and I am happy to give you those numbers..

Yes, maybe it’s more of an offline question. That’s fine. I will follow up with you later on that, okay.

And then just in terms of some of the acquisitions on 2525 McKinnon, for instance, it says excluding cost of future rental capital, how much renovation do you expect to put into that asset? And then I think same questions for one of the other buildings here as well, Park Tower?.

So, Park Tower, it’s a pretty major renovation we are planning on doing. We are working with Gensler as far as both a lobby, some exterior work. And so when we bought that, we factored in about an $8 million budget, which we think will have a significant impact in moving rents. So, it’s really quite a dramatic improvement repositioning it.

So, that is underway as far as planning, that’s our best estimate today. 2525, it’s much smaller number. I think we have got internally around 400,000 to 500,000 earmarked with that. We haven’t finalized plans there. So, it could come in a little below or little above, but that’s our expectation..

Okay.

And do you think that $8 million will be spent this year or is that over more than just 2017?.

That’s probably ‘17 and it will slip into ‘18 as well..

Okay, great. Thank you..

[Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the call back over to Mr. Farrar to conclude..

Thank you. Overall, we are pleased with our progress last year and believe that we are well positioned to create value for our investors in 2017. Thanks for joining us today. We look forward to discussing our progress in the coming quarters..

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