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

Craig Kucera - Wunderlich Securities Barry Oxford - D.A. Davidson Rob Stevenson - Janney Vincent Chao - Deutsche Bank Steve Shaw - Compass Point.

Good morning and welcome to the City Office REIT, Inc. First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [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 first 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 reflect 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 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 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. On April 21, we celebrated the third anniversary of our initial public offering. Since that time, our company has grown from just over $300 million of real estate to north of $850 million at the end of the first quarter.

While accomplishing this growth, we have expanded our footprint in a number of leading markets, secured numerous high-credit tenants and at the same time strengthened our balance sheet and liquidity. We are pleased with our continued progress and I want to thank all of our shareholders for their continued support along the way.

Our growth this quarter was of particular note with property net operating income increasing 24% over the prior quarter. This is the largest quarterly increase in NOI since our inception, which demonstrates the momentum we are carrying into 2017. The backdrop for this growth has been strong real estate fundamentals in our market footprint.

As a few examples, Phoenix ranked as the top U.S. market for positive net demand in 2016 and supply levels remain very low. In Orlando, employment growth was 4.3% over the last 12 months and year-over-year office vacancy has declined 440 basis points. In Dallas, the 5.3 million square feet of office leasing demand in 2016 set a record for the MSA.

In short, we think that there is a long runway for our strategy of investing in midsized metropolitan areas, primarily in the Southern and Western U.S. With that, I would like to turn to operations and portfolio performance for the first quarter.

Our total leasing activity for the quarter was 262,000 square feet, comprised of 186,000 square feet of renewal leases and 76,000 square feet of new leases.

Our weighted average portfolio occupancy at March 31 was 90.2% and approximately 52% of the base rental revenue from our properties was derived from tenants that are federal or state government agencies or investment grade tenants or the subsidiaries. During the quarter, we secured several significant early renewals to strong tenants.

We signed a 7-year early renewal with KeyBanc at our Superior Pointe property for 59,000 square feet commencing in the first quarter of 2018. The triple net renewal rate of $17.25 per square foot represents an 8% increase over the expiry rate of $16.

This result highlights our proactive approach of extending lease terms with strong credit tenants across our portfolio.

As mentioned on our last call, we also completed an early 30,000 square foot lease extension with Microsoft at our DTC Crossroads property in Denver, extending their lease term from 2019 until 2025 and increasing their rentable square footage through a re-measurement.

Also at our DTC Crossroads property, we completed a 51,000 square foot extension with ProBuild Holdings. As we expected, we will be getting back approximately 42,000 square feet of very marketable space in the fourth quarter.

Overall, our occupancy was negatively impacted during the quarter by 81,000 square feet of move-outs, a majority of this related to an expected vacate at Plaza 25 that we discussed previously and one tenant at our FRP Collection in Orlando.

At Plaza 25 in Denver, we made progress towards improving leasing prospects at the property following two negotiated early terminations. We have completed the final design package for the renovation, which includes attractive spec suites and amenities, such as a conference center, fitness center, coffee bar and an outdoor deck.

We are in discussions to expand and extend several current tenants at the property and believe that Plaza 25 will be well-positioned to drive leasing post renovation later this year. Moving to our investment activity, we have acquired and placed under contract nearly $100 million of properties thus far in 2017.

As previously disclosed, we acquired 2525 McKinnon in January in the 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 in 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 over 30% below market and we expect the increased cash flow as we roll rents up to market. In addition, subsequent to quarter end, we entered into a non-binding purchase agreement to acquire a three-building portfolio in Orlando, Florida for a purchase price of $51.5 million.

The transaction is scheduled to close later this month, but remains conditional on the satisfactory completion of our due diligence, which is ongoing. On top of that, our pipeline remains robust with over $400 million in attractive opportunities that meet our preliminary investment criteria.

Our best estimation around timing is that we will invest our remaining dry powder in the second and third quarter. On the disposition side, we closed the sale of 2 of the 5 buildings at our AmberGlen property in Portland, Oregon. We purchased AmberGlen as a 5-building portfolio at a very low cost base.

Three of those buildings are newer and represent attractive long-term assets with stable tenancy profile and we decided to opportunistically sell the other two, the 1,400 and 1,600 buildings. We closed the sale of these two buildings on May 2 for $18.9 million, representing a gain of approximately $9 million for our 76% ownership state.

This was a small disposition, but is another example of their value we have been able to create through prudent acquisitions. In connection with the disposition, we also refinanced the three remaining buildings with a very attractive $20 million loan with a fixed interest rate of 3.7% for 10 years.

As a refresher, our Washington Group Plaza property at Boise, Idaho remains under binding contract for sale for $86.5 million. Closing schedule for April 2018, however, either party has the right to accelerate closing by providing at least 120 days advance notice and paying the mortgage prepayment penalties.

At this time, we do not anticipate accelerating the closing, but there remains a reasonable possibility that the buyer may elect to do so. Lastly, I wanted to note that our Board of Directors approved the amendment and restatement of our bylaws in the first quarter.

Consistent with our commitment to governance best practices, we have undertaken a series of initiatives to enhance our corporate aims of transparency, shareholder rights and alignment of interest between our shareholders and our officers and directors. Most notably, our bylaws now provide for majority vote standard in uncontested director elections.

We are pleased that institutional shareholder services, or ISS, an industry group that provides corporate governance ratings, has updated our governance quality score in several metrics following these initiatives placing us in the upper echelon of our peers. 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 first quarter was $15.8 million. This represents a $3 million increase over the $12.8 million achieved in the fourth quarter of 2016.

The increase was primarily a result of the acquisition activity in the busy fourth quarter of 2016, which saw over $180 million in transactions and the acquisition of 2525 McKinnon in the first quarter, which Jamie discussed. We reported core FFO of $7.8 million or $0.26 per share.

Our core FFO adjusted nearly NAREIT defined FFO for acquisition costs and the amortization of stock based compensation. I should mention, in January of 2017, FASB issued ASU 2017-01, a new guidance on business combinations.

We chose to early adopt this accounting standard update, which resulted in capitalizing acquisition costs related to our 2525 McKinnon transaction, rather than expensing as of typical in the past. Therefore, we expect the expensing of acquisition costs to be near zero on a go-forward basis.

Our core FFO ended the quarter $2.2 million higher than Q4, primarily due to the increased NOI from the acquisition activity in the fourth quarter and start of the year. Our first quarter AFFO was $6.0 million or $0.20 per share, a 43% increase over Q4.

Our AFFO numbers will move around [indiscernible] quarter-to-quarter due to the relative size of our portfolio and the impact of significant leasing in any one quarter, which we saw in Q4 of last year.

We expect to return to full dividend coverage on an AFFO basis once we have fully deployed the proceeds from common offering, which occurred in January. 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 costs and the repositioning activities, which have begun at Plaza 25. Further details are disclosed on Page 19 under non-reoccurring capital in expenditures. Our same-store cash NOI growth for the quarter was 0.7%.

This was negatively impacted by two significant leasing transactions that include three rent credits during the first quarter of 2017. Removing the variance related to these items, our same-store cash NOI growth for the quarter was 3.5%.

As I mentioned, we closed on $71.3 million common stock offering at the beginning of the quarter as well as a number of property level financings, which improved our liquidity at quarter end.

We have continued to see attractive terms for debt with three financings in the quarter and one at AmberGlen subsequent to quarter end coming in at a weighted average fixed interest rate of 4.2%, each with a 10-year term. At March 31, we had cash of about $50.6 million and approximately $22.6 million of restricted cash.

We expect to put that cash to work in Q2 and are still on track to close an additional $165 million to $185 million of properties in the remainder of 2017. Our total debt net of deferred financing costs at March 31 was $400.8 million or $392.3 million when deducting the non-controlling interest share of certain indebtedness.

All of our debt was fixed rate as of quarter end. Our net debt enterprise value was 41.8%. That concludes our prepared remarks. And we will open up the line for questions.

Operator?.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Craig Kucera of Wunderlich Securities. Please go ahead..

Hi, good morning guys.

Going through your press release and your comments, I just wanted to ask about your guidance, because you didn’t make a mention of it, should we assume that you are reaffirming your core FFO guidance for the year?.

Hi, good morning Craig, it’s Tony here. Yes. Based on our first quarter results and the acquisition activity we have, we are still tracking towards our previously issued guidance. We didn’t provide any explicit kind of commentary regarding the guidance, because there is really no material updates..

Got it.

And as it relates to AmberGlen, I know it doesn’t sound like you are selling the other three, but what was the cap rate on what you sold there?.

Sure Craig, so Jamie here. We sold two of the older buildings, one which has had a dark tenant since our IPO and had some R&D flex base.

So on a cap rate, based on 2017, it’s just under 7, about 6.8, but keeping in mind that that building has a significant dark tenant, which is about a quarter of the portfolio, so we were very pleased with that result..

Got it.

Can you give us a little bit more color on the Orlando transaction, maybe the tenants there in those buildings or maybe some of the economic terms or is it too early to disclose that?.

It’s too early, Craig. So we are under contract. We are finalizing our due diligence as we speak. Cap rates, I think we have been providing guidance for higher quality transactions, 7, 7.5 range. So it fits within that general bucket..

Got it.

And what is the – refresh my memory, what’s the total budgets for the Plaza 25 this year?.

It’s in the range of $2.5 million, our CapEx program..

Got it.

And one last one for me and I will jump back in the queue, I know you mentioned that you had an 8% increase with the KeyBanc renewal, but overall, with your leasing this quarter what were spreads relative for the whole pool?.

Hey Craig. Yes. So for the entire pool, not a huge amount of activity, including the early renewals, our retention rate was 69%. Overall, leasing spreads were actually pretty consistent with our same-store analysis, adjusted and that being just slightly above 3%..

Okay. Thanks, guys..

Thanks Craig..

The next question will be from Barry Oxford of D.A. Davidson. Please go ahead..

Great. Thanks guys.

When I look at your same-store NOI of 0.7%, that was dragged down by, I guess some free rent, does that mean that when that burns off, we will see an acceleration in that number or not necessarily?.

I think that’s a fair assessment, Barry. There was really an adjustment in the Q in the first quarter. We provided guidance at the end of last quarter ending 4% to 6% and really nothing has changed on a total basis for the year. So I think that’s a fair assessment..

Great.

What are you guys seeing as far as competition for acquisitions, is it more fierce about the same or you are not seeing quite as many bidders at the table as you previously did, let’s just say at the beginning of the year?.

Thanks Barry. So you got to look where a lot of capital in the market is focused on right now. It is in secondary markets, particularly in leading markets like the cities that we own. We have been buying in some of the best employment population growth areas in the country.

So for sure, the investor interest in our markets is elevated and in some cases has caused some cap rate compressions. I would say from our standpoint we are still finding opportunities, but it’s been more challenging to find good value and so we are focused on that regard.

Consistent with what we have done in the past, we have stayed very close to sale processes that ultimately went another direction, based on competition offering a higher price and we have stayed close to that. A lot of those transactions often fall out in the $25 million to $100 million range.

So that’s often where we have gotten our best buying opportunities is when a seller has been frustrated that somebody else hasn’t closed. And if you look at our pipeline today, there are a number of deals like that.

So we are staying close and we are still comfortable that we are going to be able to execute on our plan as we go forward at attractive pricing..

Great. Thanks for the color, guys..

Okay..

[Operator Instructions] And the next question will come from Rob Stevenson of Janney. Please go ahead..

Good morning guys.

Jamie, in terms of the Orlando acquisition, what type of bucket does this fit into, is this a below market rents, but decently occupied, is this a renovate, put some CapEx dollars into a type of deal or something else?.

This is an attractive long-term property, institutionally maintained, well leased with great credit tenants on a long-term basis with nice step-ups in rent, so a nice stable property..

Okay.

And then Tony, back to the question about the rent burn off, when does or did the free credits burn off for you guys or when do they, of the two leases?.

There is a bit of a carry over into Q2 into the first month and then they burn off..

Okay.

And then when you are looking out there today, I mean from a market standpoint, are there any markets that are sort of sticking out at you in terms of either a good amount of products that you would like to buy coming on the market or fundamentals that have you to basically moving it down to the bottom of the priority list, I mean anything sort of changing up as you are going through the early part of ‘17 here?.

Sure, Rob. So if you look at our portfolio where we own real estate today, we have got a significant number of assets in Florida. So that’s shifting for now towards the bottom, just given our exposure there assuming we close on this deal in Orlando.

Where you look at great fundamentals and where we are seeing good product top of the list in our existing markets would be building out further within Dallas and Phoenix. We also do have some interesting transactions in Salt Lake and Seattle, which are also very strong markets and looking to capital and entering there at an attractive point..

Okay. Thanks, guys. I appreciate it..

Thanks, Rob..

The next question will be from Vincent Chao of Deutsche Bank. Please go ahead. Mr. Chao, your line is open..

Yes. Hi, sorry guys as I mute there.

Just wanted to follow-up on the last comment about Orlando, it sounds like after this deal, you feel like you have got enough exposure there, so you don’t want to continue to expand, I know you mentioned some stats there in terms of vacancies going down and job growth being very strong, I am just curious though I mean as we look at the job growth data there, it does seem to be slowing a little bit, but still so much better than the rest of the country, but at the margins slowing, we have heard from some of our apartment REITs that their metrics in those markets are in South Florida and Orlando are starting to slow a little bit, not soften, but slow, I am just curious if you are seeing any other sort of early warning signs in that particular market?.

Yes. I think when you look at especially in the office sector, there is very little to no development. We have seen significant increases in employment there. So if you look at the vacancy year-over-year, it’s down about 340 basis points. Rents have started to move finally. It’s been slow to pick up, but year-over-year, they are up about 4.3% as a whole.

So when you look at the trend of not having much new development and continued job and population growth in that area, we still think it’s well positioned. Having said that, the asset that we are buying, phenomenal credit, long-term leases with nice step-ups in rent in a well positioned sub-market, so we are quite protected from that standpoint..

Okay.

So the pullback there is just you guys have a fair amount of exposure, so want to grow in other parts?.

If you look at our overall portfolio Tampa, we are assuming this deal gets done, just over 20% of our portfolio there today based on square footage, Orlando, just under 20%. So until we further diversify elsewhere, that’s a level that probably is a reasonable exposure for us from a market standpoint..

Okay, thanks..

[Operator Instructions] The next question will come from Steve Shaw of Compass Point. Please go ahead..

Hi Tony, you mentioned dividend coverage once fully deployed and was that on a run-rate basis or can you guys get there this year?.

Hi Steve. Yes, so our original guidance had a fully deploying by the end of Q3 and so we project out – I think we gave guidance before in Q4 that on a core FFO basis would be kind of $0.29 to $0.31 and then on an AFFO basis covering it for Q4. Now if that timing of acquisition slides a little bit, it could impact it.

But everything we are saying is it’s still achievable to do that, in Q4 of this year..

Thank you..

You’re welcome..

And at this time, there are no additional questions. I will turn the call back to Mr. Farrar for closing remarks..

Thank you. Overall, we are really pleased with our results in the start of 2017. And we are looking forward to a successful end to the year. Want to thank everybody for joining today and look forward to discussing our progress with you in the coming quarters. Have a great weekend..

Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines..