Anthony Maretic - CFO, Secretary and Treasurer James Farrar - CEO.

Craig Kucera - FBR Capital Markets Bill Crow - Raymond James Vincent Chao - Deutsche Bank Barry Oxford - D.A. Davidson Rob Stevenson - Janney.

Good morning and welcome to the City Office REIT Incorporated Third Quarter 2017 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 third 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 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. I will review our financial results after James Farrar, our Chief Executive Officer, discusses some of the quarter's operational highlights. I will now turn the meeting over to Jamie..

Good morning. Since our last earnings call in August, we've been very busy executing on the strategic growth of our company. We have grown our total assets by over 30% in 2017 year-to-date with over 250 million of acquisitions including one that closed subsequent to quarter end.

In fulfilling this acquisition strategy, we believe we have improved the quality and diversification of our assets. With the San Diego portfolio acquisition, which I will discuss shortly, we gained a foothold in a new growth market and brought down the concentration in each of our other markets to approximately 20% or less.

With incremental acquisitions in our existing markets, such as Papago Tech in Phoenix, we have been to achieve economies of scale with G&A costs, property operational costs and third-party vendors.

In conjunction with the acquisition of 2525 McKinnon in Uptown Dallas earlier this year, we believe our recent acquisitions continue to prove our ability to find properties with excellent long-term return profiles in high growth markets.

At the end of the third quarter, we closed the previously announced acquisition of the ten-building 670,000 square foot San Diego portfolio for $174.5 million exclusive of closing costs.

The San Diego portfolio is comprised of Mission City Corporate Center, a 285,000 square foot Class A office campus located in the Mission Valley submarket, and the Sorrento Mesa portfolio, a 385,000 square foot complex, as well as a nearby land parcel.

The acquisition is anticipated to generate a combined pro forma net operating income yield of approximately 7.4% inclusive of estimated closing costs, reserves for planned capital improvements and the cost of the land parcel.

Subsequent to quarter end, we closed a $47 million fixed rate financing at 3.78% for Mission City, locking in an attractive spread. This portfolio provides CIO with immediate scale of diversification in San Diego, a highly desirable coastal market with high barriers to entry and significant institutional investment demand.

In addition to strong cash flow, the portfolio provides opportunities for income growth. Rents at the property are approximately 8% below current market rates and we have already experienced solid leasing tour velocity, indicating potential to lease up vacant space.

Existing leases are below current both the measurements providing upside as leases roll. Despite owning it for a short period, we are already focused on proactively taking steps to unlock value at certain buildings, which we believe will drive future NOI growth.

Last, the Sorrento Mesa portion of the portfolio includes an exceptionally located 5-acre development land parcel. We believe there will be opportunities to create additional value from this and CIO's other land holdings in Florida.

Subsequent to quarter end, we acquired Papago Tech, a two building, 163,000 square foot complex located in the desirable Tempe submarket of Phoenix, Arizona. The first-year anticipated acquisition cap rate was approximately 7.5% based on the purchase price of $33.3 million.

Papago Tech is well located in Tempe, the geographic center of the Phoenix, MSA, with easy access to freeways, light rail and Sky Harbor Airport. Tempe is experiencing significant rental rate growth and low vacancy due the desirability of its amenity base and demand for space by creative and technology oriented tenants.

The area offers a well-educated workforce anchored by Arizona State University, which we expect will benefit leasing over the long-term. Over $8 million has been recently invested into exceptional creative build-outs at the property, which likely represents some of the most attractive finishes in our entire portfolio.

134,000 square foot suite, won an award in 2016 as Phoenix's best tenant build-out over 5,000 feet. Papago Tech was 98% leased to close and we believe that will require limited capital going forward, given the quality finishers.

On the operational front, we ended the quarter at 88.7% occupancy and expect this to tick down slightly in the fourth quarter, which is below our recent average occupancy. There are several contributing factors to this over the last two quarters. First, we acquired the large San Diego portfolio, which was 87% occupied at quarter end.

Second, occupancy at our Washington Group Plaza property was 83% at quarter end, with numerous tenants not renewing due to the pending sale of the - to a corporate user. We're not concerned about this reduction as we anticipate closing the sale in early 2018 and generating a gain of over $40 million.

Third, we've received the full floor back from ProBuild at our DTC Crossroads property during the quarter. As part of our previously communicated renewal, we received this space back in Q3 and will receive approximately 12,000 square feet in the fourth quarter.

The renewal terms with ProBuild were better than what we underwrote when we acquired DTC Crossroads, but nonetheless it lowered the property's occupancy to 77% at quarter end.

For those reasons, and our strong 7.3% year-to-date same-store NOI growth and 94% occupancy at our same store properties, we believe our lower current occupancy is primarily a result of timing and the occupancy drag from Boise and the San Diego portfolio.

Our property operations continue to be healthy, the leasing fundamentals in our markets remain strong and we anticipate achieving stabilized occupancy for our portfolio in the 92% to 94% range in the near to medium term.

One such effort to create value through lease up is underway at Park Tower, our downtown Tampa property that we acquired late last year. Given the strength of the Tampa market and the property's exceptional potential, we enhanced our renovation scope to approximately $11 million.

This will include a major exterior renovation and extensive lobby upgrade and various Class A amenities, such as a high-end fitness and conference facilities. Construction has already commenced, and we expect to have the bulk of the work completed by the fourth quarter of 2018.

During the quarter, we signed three leases, totaling approximately 14,000 square feet indicating that the marketing efforts to lease the new Park Tower is gaining traction. With that, I'll turn the call over to Tony to discuss our financial results..

Thanks, Jamie. On a GAAP basis, our net operating income in the third quarter was $14.1 million. This represents a $400,000 decrease over the $14.5 million achieved in the second quarter.

The decrease was primarily a result of the disposition of two buildings at the AmberGlen property during the second quarter and a decrease in occupancy at Park Tower, due to the downsizing by a tenant, for which we received a $2 million return of the purchase price held in escrow that we will use to finance the first-generation TI and LCs associated with the vacated space.

As the San Diego acquisition occurred on the second to last day of the quarter, it had little impact on our results in Q3. We reported core FFO of $5.9 million or $0.19 per share. Our core FFO ended the quarter $500,000 lower than Q2, primarily due to the same reasons described earlier.

Had we closed the San Diego and Phoenix acquisitions at the beginning of the third quarter, our core FFO would have been $0.29 per share on a pro forma basis. Our third quarter AFFO was $5 million or $0.16 per share as capital and leasing costs were relatively light in the quarter.

Similar to core FFO, the acquisitions in San Diego and Phoenix will have a material impact to AFFO going forward and would have returned us to full dividend coverage in Q3 on a pro forma basis, have the acquisitions occurred at the beginning of the third quarter.

However due to the relative size of our portfolio and the impact of significant leasing in any one quarter, our AFFO numbers will continue to move around some from quarter-to-quarter. Our dividend yield based on our closing stock price at September 30th was a very healthy 6.8%.

Our leasing activity and capital expenditures are clearly laid out on pages 18 and 20 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 and Park Tower.

For the details we disclosed on page 20 under reoccurring capital expenditures. Our same store cash NOI growth for the quarter was 4.1% and 7.3% year-to-date.

The largest driver of the increase in the same-store NOI was from AmberGlen as year-over-year occupancy increased due to the lease to Kaiser Foundation in the prior year, which commenced paying rent late in 2016.

Earlier this year, we launched an ATM program through which we may have make placements of our common stock and Series A preferred stock from time to time. No stock was issued under the program during the quarter. We have continued to see attractive terms for debt.

During the quarter, we exercise accordion feature on our secure line of credit and increased our availability under that facility to $150 million Also as Jamie referred to earlier, we closed on a 10-year fixed rate financing for Mission City in San Diego, which further increased our liquidity.

The interest rate of that property financing was a very attractive 3.78%. Our total debt net of deferred financing cost at September 30th was $532.1 million or $523.2 million when deducting the non-controlling interest share of certain indebtedness. Our net debt to enterprise value was 48.9%.

Lastly, we are reiterating our prior guidance that we are anticipating fourth quarter 2017 core FFO in the range of approximately $0.29 to $0.31 per share. Due to the temporary occupancy decreases mentioned earlier by Jamie, we expect the results to trend towards the lower-end of this range.

That range assumes no further acquisitions, dispositions or capital leasing activity during the fourth quarter. That concludes our prepared remarks and we will open up the line for questions.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Craig Kucera with FBR. Please go ahead..

Hey, good morning guys..

Hey, Craig..

Wanted the circle back to your financing this quarter, you clearly relied pretty heavily on the line, are you anticipating doing any other permanent financing on either Sorrento Mesa or the Papago transaction?.

Hi, good morning Craig, it's Tony here. So, we did close the full San Diego acquisition with the line as you mentioned post quarter-end we did put financing on a portion of portfolio, but our intention is to leave the other two amounts on our line of credit.

And as a total it'll represent less than 20% of our overall indebtedness and that's up to the upper end of the range of which we want to keep in floating rate debt or on the line with the balance being 80% fixed rate debt. So, it's a level of comfortable with, but it's just about upper end of the range..

Got it.

And circling back to the Papago transaction, was that sort of a - can you give us some color there? Was that a transaction or maybe it got away from you and then came back or can you just give us a little bit color on how that was sourced?.

It was a transaction from a private seller and when we got a sense of valuations, we found it very attractive, Craig. There is a nice healthy discount to market rents, attractive cap rate and when you look at the quality of the build out, we think there is going to be very minimal cost going forward on re-tenanting and a great submarket of Tempe.

So that's what really drove us to do the transaction..

Got it. And one more for me and I'll jump back in the queue.

I know you have the expected move-outs in Denver, but could you talk about how activity is progressing in that market from a leasing perspective?.

Denver still has been a little slow, overall, there is currently about 4 million feet constructions, so we have seen some softness. We are in the process of doing our renovations at Plaza 25, which we expect to have done for Q3. We have made some good traction on some renewals there we were also working on a number of new transactions.

So, we think, as we get the renovation there, that one will be really well positioned. In terms of DTC Crossroads, that one we have the ProBuild move out, which was discussed previously, we've since restacked the building and we now have the top floor available with name and signage rights.

So, we think we've got a really solid block of space there to lease. And we're looking forward to driving that in 2018..

Okay, thanks..

Thanks, Craig..

Our next question comes from Bill Crow with Raymond James. Please go ahead..

Good morning, guys. Jamie, could you comment on the acquisition pipeline and thoughts on permanent financing and I understand you addressed the kind of third quarter financing. But as we look forward to additional acquisitions you are at the almost 8 times net debt-to-EBITDA.

So just thoughts on how you are funding the future growth?.

Sure, so in terms of acquisition pipeline, Bill I'll take that first. So, we closed 250 million to-date with the Tempe deal. We expect to close the sale of Boise in early '18, which is going to bring back another $86.5 million of proceeds.

We do intent to redeploy that, pipeline actually has been very strong, I mentioned on our last call, we saw volume of transactions available were a bit lighter than what it normally is. And sellers pricing expectations had really increased given the strong leasing markets.

So, we were a little conservative coming into this quarter, that seems to have reversed a bit and there is a lot more buying opportunities right now in general. Our pipeline is actually one of the healthiest been in a while we've got over $1 billion of transactions that we're currently reviewing.

So, from that standpoint, we think there is good opportunities. In terms of financing, I'll turn it over to Tony..

Yes, Bill just as a reminder, we do have Washington Group Plaza, which is under contract for sale that's $86.5 million we do anticipate that that will close in all likelihood somewhere towards the backend of Q1 in 2018.

And so, with those proceeds we will have an ability to either pay down our line also intent to redeploy that with another acquisition. The cap rate on that sale was quite low when we announced it and subsequently we have had some occupancy decline which Jamie described.

So, we are anticipating that when we redeploy the proceeds in a typical cap rate range, that that will significantly improve the net debt-to-EBITDA ratio in particular..

That's helpful.

And there is no worry that they could try and renegotiate the $86.5 million given the lower occupancy rate that's under contract?.

Yeah, that's under contract, we are in discussions with them regarding taking - getting access to certain space as they look to build out their foot print in there. So, we don't have any concerns that it won't be executed in Q1..

The buyer is a very credit worthy entity as well..

Sure. I assume the San Diego cap rate that you have disclosed that assumes the prop 13 adjustment to property taxes I assume.

And if so when does that hit so we can think about property tax costs going up in a quarter?.

It does include our expected property tax going forward, as far as timing, our expectation is its wrapped in, I can't tell you right now exactly when that is Bill, but we have factored the full adjustment within our cap rate. I'll get back to you on that..

That's it for me. Thank you, appreciate it..

Thanks, Bill..

Our next question comes from Vincent Chao with Deutsche Bank. Please go ahead..

Hey good morning everyone. Just sticking with Sand Diego here for a second, I think the seller had mentioned something about some roll downs hitting relatively near-term it sounds like you see a good mark-to-market opportunity.

Just curious reading about the more near-term rolls 2018 maybe, is there a markdown coming shorter term?.

So overall, rents are about 8% below market. You are correct, that there is one building that rolls the end of 2018 that we have currently assume will roll down.

I think overall not material and at the same time we think there is another opportunity for different building to potentially remeasure to current BOMA standards and I think that will probably offset a good portion of that..

Got you.

And just in terms of the - I know you have only taken ownership relatively recently, but in terms of the 88% occupancy level, I mean, what's the pipeline look like for you today? How is the interest in the buildings and when do you think that can get something over 90%?.

So early days, we have been very happy with the interest in some of the spaces, we are going to put some capital as we announced that the acquisition into Mission City, which we think will elevate the quality of some of the spaces there, there are some good prospects though that we are working on.

So, timing for us, I mean, that's probably not a '17, we do expect to make some headway in that regard in '18..

Okay. And then just on the land parcel that in San Diego you mentioned that and then also some land in Florida.

I guess at this point what the land is entitled and how far would you take the developments? I mean, would you look to get it entitled and then try to sell it to a developer or would you actually try to develop it on your own or with maybe a partner?.

So, there is three parcels we have. There is San Diego, and then there is two in Florida. San Diego did have entitlements in place. Time to launch development had been winding down in that respects. So, there is some work we're going to have to do to kind of reaffirm the permitting on that and the one in Tampa.

So, our expectation is we'll evaluate both potential sales of that as well as potentially build the suite and partnership likely with the developer. Early stage that's something we're going to really explore in 2018..

Okay. Thanks, I think all I had end..

Okay, thanks Vince..

Our next question comes from Barry Oxford with D.A. Davidson. Please go ahead..

Great, thanks guys for taking my questions. Most have been answered. But on the occupancy, you guys indicated that you feel in 2018 that you could move that to let's say around 93%.

Is that just because of market conditions or do you have some known movements that you know are coming to get a little color on why that occupancy is going to be drifting?.

Sure. So, we have a few really good blocks of space Park Tower, DTC Crossroads, Plaza 25 and FRP Collection. We do have a number of leases we're in discussion with. So, we're feeling that the market is very strong Barry. And given the quality of space that we have, we do think we're going to be trending towards those levels, towards the end of 2018..

Right.

And then on the other side, what about known move outs for '18? Are there any big blocks or is it just really '18 looks to be more along the lines of normal course of rollover?.

Hey, Barry, it's Tony. I can take that question. So, if you look at 2017, there is 1.6% a third of that is relate to the ProBuild space that we had at DTC Crossroads there will be another portion of that that's given back to us in October. And then beyond that there aren't any really large leases beyond that one space.

But that one piece will come back to us..

Great, thanks for the color guys..

Thanks, Barry..

[Operator Instructions] And our next question comes from Rob Stevenson with Janney. Please go ahead..

Good morning guys. In terms of the renovation stuff that you have going on plus the cost of lease some stuff up.

What are we looking at over the next 6 to 12 months in the portfolio that hasn't already been spent on some of the current renovations?.

So, we have a few different projects and we can speak to them. Park Tower it's really like a value add transition for us. We announced $11 million total spend, so there is approximately another $8 million on Park Tower in 2018. The other one that we discussed was Plaza 25 we announced previously it's a $3 million renovation.

That renovation really hasn't got underway at all of the plans and what not sort of ready to kind of if you will kind of swing a hammer now. And so, the bulk of those costs will start in 2017 and go into 2018. Those are really the two biggest capital costs that we have going into '18..

All right.

And then the commentary about getting the 88 and change occupancy up into the 90s, maybe what are anticipating at this point either just on a per square foot basis or an aggregate is going to wind in the TIs and leasing commissions they are going to take you there?.

Yeah, I can do that. So, for spec leasing, it's typically we're seeing, if you look at historically where our numbers have been it's kind of in the $20 to $30 TI range. I will say that we are seeing an uptick just generally in constructions cost. And so, it will be kind of the higher end of that range..

Okay.

And then from a standpoint of sitting here and told Washington Plaza closes, I mean, what are you without rationing up the leverage, what is the sort of dry powder to sort of make acquisitions between now and then?.

So, if you look at where we are at now, effectively we're at a leverage level that we're comfortable with. Saying that as you point out we do have $86.5 million coming back to us net of debt, it's just north of $50 million of net proceeds after we paid down the debt associated with that.

If you look at our line of credit, we did recently increase it to $150 million availability, so we do have room there. If we did want to temporarily close on an acquisition take it up higher than pay it down because we are conscious of trying to redeploy the proceeds as quickly as possible.

But any other acquisitions would be kind of just at front run the proceeds coming in from Washington Group Plaza..

I'll just add on to that Rob. So, we are intending to do a 10/31 on the sale. And so as far as acquisitions we have completed to-date we're in good shape to shelter..

Okay.

And then just lastly for me, I mean, back at the beginning of - I guess, at the beginning of October, the stock was sort of pushing $14, how attractive was it for - I mean, from an ATM standpoint did you guys think seriously about issuing at those levels to sort of help some of the leverage and fund the next deal at least partially or so, or where you guys blacked out or anything like that?.

Yes, this is Tony, just to give you some inside into our thinking around that.

We had at the time - at that time frame we were still looking to deploy the proceeds from the last offering and looking at the - we are - the ATM for us, we are restricted by the volume the daily volume on the stock and looking at the amount of proceeds we could have taken down on that.

While maybe somewhat meaningful they are not significant dollars and for those reasons we have decided that it didn't make sense for us to be tapping the ATM at that time and we haven't done so to-date..

Okay, thanks guys..

Thanks, Rob..

And as there are no additional questions, I'd like to turn the call back over to Mr. Farrar, to conclude..

Thanks everybody for joining today, we look forward to discussing our continued progress with you. Bye-bye..

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect..