Good morning, and welcome to the City Office REIT, Inc. First Quarter 2024 Earnings Conference Call. 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. Mr. Maretic, you may begin. .

Good morning. Before we begin, I would like to direct you to our website at reit.com, where you can view our first quarter earnings press release and 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..

While 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 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 obligation to update any forward-looking statements that may be 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 call over to Jamie. .

Good morning. I'd like to start with some observations on the office sector fundamentals and then move to the highlights since our last call. Overall, the office sector is trending more towards equilibrium. Both our own tracking and national data reflects an increase in tenant demand. For the first quarter of 2024, JLL reported that 70% of U.S.

office markets experienced an increase in tenant demand as compared to the prior quarter. Leasing has not recovered to pre-pandemic levels. Active office requirements have increased 28% nationally year-over-year according to JLL. .

On the supply side, the sublease vacancy rate has continued to decline and new sublease additions have dropped off from a year ago. New construction has also essentially ground to a halt, with the lowest quarterly volume of new projects breaking ground on record.

Also, there has been an increase in conversions or demolition of obsolete buildings and 2023 had the highest [ demo ] buildings converted on record. This dynamic appears to indicate a long runway of net improvements to the supply-demand equation although we expect the pace of improvement to be gradual..

We see these trends playing out within our own portfolio. During the quarter, we executed 191,000 square feet of new and renewal leases. Within the 110,000 square feet of new leasing, we executed on 2 larger leases. At Block 83 in Raleigh, we completed an 11-year 29,000 square foot lease with a strong financial tenant for the last full floor vacancy.

Block 83s best-in-class amenity package and high-end suites continue to attract strong demand..

At our FRP Ingenuity Drive property in Orlando, we signed a 10.5-year, 43,000 square foot lease with a health care-related tenant. As a result of this and prior new leasing, a healthy 172,000 square feet or 3% of our portfolio has signed leases that will commence in subsequent quarters..

Our leasing pipeline continues to be strong with a number of larger potential new tenants evaluating spaces across our portfolio. The trend of shorter-term lease renewals in place seems to be gravitating to longer-term solutions, which is a positive for the industry. Tony will discuss our revised estimates for our 2024 guidance momentarily..

These reflect current discussions with WeWork who are tenants at 2 of our properties at quarter end. After engaging in extensive negotiations with the management team at WeWork, we believe we have an agreement in principle that would have them continue in both of our buildings, but with a smaller footprint when they emerge from bankruptcy.

This expected outcome has not yet been finalized in a lease [indiscernible]. If completed, we would get back one floor at the terraces in Dallas' Preston Center submarket early in the third quarter and one floor back at Block 83 in Raleigh in the fourth quarter..

The terraces in Dallas is currently 100% leased, and we expect high demand for the 25,000 square foot premium full floor. Similarly, with the recently signed leases at Block 83, 98% of the office component is now leased and therefore, we expect high demand for this 28,000 square foot full floor space.

The conclusion of these discussions would put an end to the WeWork uncertainty and reduced them to just over 1% of our portfolio. Ultimately, when we have backfilled these spaces, our rent rolls will be further diversified and we expect that would result in a net increase in overall property value..

Going forward, as we look to best position ourselves in this environment, we've commenced certain investments that will elevate key assets and help us to grow net operating income. We're fortunate to have the bulk of our overall value invested in leading cities that are primed for continued employment growth.

While many of our assets are newer vintage are recently renovated, we have a handful of quality properties that required a refresh to optimally position them. This opportunity aligns with tenant demands, and we've already are well underway making these improvements..

The first phase of our Pima Center renovation in North Scottsdale is done, and we're now constructing the lobby amenity upgrade at the second building, which we expect will conclude by the end of the summer.

Our well-located 5090 property in Phoenix's Camelback Corridor has kicked off its renovation construction, and we anticipate it will be completed by the fall..

Further, we have now completed the renovation plan for our Waterfront City Center property in downtown St. Petersburg and initiated construction, which is starting in May and is expected to conclude by early 2025. And last, we're finalizing plans for an enhancement of 2525 McKinnon and Uptown Dallas, which is scheduled to commence later this year..

We anticipate investing approximately $9 million into these 4 projects, of which we've already spent approximately $2 million at quarter end.

At the conclusion of this renovation program, the vast majority of City Office's portfolio value will reside in new or fully renovated properties that are positioned for long-term leasing success and cash flow maximization.

We anticipate that leasing execution will be enhanced by these moves, and we are setting ourselves up for a strong 2025 and beyond. With that, I'll hand the call over to Tony to discuss financial results in more detail. .

Thanks, Jamie. Our net operating income in the first quarter was $26.7 million, which is $200,000 lower than the amount we reported in the fourth quarter of 2023. NOI was marginally lower in the quarter as a result of lower occupancy. We reported core FFO of $13.5 million or $0.33 per share for the first quarter.

This was the same amount as in the fourth quarter..

Our first quarter AFFO was $9.1 million or $0.22 per share, which resulted in a well-covered dividend this quarter. The largest impact to AFFO was $600,000 of tenant improvement costs at Park Tower in Tampa. We also continue to invest in our spec suite and vacancy conditioning program, although at a slower pace than in 2023.

The total investment in spec suites and vacancy conditioning in the first quarter was $400,000..

Moving on to some of our operational metrics. Our first quarter same-store cash NOI change was negative 1.0% were $200,000 lower as compared to the first quarter of 2023. Excluding Cascade Station in Portland, the rest of our same-store portfolio was a positive 0.8%.

Our portfolio occupancy ended the quarter at 83%, including 172,000 square feet of signed leases that have not yet commenced, our occupancy was 86% as of quarter end..

Our total debt as of March 31 was $668 million. Our net debt, including restricted cash to EBITDA, was 6.6x. As of March 31, we had approximately $97 million undrawn and authorized on our credit facility. We also had cash and restricted cash of $43 million as of quarter end.

As far as our debt maturities in 2024, we have 4 scheduled maturities for a total of $102 million principal balance..

The liquidity in debt markets for new office loans remains challenged. And as such, the priority is working with existing lenders. The first maturity we have discussed on prior calls. The $21 million nonrecourse property loan at our Cascade Station property in Portland matured earlier this week on May 1.

In December 2022, we recorded an impairment in that asset's value that effectively rolled off our equity value at that time..

We are negotiating the terms of a deal and new transfer and continue to expect that we will dispose of the property to the lender during the second quarter, which would reduce our total debt by $21 million. This assumption has already been reflected in our prior guidance..

At Central Fairwinds in Orlando, we have a property loan with a $16 million principal balance that matures in June. We have come to terms with the lender on a 5-year loan extension. We intend to enter into a swap agreement at closing that will effectively fix the rate. We expect closing to occur in May.

Based on today's interest rates, the fixed rate on the loan is expected to be in the high 7% range..

At FRP Ingenuity Drive in Orlando, there is a property loan with a balance of $16 million that matures in December. As Jamie mentioned, we signed a 43,000 square foot lease at this property in the first quarter, which will take the occupancy back to 100% at that property when the lease commences.

That lease execution is very positive for the prospects of a loan extension, and we continue to advance discussions..

Finally, we have a $50 million corporate term loan that matures in September, which is part of our $375 million credit facility. We continue to have discussions with our lending group and expect to be able to provide an update on our next call.

Lastly, we are reducing guidance to reflect the impact of the WeWork expected downsizing that Jamie described. The impact of the WeWork downsize on core FFO guidance is approximately $1.8 million or $0.04 per share in 2024. Approximately $0.02 of this reduction relates to the noncash write-off of this tenant's straight-line rent..

We have updated the respective ranges of our net operating income, core FFO, same-store and occupancy to reflect the impact of this change in assumption. That concludes our prepared remarks and we'll open the line for questions.

Operator?.

Our first question today comes from the line of Rob Stevenson with Janney. .

Jamie, in terms of WeWork, given the quality and occupancy of those 2 assets, how did you think about entering into negotiations with them and coming to this solution versus just biting the bullet, taking back the space now and not having to deal with this again when they're having issues in a year or 2, et cetera?.

So that required a lot of thought and analysis. I mean it's a good question. The way we look at it is I think it's a net negative today having as much space as we do in these 2 premium buildings. And we came to a consensus with them where in Dallas will take back one floor.

They're going to be really full on the remaining floor and in a good spot from their standpoint..

Same story in Raleigh, where we take back one floor, they'll be extremely full on the remaining 2 floors. And for us, we have no vacancy remaining in those buildings. Rents are good. We've just leased 2 full floors basically in Raleigh in the last 6 months. The highest rents in our entire portfolio or at The Terraces building in Dallas.

And so we're feeling really good there. We have tenant prospects to potentially expand into one of those spaces already. And so we're setting ourselves up really to diversify the overall rent roll, and I think it's a win for everyone. .

Okay. So Cascade Station goes off the books at some point here in the second quarter. How are you guys thinking about incremental asset sales? And what you could achieve pricing-wise on that, given that the incremental debt cost? I think Tony said on the Central Fairwinds extension is going to wind up being high 7s.

So I mean, is that something that's still on the table? Is it just not there market-wise for the assets that you'd want to sell within the portfolio? How should we be thinking about the asset sales situation these days?.

Yes. From our standpoint, over time, we'll look to prune our portfolio and exit when it makes sense. Near term, as you said, the markets are extremely illiquid. The major driver to that is it's very difficult to get financing.

So the way we're looking at it is position our assets so that our best assets in our portfolio are positioned to win leasing, be careful on kind of the bottom few assets that are challenged and position those to monetize at the right time.

And then the ones in between be careful and prudent position to try and create value and over the next few years when the markets open back up, which they inevitably always will, look to pare back the portfolio and really focus on our best positioned assets. .

Okay. That's helpful. And then last one for me.

Tony, any incremental move-outs of note that we needed net against the leasing you did here in second -- in the first quarter when we're thinking about net occupancy towards the back half of the year and into '25?.

Sure. So maybe I'll just speak to really quickly our expiries over the next 4 quarters. We do have 4 tenants that are of significant size over 30,000 square feet that role. One is an expected renewal, which we talked about before, at FRP Collection that occurs in Q2.

The other that is unknown at this point is that DTC Crossroad which is in early 2025, that's 30,000 square feet. And then we do have 2 no vacates. I think we've talked about, one about both that are occurring both in Portland One has already occurred at Cascade Station, which is related to that issue with the debt.

And then the other is we have a 72,000 square foot tenant at AmberGlen that is expected to vacate in Q1 2025. .

Okay.

So nothing beyond what the stuff that you've talked about before at this point?.

Yes, nothing new. These are all the ones we've spoken to in the past, and I should highlight they're offset by the known move-outs, which we have signed of 173,000 square feet that will take occupancy over the next 3 to 4 quarters. .

The next question comes from Barry Oxford with Colliers. .

Great. Tony, you had mentioned in your prepared remarks that the spec suite investments are slowing.

Is that going to be a continued trend or so you're going to be doing less of them in the future? Or is this just kind of a point in time?.

I think it's more at a point in time. It was a really big focus of ours, Barry, in 2023. And we focused on that. We had a higher spend, and we spent just over $7 million in 2023. So for 2024, we're projecting spending about half the amount that we did in 2023, which is kind of returning to a more normalized level.

So I think you'll see more spend along the lines what you saw in Q1 going forward. .

And just to add on to that, Barry. So today, we've got about 80,000 feet of spec across our inventory. We've got about another 16,000 that will complete by the end of the year. So call it, 100,000 feet, it's just under 2% of our portfolio. And that's very impactful because our own estimates are that will generate more than $2 million of NOI.

So we want to see that get leased in some progress, and then we'll revisit the remaining inventory. .

Are you still achieving the rents that you had anticipated when you started the work?.

Yes. Rents have generally held pretty well across the portfolio. So we're pleased there. .

Okay.

So you're still getting the return on investments that you had penciled out to begin with when it comes to the spec suites?.

Correct. We just feel we've got enough in inventory right now. We want to see that get leased and then we'll reassess at that time. .

Right. No, and I have no objections to that. That seems like a smart move. .

Our next question comes from the line of Aditi Balachandran with RBC Capital Markets. .

I think just a more general office-based question.

How are your discussions with tenants going? What exactly are in the Q4? And how long is that taking?.

Thanks for the question, it's Jamie. I would say in general, and you'd see this in the results from our leasing last quarter. So the last few years really has been about tenants wanting to figure out their space, some downsizing. And those that renewed generally wanted to have shorter-term renewals while they figure things up.

And I'd say in most of our markets, that's trending to tenants wanting to have a longer-term solution, which obviously, for us, is a big positive..

There still is. We've worked through a lot of the downsizing across our portfolio. Over the next couple of years, there still will be some more of that but we're seeing it being offset by tenants looking to whether it's relocate in buildings or into markets on a longer-term basis.

So I'd say from our own feeling, trends are much better than they were a year ago. We're seeing utilization mid-week really pick up by our tenants, Monday slow, Friday is very slow, but midweek is actually quite good. So trends are moving in the right direction. .

The next question comes from Upal Rana with KeyBanc Capital Markets. .

So given the occupancy guidance that you anticipate to kind of trend higher for the remainder of the year. Could you walk us through some of the moving pieces? Because it looks like the 2 floors for WeWork downsizing hasn't taken place yet.

And why do you anticipate them to consolidate? And do you see 2Q to be the floor in occupancy here?.

So good question. So let's talk about those. So we are expecting the 2 floors when WeWork, as Jamie mentioned, those agreements have not been finalized yet.

This is based on the outline of can -- and what we anticipate is that the floor at the tariffs would come back midyear, whereas the floor at Block 83 would be end of the year, but both of those would come back to us before the end of the year, and we are not assuming a lease-up just given they're going to be -- when they're received in the balance of the year.

.

So we're expecting that, that will have an impact on occupancy on year-end occupancy. Beyond that, the 170,000 square feet of new -- leases that we have signed that don't take occupancy, all of that is expected to take occupancy before the end of the year. It may slip a little.

This does include the 2 leases that Jamie highlighted in his prepared remarks at FRP Ingenuity and Block 83..

Both those leases have Q4 starts -- and so we should see the positive impact of that leasing on year-end occupancy numbers. And so to your question, yes, we do expect that this represents the floor in terms of occupancy for the year. .

Okay. Great. That was helpful. And then last quarter, you mentioned backfilling Block 23s WeWork space with another co-working tenant, which could commence in early '25.

Is this the case? Or has it changed?.

Yes. So we're still advancing discussions there. It's likely if we're going to pursue what the part of the space. So -- we've got a full floor just stepping back in that building, call it, just under 50,000 feet.

Half of it is kind of what we're looking at in co-working, which is already well built out from the WeWork space and then looking at breaking up the balance and do a couple of smaller suites, which is really what's being leased in the market. And so I think -- we'll have a better view on timing and whatnot on our call next quarter. .

Okay. Got it. And one last one for me. with Cascade Station on its way out, how do you view the AmberGlen property with upcoming exploration and its next debt maturity is going to be in '27.

So maybe what are your views on AmberGlen and maybe Portland as a whole?.

I'd say Portland as a whole is our most challenged market, and that translates down to what your views are on individual assets and leasing prospects. So we're being very careful there. It isn't a good location within the sunset corridor, but it is an extremely challenged market. .

We have no further questions. I'll turn the call back to Jamie. .

Thanks for joining today. As always, please feel to reach out if you have any follow-up questions. Goodbye. .

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines..