Tony Maretic - Chief Financial Officer, Secretary and Treasurer Jamie Farrar - Chief Executive Officer and Director Greg Tylee - President and Chief Operating Officer.

Wilkes Graham - Compass Point Craig Kucera - Wunderlich Securities Rob Stevenson - Janney Amit Nihalani - Oppenheimer.

Good morning, and welcome to the City Office REIT Incorporated First Quarter 2015 Earnings Conference Call. At this time all participants will be in 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 now 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 supplemental information package.

Certain statements made today to discuss the company’s expectations are not based on historical facts may constitute forward-looking statements within the meaning of the federal securities laws.

Although, the company believes that these expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved.

Please see the forward-looking statement 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 may be made in the course of this call. The earnings release and a supplemental package both include a reconciliation of non-GAAP measures that will be discussed today to their most directly comparable GAAP financial measures.

I will review our financial results, after Jamie Farrar, our Chief Executive Officer discusses some of the quarter’s operational highlights. I will now turn the meeting over to Jamie..

Good morning. With me today is Tony Maretic, our Chief Financial Officer; and Greg Tylee, our President and Chief Operating Officer. I’d like to begin by stating that we are pleased with our first quarter results and the progress that we continue to make on a number of important fronts.

Our management team has been focused on advancing our acquisition strategy as well as executing against specific lease extension initiatives that we believe will create substantial value from within our properties. Starting with our acquisition strategy, we’ve continued to build our pipeline as well as securing several new opportunities.

In February, we closed on the purchase of Logan Tower which is located in downtown Denver. While this was a small acquisition at $10.5 million, we really like the fundamentals of the real-estate at Logan Towers below market rental rates. The property has been extensively renovated and it is well positioned within downtown Denver.

It’s situated in close proximity to the financial district, the State Capitol building, mass transit stations and quality restaurants and amenities. We acquired Logan for $150 per square foot, representing an 8% capitalization rate on year one projected net operating income.

At acquisition, the in-place rents were approximately $18 per square-foot which is $5 per square-foot or 22% below current market rates. Over time, we expect to achieve significantly higher net operating income from this property as the below market leases roll-over.

On our last conference call, we mentioned a property that we previously had under contract but then decided not to pursue further as a result of our due diligence. I’m pleased to report that we successfully resolved this issue and we recently announced our entry into a purchase and sale agreement to acquire Superior Pointe in the Denver market.

While the acquisition is subject to customary closing conditions, most have already been met and we expect to close on the transaction in June. I think Superior is a great case study relating to our disciplined purchase process.

After being awarded the transaction late last year, our engineers determined that significant repairs to the surface parking lot were required. At the time, we were unable to agree upon a purchase price reduction with the seller to cover these repairs, so we elected to drop the deal.

Subsequently, the seller conducted their own investigation and concluded that our proposed repairs were reasonable and they agreed to fund them through a purchase price adjustment.

Bottom line, we negotiated the acquisition Superior at a 7.5% going in capitalization rate after accounting for the improvements to the parking lot that we intend to complete. We expect to close Superior in late June and intend to contribute it as additional security for our operating lines.

Superior is 149,000 square foot Class-A multi-tenant office building that is 90% occupied. The purchase price is $25.8 million or $173 per square foot which we think is good value for a 2000 vintage property with very attractive attributes. Specifically Superior has strong in-place cash flow from a number of credit tenants.

The property’s elevated location just off U.S. 36 Highway provides great mountain views which are a strong leasing amenity. It’s situated close to the Superior marketplace Shopping Center which has numerous restaurant and retail amenities as well as MaceRich’s Flatiron Crossing, a regional shopping mall with sales per square foot of over $540.

Superior’s in-place gross rents are approximately $23.30 which is about $1.20 below current market rental rates. However, it’s located near downtown Boulder, which has been achieving enormous rental rate growth. Today, vacancy levels are in the 5% range and rental rates for premium Class-A products is in the high-$30 range.

We believe that Superior’s amenities, unobstructed views and proximity to downtown boulder position it very well over the long-term. In terms of our future growth, our current transaction pipeline is over $200 million in a number of our key target markets including Dallas, Denver, Orlando, Phoenix, San Antonio and Tampa.

These markets continue to lead the country in terms of job and population growth. And we believe they continue to offer an attractive buying dynamics. The acquisition stage of each of these deals differs in terms of the status of their sale process as well as the level of work that we have completed to date.

We believe that the quality of our pipeline remains attractive and we are well positioned to secure a number of these properties. The purchase valuations have a fairly wide range however the in-place cap rates generally continue to be in the $7 and $7.75 range. Turning to City Office REIT’s operating performance during the quarter.

Results were consistent with our expectations. And we completed 101,000 square feet of new and renewal leases. At quarter end, our portfolio was 93.7% occupied which is a 30-basis point improvement to year-end. During the first quarter, we experienced limited lease rollover.

We renewed 9,000 square feet of space that commenced during the quarter plus an additional 78,000 square feet of early renewals. The majority of the early renewals relate to our Portland property where we proactively saw the early extension of Planar Systems’ 72,000 square foot building. Their lease would have originally expired on October 31, 2016.

And during the quarter, we secured an extension until January 31, 2022. The terms of this extension included a 20% increase in base rental rates over the expiring rents, increasing at 3% annually.

We were pleased with the Planar, results and remain focused on creating substantial value for our shareholders by materially extending lease rollover at other properties. Turning to another example, on our last call, we mentioned the upcoming lease rollover at our Boise property.

As a reminder, Acorn Technology Corporation currently occupies approximately 143,000 square feet and has a December 31st 2015, lease expiration. At this time we continue to be unable to provide any specific guidance due to the status of negotiations which are at a very advanced stage but are not yet complete.

We remain highly confident in our ability to conclude a lease and if we are successful, we will press release specific details at that time. As I mentioned previously, our focus remains on achieving long-term leases with strong credit tenants. I will now turn the call over to Tony Maretic, our Chief Financial Officer to discuss our financial results..

For the first quarter, we reported core FFO of $4 million or $0.26 per share. Our core FFO adjusts NAREIT defined FFO for acquisition fees and expenses, change in the fair value of the earn-out and the amortization of stock-based compensation. On a GAAP basis, NOI was $7.1 million this quarter versus $6.4 million in the fourth quarter.

Two thirds of the $750,000 increase from the fourth quarter is attributable to the additional NOI contributed by the Logan Tower acquisition in the quarter and having a full quarter of operations for Florida Research Park. The remaining increase was due to improved operating performance from the existing portfolio.

The existing portfolio was tracking slightly ahead of budget primarily due to lower operating expenses as R&M expenses in particular were lower than budget which we expect are timing differences which will even out by the end of the year. Nonetheless, we are very pleased with the operating performance from our existing portfolio.

G&A also continues to track our budgets with small variations due to the timing of expenses related to our Annual Meeting which will appear in Q2. Similarly, the other components of our core FFO are tracking our budgets and we ended the quarter $750,000 higher in Q4 on a sequential basis.

The growth in our core FFO was more than offset by the increased weighted average share count due to our equity offering in December of last year despite having only put a small portion of the proceeds of that offering to work in the quarter. Our first quarter FFO is $3.4 million or $0.21 per share.

The leasing commissions in the quarter include $440,000 for the Planar, lease extension. As Jamie described, this lease for 72,000 square feet extends the maturity of the lease to 2022. Our leasing commission per square foot per year, are $1.17.

When you exclude this lease commission, our AFFO for the quarter would have been $3.7 million or $0.24 per share. The chiller replacement project at Central Fairwinds, which we noted on our last call was recently completed after our quarter end in April.

The estimated remaining cost of approximately $270,000 associated with that second phase will reduce second quarter AFFO by approximately $0.02 per share. We expect a savings in annual operating expenses to be approximately 8% of the estimated $540,000 full project cost.

From a liquidity standpoint, we had cash of about $24 million and authorized undrawn credit facility of $30 million at March 31, 2015, which provides us ample liquidity to fund our acquisition strategy going forward. Additionally, we have $9.2 million of restricted cash that is available to fund future TIs, LCs and capital projects.

Our total debt at March 31 was $189.7 million or $182.4 million when deducting the non-controlling interest share of certain debt. Our net debt enterprise value was 44%. Our conservative strategy of building a stable portfolio with predictable growing cash flows extends to our capital structure.

All of our debt is fixed rate with a weighted average interest rate of 4.3% and a weighted average maturity of six years. Lastly, with results tracking our budgets, the company is not providing any change to its previously announced guidance for 2015.

That guidance covered the net operating income of the portfolio we owned at December 31, 2014 on cash and GAAP basis which according to our definition of NOI is total revenues less property operating expenses, as well as our full year G&A estimate.

We will continue to provide the expected full-year cash NOI yield with each acquisition announcement in 2015. That concludes our prepared remarks. And we are now happy to open up the lines for any questions.

Operator?.

[Operator Instructions]. First question comes from Wilkes Graham from Compass Point..

Hi, good morning. Couple of questions. First, I noticed that the NOI margin in the quarter went up about 200 basis points off the fourth quarter even 300 basis points off of last year, looks like property operating expenses as a percent of NOI came down.

Is that a sustainable 71% NOI margin going forward?.

Hi Wilkes, it’s Tony here. Thanks for the question. As mentioned on the call, we did have a slightly higher, we were tracking ahead of our budgets, I mean, a big portion of that amount is just really the timing of expenses, so I don’t expect it to remain that high throughout.

R&M expenses across a number of our properties were lower than we budgeted, and I do think that is a matter of time expense and it will catch up later in the quarter. And so, as we mentioned on the call, we’re not updating our guidance and we still feel good about the guidance we previously issued..

Okay, fair enough.

And can you just say again Tony, how much of the leasing commissions was the plan or lease?.

So, the leasing commission plan or lease is about $440,000 of the amount, so it’s a bulk of that number this year..

Got it, okay.

And then, you mentioned that you got $200 million pipeline, I think maybe you can just remind us maybe how much buying power you have left on your current equity base, and then maybe a short comment on the two RS3s that were filed earlier this week?.

Sure, I can answer those questions as well, Wilkes. So, I mean, I think in the last call we talked about acquisition capacity being around $110 million was the number we threw out. And I think we still feel good about that number. We’re going to use about $25.8 million of that for the Superior Pointe acquisition which we announced.

So that will leave us about $85 million capacity for future acquisitions. And then with respect to your second question on the Shelf, thanks for asking that question. I think we indicated some time that we were intending to file a Shelf Registration Statement as soon as we’re eligible. And we became eligible in May. So we filed that earlier in the week.

Really, all that allows us to do is just raise future capital in a much more efficient basis as it significantly reduces the lead-time and it’s the volume of filing with the SEC, when a company decides to raise more capital. So, the Shelf will be, maybe used for up to three years after its being declared effective by the SEC.

And I just want to say that this was more of an administrative process and not necessarily an announcement that we’re raising capital today. And we talked about there is still significant dry powder. And to answer your question, I should also just mention that we also filed a resale Shelf for the second Citigroup.

We had a requirement to do so as was outlined in our initial IPO. And so we’re not aware of any intention on their part of the selling but we just feel the obligation by filing at the same time, and given the similarities between the resale shelf and RS3 statements is much more efficient to do it all at the same time and get that out of the way..

And just to remind me, the last capital raise you did made yourself eligible from a size perspective but then you had to file your 10-K afterwards?.

Yes..

In order to have the ability to file the Shelf is that right?.

Exactly. And the rule that we fell under was 12 months after our IPO and our IPO was in April, so May 1 we filed..

Got you, okay. Thanks a lot..

Thanks Wilkes..

Thanks Wilkes..

Next question comes from Craig Kucera from Wunderlich Securities..

Hi guys, good morning..

Hi Craig..

Wilkes had hit most of my questions, but I did want to kind of get back to the acquisition pipeline more specifically just so I make sure I’ve been thinking about this the right way, $7 to $7.75 cap rates.

What you guys think is going to fall the second quarter versus maybe slipping into third quarter?.

Sure Craig, Jamie here. So, looking at timing we announced recently Superior. Closing for that is probably the end of June and that just gives you an indication of when we announce ongoing part, the time-period it takes to affect a closing. So looking at our pipeline there is different stages we’re at.

In some cases we’ve been ordered a deal and we’re working through our due diligence as we speak. So, I would look at it at early in the third quarter is the most likely timing, maybe one of those could be accelerated to the very end of the second quarter. But probably early in the third quarter is the best assumption..

Got it. And just to go back to the commentary on operating expenses, it looked like there was some seasonality but it sounds like it’s really more of a timing perspective.

So, from the standpoint of looking at kind of I guess, maybe annual versus quarterly, when we think about NOI margins, should we look at it as being sort of more flattish with all of 2014 versus -- where we were in fourth quarter versus kind of raising our NOI expectations and margins for this year?.

Yes. I mean, I think in our case for the first quarter was less to do with necessarily seasonal expense related, weather or what not and more to do with just the timing of R&M expenses. And so, I think the statement you made with respect to assuming a more flat would be a more reasonable assumption, yes, I’ll agree with that..

Got it, okay. Thanks. I’ll get back in the queue..

Thanks Craig..

Thanks Craig..

[Operator Instructions]. Next question comes from Rob Stevenson from Janney..

Good morning guys..

Hi Rob..

With the Logan Tower, now Superior Pointe acquisitions in Denver, how do you look at your exposure to that market relative to the overall portfolio? If the next two or three best deals you see in Denver, do you have any qualms about over-waiting the portfolio into that market for a loss?.

It’s a great question, Rob. So, we obviously look at various markets and maximum exposure. Having said that in Denver, it still remains at the top of our list as far as fundamentals and where we see attractive opportunities. So, we do look at exposure to various markets and there is still a little bit of capacity remaining within Denver.

Now, the way we’ve been looking at rolling out our strategy over time is building some scale within certain markets. So you take Denver as the case study, we own in the Cherry Creek area, we have an asset in the downtown market. We have an asset in Greenwood Village, with Superior Pointe. We’re going to be covering off the Boulder market.

So we’ve got pretty good coverage. We still like the Tech Center would be one of the other ones that we’ve been looking at closely. That probably we probably have capacity for one more in Denver, until we further build out other markets.

But using a strategy like that Rob, where we built some scale and then we can really zero in on our efficiencies within that market and replicating that across other markets, here is what our long-term plan is.

So, we’re very happy with where our exposure is in Denver, and we still see great opportunities there but we’ll be careful not to greatly over-wait..

Okay.

Is that going to be managed, is the new acquisition going to be managed by the same people managing your other assets there?.

Yes..

Okay. And then, you guys have had some good success in renewing leases.

When you look at the remainder of the ‘15 and ‘16 lease expirations, of what’s remaining, how many and what type of square foot are we looking at in terms of guys that you know at this point are highly likely not to renew with you versus guys that you’re still engaged with?.

So, if you look at kind of the major ones we mentioned Acorn, which would be the largest lease at the very end of 2015. So, that space we commented where we’re at as far as lease negotiations and we had worked in very good shape there. Moving across the portfolio, there is one other large space in Portland.

At the end of the year we’ve got Cascade Microsystems, they for sure are vacating the space as dark as we’ve consistently said but very attractive space. We are in fairly advanced discussions with one tenant there. So, hopefully we can move that along in the coming months ahead. But that’s very highly lease-able space.

And then the only other really major role outside of that is the Dun & Bradstreet lease and Allentown, which is 178,000 feet at the end, November 31, 2016. So that still has quite a bit of time left on the lease but we have been very proactive in trying to advance discussions, we said consistently we’re looking for long-term extensions.

So, I think Dun & Bradstreet are thrilled with the space. They’re fully utilizing it today. So we think we’ve got a very good chance of being proactive there as well..

Okay.

And then just last question, on the $200 million pipeline that you’re currently looking at, is there anybody in there that’s thinking about or looking to take equity back?.

We’ve had some dialog with that in the past, but then it becomes very confusing in a discussion about shareholder rights and other things they wanted. It’s much easier for us to focus on cash purchases, so they’re similar to other alternatives.

Having said that, there have been a few situations in the past where there has been, tax reasons or other advantages to do that. So, I think that may happen over time but the easier transaction clearly is cash unless we can somehow get an advantage by helping the seller with an issue that they have..

Okay. Thanks guys, appreciate it..

Thanks Rob..

Next question comes from Amit Nihalani from Oppenheimer..

Hi, good morning..

Hi, good morning.

How are you?.

Good.

Going back to the $200 million pipeline, how much do you anticipate closing on in 2015?.

So, we’ve consistently said that our acquisition expectations, is probably around the $200 million mark, $100 million of equity, $100 million of debt. So, I think looking at where our pipeline is today, what we’ve announced and closed in the year and kind of our expectations, we can easily achieve that and we hope to exceed it..

Got it.

And I was just looking for some more color on the leasing on, specifically are you able to provide leasing spreads?.

Hi Amit, this is Tony here. So, in terms of leasing spreads, we only had assets, the data points in the quarter are fairly small. Planar is by far the largest amount. And we already announced that that one there was at 20% increase over their existing terminating lease, which translates into about $2.50.

The remaining small leases were effectively a wash..

Got it, okay. Thank you..

Sure..

And there are no more questions. I’d now like to turn the call back over to Mr. Farrar, to wrap up..

Thank you. So I’d like to conclude by stating that we remain very optimistic about our target markets and our ability to create value for both acquisitions and from the specific initiatives that I mentioned earlier. Now we believe that we’ve got a solid pipeline of acquisition opportunities and we’ll continue to generate strong returns.

Thanks for joining today. We look forward to communicating our progress with you..

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