Anthony Maretic - Chief Financial Officer, Secretary and Treasurer James Farrar - Chief Executive Officer.

Robert Stevenson - Janney Montgomery Scott LLC Craig Kucera - Wunderlich Securities. Inc Amit Nihalani - Oppenheimer & Co. Inc Kenneth Billingsley - Compass Point Research & Trading, LLC.

Good morning, and welcome to the City Office REIT Incorporated Fourth Quarter and Full-Year Ended 2015 Earnings Conference Call. At this time, all participants are 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 to you to Mr. Tony Maretic, the company’s Chief Financial Officer, Treasurer and Corporate Secretary. Thank you, Mr. Maretic. You may begin..

Good morning. Before we begin, I would like to direct you to our website at cityofficereit.com, where you can download our fourth quarter earnings press release and a supplemental information package.

Certain statements made today to discuss the company’s beliefs or expectations are that 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 statements disclaimer in our fourth quarter earnings press release and the company’s filings with the SEC for factors that could cause material differences between forward-looking 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 the 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..

Thanks for joining today. I would like to start by saying that we are very pleased with the company’s performance for both the fourth quarter and our full fiscal year. We delivered impressive growth and our net operating income as well as our per share core FFO and AFFO.

These accomplishments are particularly impressive given the choppy capital markets during 2015, which were dominated by concerns related to economic and financial conditions throughout Europe and China, falling commodity prices, rising interest rates in a slowing economy.

Notwithstanding, the negative capital markets, our focus was concentrated on providing cash flow growth and sourcing attractive property acquisitions. Our targeted cities continue to experience improving demand for space, rising market rents and higher occupancy.

These positive trends support our confidence at selecting high growth markets and buying well located real estate with strong tenants and low in-place rents, we’ll continue to create value for our investors. The success of the strategy has been reflected in our results.

Our fourth quarter was our strongest quarter yet and we continue to achieve both higher portfolio net operating income as well as rising per share cash flow metrics. For example, our portfolio’s fourth quarter net operating income increased to $10.9 million from $6.4 million for the fourth quarter last year.

This increase was primarily attributed to acquisitions, higher rental rates and improved occupancy. Same-store net operating income increased an impressive 12.7% over the fourth quarter of last year reflecting the value creation from our existing portfolio.

Core FFO was $0.37 per share in the fourth quarter, a 42% increase over the same period of last year. Similarly, AFFO was $0.28 per share, a 22% increase over the fourth quarter of last year. Well any dividends we declared or at the discussion of our Board, we remain confident that our $0.23.5 per share quarterly dividend remains well covered.

We expect that our coverage levels will continue to grow over the long term as we benefit from contracted escalating rents as well as our below market in-place rents. Moving to leasing activity, 2015 was an exceptional year for us.

In total, we completed a remarkable 565,000 square feet of new and renewal leases and ended the quarter at a healthy 94.8% occupancy level. These leases included 10-year deals with the Dun & Bradstreet Corporation, St. Lukes Regional Medical Center and Kaiser Foundation Health Plan.

However, while these leases have created substantial long-term value for us there is an upfront investment that'll occur during the first two quarters of 2016. During this time our FFO, core FFO and AFFO will temporarily operate at lower levels until later in the year when these tenants take occupancy and rent commences.

Tony will reflect on this in a few minutes, so you can clearly understand the impact in 2016 and where these levels will stabilize by the end of the year. On our last earnings call, we indicated that we had engaged CBRE to explore opportunities and commence marketing of our Corporate Parkway property in Allentown Pennsylvania.

During the quarter, we signed a non-binding contract to sell the property. While the transaction could close as early as the second quarter of 2016, numerous conditions and uncertainties remain and there could be no assurance that the transaction will close.

In terms of issuing equity, a question that we're frequently asked, we continue to believe that over the long-term growing our shareholder base, improving our liquidity and buying additional high quality real estate will benefit the company.

However, capital markets have been extremely volatile and our share price has been trading at a steep discount. Given these factors, we remain focused on finding opportunities to create value internally. This was a major focus for us during 2015 and I think the pace of improvements in our quarterly per share results really demonstrate success.

For your own reference, we posted on our website an updated investor presentation and it provides a great summary of the quarter-by-quarter trends across the number of important metrics. Finally, before I hand the call over to Tony, I would like to touch upon the recent changes in our management structure.

On February 1, we completed the previously announced internalization of our management team, which is viewed as a best practice by many REIT investors. The feedback received from shareholders has been overwhelmingly favorable and we're confident that it positions us positively as we build the company.

I will now turn the call over to Tony Maretic to discuss our financial results..

As Jamie mentioned earlier, on a GAAP basis our net operating income continues to grow and reach its highest level in the fourth quarter at $10.9 million. This represents a $1.8 million increase over the $9.1 million achieved in Q3.

$1.2 million of the increase is attributable to the acquisitions of 190 Office Center and Intellicenter, which were both acquired late in Q3 on September 3. $600,000 of the increase was attributable to our existing portfolio of which $385,000 related to an unspent lease incentive and a lease departure payment for leases which expired on December 31.

This represents a same-store sales quarter-over-quarter NOI increase of 8.6% and a healthy a 3% when excluding the one-time unspent lease incentive and departure payment. We reported core FFO of $5.9 million or $0.37 per share.

Our core FFO adjust NAREIT defined FFO for acquisition fees and expenses, change in the fair value of the earn-out, cost internalization and the amortization of stock based compensation.

Our core FFO ended the year ahead of our budget and we ended the quarter $0.8 million higher in Q3 on a sequential basis as the increase in NOI was offset by the increase in interest expense as a result of the aforementioned acquisitions. Added back to core FFO are some costs associated with the internalization.

You will see this line item described as external advisor acquisition. These costs are comprised primarily the legal and other advisor costs incurred to year-end. We do expect approximately 100,000 will be expensed in Q1 of 2016 related to the work completed as of the closing date of February 1.

Our fourth quarter AFFO is $4.5 million or $0.28 per share. AFFO similarly benefited from the full quarter of these acquisitions and improvements in same-store NOI. Our leasing activity and capital expenditures are clearly laid out on page 15 and 17 of the supplemental package.

Consistent with our definition of AFFO we have excluded some first generation leasing costs and the capital costs planned at acquisition for the most recently completed acquisitions. We have also excluded those costs associated with the major repositioning of Plaza 1 at Washington Group Plaza as we did in the prior quarter.

Further details are disclosed on page 17 under non-recurring capital expenditures. As a result of our recent success during the quarter, we increased the earn-out liability of Central Fairwinds.

As you may recall, as part of the IPO formation transactions Central Fairwinds property in Downtown, Orlando included future earn-out liability linked to achieving leasing and cash flow milestones.

As a result of the faster than anticipated leasing results, the company increased the expected value of the earn-out liability by $200,000 to $5.7 million at December 31.

Also during the quarter, the NOI thresholds associated with 80% occupancy was achieved and $3.8 million of earn-out consideration will be paid in common stock and operating partnership units during the first quarter of 2016.

These awards are subject to a call back if any of the new tenants move out or if the property fails to achieve an annual 2% NOI growth rate excluding the impact of the rents from the new tenants.

From a liquidity standpoint, we had cash of about $8.1 million at December 31, and approximately $25 million remaining undrawn and authorized under our current $75 million credit facility. Additionally, we have $15.2 million of restricted cash as available to fund future TIs, LCs, and capital projects.

Our total debt at December 31 was $344.7 million or $337.5 million when deducting the non-controlling interest share of certain debts. Our net debt to enterprise value was 63% based on our share price at December 31. Lastly, we would like to provide some guidance for 2016.

Prior to providing that guidance, we would like to remind everyone of the downtime associated with re-tenanting two material leases Washington Group Plaza and Amberglen. We previously announced that we secured a replacement tenant for ACom who’s lease expired on December 31, 2015.

St Luke’s Hospital Administration premises are currently being built out with a scheduled Q3 delivery and no revenue will be received on the approximately 147,000 square feet until that time.

Similarly, Cascade Microtech also vacated their space on December 31, 2015 and Kaiser Foundation Health Plan approximately 33,000 square feet space is also currently being built out with the schedule Q2 delivery.

As a result, of these move out, our 2016 first quarter property GAAP NOI will dip and is expected to come in the range of $9.6 million to $9.8 million. Q2 will see a further slight dip before building backup beginning in Q3 and then by Q4 reach the normalized level achieved in the fourth quarter of 2015.

That translates into a full-year guidance of property level GAAP NOI between $40 million and $41 million.

This guidance was determined based on incorporating a full-year results for all 14 properties owned January 1, 2016 and does not include acquisitions or divestitures and is based on assumption of weighted average shares outstanding of 16.4 million to 16.6 million during 2016.

On a core FFO basis, we are providing guidance in the range of $1.19 to a $1.25 per share for the year inclusive of the lower results in the first half of the year. Further details on how we right that outlook including a more complete discussion of our assumptions can be found in our press release.

That concludes our prepared remarks and we will open up the line for any questions. Operator..

We will now begin the question-and-answer session [Operator Instructions] Our first question comes from Rob Stevenson of Janney. Please go ahead..

Good morning, guys. Jamie, I appreciate that it’s still influx and haven’t closed in anything yet.

But could you just talk a little bit about any of the parameters around Dun & Bradstreet building and sort of where the things come in as you would expecting et cetera, anything positively or negatively surprise you during that process?.

Sure. Thanks for the question Rob. So if you recall, we launched our process back in the fall and I would say November, December, January were pretty choppy times and also not only in the capital markets, lenders generally widen their spreads appear a bit over that period of time. So that has hurt buyers underwriting a bit.

I think the question was asked on our last call, if the broker opinions were in the range of I think 6% to 6.5% cap and we acknowledged at the time that that was in the ballpark. So with the weaker capital markets, generally cap rates have weaken somewhat, meaning they are a bit higher, but they are not tremendously different Rob.

So our expectation today is, if closes as a number of conditions remaining, it’s likely to occur in the second quarter and not tremendously different as far as our expectations from where we were last time..

Okay. And then how active are you guys, I mean given your capital stance and your sort of desire not to issue a common equity on here.

How active have you guys been over the last sort of four or five months in underwriting potential acquisitions and how robust is that market today?.

Yes, we've been pretty active as far as underwriting and I would say values have come down a little bit over the last quarter from the fall. So we continue to be active. We closed last year about a $172 million of acquisitions, which was right in the midpoint of our guidance of $152 to $200. So, there still are attractive opportunities out there.

And I guess our view is if capital markets improve, we still think we can execute kind of in that range of what we said we would do last year.

There are deals out there, but we're being cautious because we don't want to get ahead of ourselves and put ourselves in a box where we either flake out on a deal that don’t close or we are put in a position where we have to issue equity..

Okay. Thanks guys..

No problem, thanks..

Thanks Rob..

Our next question comes from Craig Kucera of Wunderlich. Please go ahead..

Hey guys I wanted to revisit your straight line rent for this year and more particularly going forward.

If you go back to the first half of 2015 I think the total was maybe a $100,000 and is it fair to say that excluding the rent abatements that you discussed in your press release that on a fourth quarter run rate or looking forward to 2017 that something in the $600,000 to a $1 million range is correct or would it be lower than that?.

Hey Craig its Tony here. I think your assessment is pretty good, we have these one-time amounts that are flowing to 2016. If you exclude those numbers, the range you gave is exactly right.

A lot of it is actually coming from the recent acquisitions, in [indiscernible] in particular is a good portion of that number and that's the difference why you're seeing a difference in run rate now versus nearly zero at the same time last year..

Got it.

So if you guys were to complete the Dun & Bradstreet sale then it wouldn't materially impact the sort of run rate straight line?.

Yes, good question, you have the one-time impacts of free rent period that burns off in early Q3. So depending on when the sale hits it could have an impact in that quarter, but if you are looking further out it doesn't have a much of the material impact..

Got it. And you spoke to this, just and may be here across the board the choppiness of the debt markets tend to be flowing on there.

You do have a term loan maturity at September, have you begun exploring refinancing that? What kind of quotes do you think you're looking at or is there any potential to maybe extend that loan?.

So a very good question. The terms of that loan are such that if we are successful in executing on a sale, the proceeds would be used first to pay down that debt and so depending on the result of the Corporate Parkway transaction that would be the first option.

Other than that if you look at our balance sheet you'll see that we still have pretty substantial cash, we have substantial room still on our line of credit and so there is an ability just to pay down a facility through existing sources.

And the term loan is actually with Keybanc who is also our lender on the line of credit, so we've an option there in that respect as well..

Okay. I want to talk about your same-store NOI it was very, very strong year-over-year and even from third quarter and I may have missed this, but recognizing that you picked up some occupancy in increment Central Fairwinds.

Were there any notable expense items that were lower than sort of where they were in the third and second quarter or was it just purely the pickup in Central Fairwinds?.

Good question, so in Q4, you do have the impact of the one-time items that are impacting our results in Q4. In our press release, we've referred to the $385,000 one-time amount that was a combination of the termination payment and a unused lease incentive amount. So if you deduct that amount that's part of it.

There isn't really anything too significant, what I can't tell you Craig is at year-end we do cam reconciliations and some time there is a little bit of anomaly in Q4 that may have slightly impacted it, but it's not significant..

Got it. One more and I'll hop back into queue. Just going back to your guidance for next year excluding the downtime for the few assets where you've got people picking up occupancy sort of mid-year. I think you got about 7% of your space rolling over, most of those are smaller leases.

Do you anticipate any material downtime and kind of what are your thoughts on how rent escalators are looking for next year, maybe some expense assumptions that you could share that?.

Sure, I'll hit the first part Craig, as far as leasing assumption. So the largest single role we have in 2016 is with Fairwinds Credit Union, subsequent to quarter end, we did do a one year extension at a very attractive rate, $33, $50 gross with no TI associated with it.

The terms of the lease included basically an extension option for another nine-years at market rates which are today in the range of $24 plus marking the market signage. So the tenant has until later in 2016 to exercise that extension rate.

So we will have better visibility later in the year, but that’s a first major role has been taken care of, the balance they are all pretty small and there would be some standard turnover, but for the most part we don’t expect much..

Got it..

And Craig it’s Tony here. Your second part of the question was in terms of rent escalations, you mean they are still averaging within our portfolio about 2.5%..

Okay, great. Thanks guys..

Thanks Craig..

And our next question comes from Amit Nihalani of Oppenheimer. Please go ahead..

Hi. Good morning..

Hi Amit..

Good morning.

Are you guys seeing any changes in competition put assets in your underwriting?.

You know I wouldn’t say there has been much of a change, I think with the capital markets in the fall. I think that’s caused some buyers to pull out, we’ve heard of a number of larger institution that have put acquisitions on hold. So I think that will translate, probably there is better buying opportunities today.

I can’t say definitively we’ve seen that yet, just because the time it takes to move through the process of buying assets and reported. So we’ll have better visibility, but I would say better now than it was probably in the last half of last year..

Got it. And looking into 2016.

Would you guys be opened to more dispositions?.

Yes. We generally try to keep an open mind about the values of our properties and we think any particular submarket is really well positioned for a sale, we certainly aren’t adverse to that and with not busy on the acquisition front, we are constantly exploring things like that expense, savings, et cetera.

So today our only asset for sale is Corporate Parkway, but I chose that with open mind, if we think there is a good opportunity..

Got it. Thanks..

Thanks Amit..

[Operator Instructions] Our next question comes from Ken Billingsley of Compass Point. Please go ahead..

Good morning. I appreciate the guidance on NOI and I just want to confirm the way you have laid out the quarters. I believe you said that was the second quarter NOI would actually be coming down slightly from the $9.6 million to $9.8 million in the first quarter.

Is that correct?.

That’s exactly right. You’ll see a further dip in Q2 before it starts to build backup in Q3 and further into Q4..

No and well that from an AFFO standpoint in the first two quarters.

Is that likely push AFFO below the dividend at least for those first two quarters before ramping backup?.

Yes. I think that’s a fair assessment Q1 and Q2, it’s a pretty substantial loss of income, you have the straight line or rent impact that gets back out for AFFO. So we do see it not covering the dividend on an AFFO basis for Q1 and Q2..

Okay. And then on the lease incentive in lease departure was about $0.2 to $0.2.5 cents in the quarter.

Is that something that should be build in the models or is that really, is that a non-recurring one-time event and there was a sizeable amount that we should be excluding from our numbers?.

It’s the later Ken, they do happen from occasion. But these two particular ones really related to departure of tenants and they are one-time in nature..

Okay.

Was that be $0.2, $0.2.5 is that the proper amount, it would be on a per share basis for the quarter?.

Yes. In $385,000 divided by $16.2 million shares closer to. Yes..

Okay. There is no offset though anywhere else, that’s what I was curious..

There isn’t an offset track..

Okay. And last question you said on page three of the press release that you reduced your normalized full-year 2015 guidance.

I just don’t recall, what was the original guidance that you’re giving?.

I can’t recall where you’re referencing, I’m just looking at page three where you’re making that comment..

Page three, internal material considerations after you give the full-year 2016 guidance, it’s real considerations, it’s in the first sentence that says “the downtime associated with re-tenanting two material properties has reduced our normalized full-year 2016 guidance.” And maybe just talking about that property specifically I don’t know if you are….

Yes. I don’t think [indiscernible] prior guidance. So I think what we’re just trying to highlight is either two signed leases, they are known vacates we previously mentioned on previous calls. We’re just highlighting the fact that impact it has in Q1 and Q2 that’s a bit of anomaly. That’s all we were trying to highlight..

Great. I appreciate you pointed that out. Thank you for taking my questions..

Thanks Ken..

Thanks Ken..

As there are no additional questions. We will terminate the call at this time. Thank you for joining today..