City Office REIT, Inc. Price & Performance (CIO)

Good morning. Before we begin, I would like to direct you to our website cioreit.com you can view our fourth quarter earnings press release and supplemental information package. The earnings release and supplemental package 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, can give no assurance these expectations will be achieved see the forward looking statement disclaimer in our fourth quarter earnings press release and the company's filings with the SEC for factors that could cause 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'll review our financial results after Jamie Farrar Chief Executive Officer, discusses some of the quarter's operational highlights. I'll now turn the call over to Jamie. Good morning. After a challenging macro environment over the last few years, 2024 marked a clear turning point for the office sector.

Supply demand dynamics for office leasing, have turned increasingly favorable for high quality buildings in great locations. Across the country, the fourth quarter of twenty twenty four reflected positive net absorption of office space. Overall leasing volume in the fourth quarter was over 90% of pre pandemic volume levels. Sunbelt markets have performed particularly well and led the way at 95% of pre pandemic volume. In addition, JLL estimates that since the onset of COVID, companies have collectively shrunk their office footprint by 8% while their office using headcount has actually grown by 5%. As the return to office continues, demand dynamics at desirable properties should steadily strengthen. As we've discussed throughout 2024, new office construction is the lowest it has been in the last fifty years. This combined with a record number of conversions, demolitions, redevelopments translates to decreasing inventory. The net effect of these industry trends is increasingly solid footing for office properties. However, not all markets in office properties will benefit from these improving fundamentals. You may note in our investor materials we have split out our Sunbelt and non Sunbelt markets in our portfolio tables. Our properties are predominantly located in Sunbelt markets and we believe these will continue to outperform due to their favorable demographic and employment trends.

We also believe that amenitized and modern spaces We'll draw the greatest share of leasing going forward. As discussed on prior calls, we have spent the last few years making impactful upgrades to our properties, enhancing amenities and investing in ready to lease spec suites.

These efforts are clearly working. Since 2021, we have completed significant property upgrades at nine of our properties, Our most recently completed large projects are at Pima Center, and 5090 in Phoenix, 2525 in Dallas, and City Center in City St. Petersburg. We also have one additional amenity enhancement project planned at Block 23 in Phoenix. The goal of these improvements is to drive occupancy as well as to capture growing rents. Also, over this period, we've constructed 231,000 square feet of modern spec suites which are over 75% leased today. These proactive efforts have resulted in strong leasing results in 2024. The 806,000 square feet of new renewal leases signed during the year represented a 35% increase over 2023. Over the course of the full year 2024, we also realized a robust 5.9% cash rent roll up upon renewal. Turning to specific highlights from the fourth quarter. We signed a 60,000 square foot lease at our Terrace's property in Dallas. The lease extended the tenant's existing 44,000 square foot space until 02/1936 expanded the tenant space by 16,000 square feet also through 02/1936. The negotiated rental rate for the new expansion space is 17% higher than what the tenant's existing space is currently paying.

This demonstrates how rental rates have increased for premium assets and aligns well with our thesis that rents are poised to grow Moving to a disposition transaction, subsequent to year end, We sold Superior Point a smaller 152,000 square foot property in the Northwest submarket of Denver. The sale decision was largely driven by our view that we would achieve more value by selling the property as compared to investing considerable amounts to try to win leasing in a challenging submarket. We elected to sell Superior Point for a gross sale price of $12,000,000 The property was unencumbered by debt. Moving to our potential redevelopment plans at City Center, in Downtown St. Petersburg, Florida. We continue to track our expectations. The redevelopment site plan application has now received unanimous approval from the City of St. Petersburg and all appeal periods have expired. The approval was for the demolition of the stand alone parking garage to allow for a new multi use water facing development. The site plan includes approximately 164 residential condos, and 78,000 square feet of retail and office. We continue to advance agreements and development plans with a very experienced developer who would be responsible for leading the project's execution.

However, any redevelopment of City Center remains subject We'll provide further updates on our progress on future calls. And last for me, in our earnings press release, we introduced guidance for 2025. Our focus in 2025 remains on driving long term cash flow growth through leasing, active asset management value creation opportunities. Our core FFO per share guidance range is effectively in line with our fourth quarter results on an annualized basis. Our expectation is that as signed leases take occupancy and we continue future leasing momentum, will have improvements in occupancy and same store results. We expect this will drive core FFO per share growth over time. While we are guiding that overall occupancy will increase during 2025, that growth is expected to occur primarily across our Sunbelt market. As discussed earlier, these markets have the strongest leasing dynamic and value creation potential. With that, I'll turn the call over to Tony to discuss our financial results in more detail. Thanks, Jamie. Our net operating income in the fourth quarter was $25,500,000 which is $900,000 higher than the amount we reported the third quarter, higher occupancy was a primary driver of the NOI increase. [indiscernible] also reported core FFO of $11,700,000 or $0.28 per share for the fourth quarter.

Core FFO was $600,000 higher than the amount we reported in the third quarter. Sumodo NOI increase was driven primarily by higher occupancy, but marginally offset by higher interest expense. Our fourth quarter AFFO was 4,300,000.0 or $0.1 per share. The success of our leasing efforts elevated tenant improvement costs and leasing commissions. The largest impact to AFFO was a $2,300,000 leasing commission on a 60,000 square foot lease at the terraces.

The significant property renovations underway in the fourth quarter that Jamie described resulted in a $1,300,000 reduction to AFFO. We also invested $300,000 on spec suites and vacancy conditioning. Net income was impacted by an $8,500,000 non cash impairment of real estate charge in the fourth quarter to reflect the sales price of Superior Point closed after quarter end. Moving on to some of our operational metrics. Our same store cash NOI trended higher in the fourth quarter There was a healthy increase of 3.3% or $760,000 as compared to the fourth quarter of twenty twenty three.

The largest contributor to that was Raleigh, where NOI continues to materially increase at Block 83 as signed leases take occupancy. Our portfolio occupancy ended the quarter at 85.4% an increase of two full percentage points from the prior quarter. Our occupancy was 87.6% Inclusive of the 122,000 square feet of signed leases that have not yet commenced. Our total debt as of December 31 was $647,000,000 Our net debt including restricted cash to EBITDA was 6.9 times. As of December 31, we had approximately $42,000,000 undrawn We also had cash and restricted cash of $34,000,000 at quarter end. Our credit facility matures in November twenty twenty five with an ability to extend it to November 2026. That option can be exercised in August ninety days prior to the maturity as long as we remain in compliance with our debt covenants which we are comfortably projected to be. As such, we expect to exercise that option and continue discussions on a renewal. [indiscernible] have only two property debt maturities in 2025. Loans for both Greenwood Boulevard in Orlando and Intellacenter in Tampa mature in the fourth quarter. Have begun discussions and expect to provide an update on next quarter's call.

Also have two high value properties, Block 83 in Raleigh and City Center in Tampa that are completely unencumbered. Continue to see improvements in debt markets. As liquidity comes back despite long term interest rates trending higher recently. Expect to place debt on some of our unencumbered assets to increase liquidity in 2025 given this backdrop.

And lastly for me, as Jimmy mentioned, we have provided our 2025 guidance The guidance includes the recent disposition of Superior Point in Denver, but assumes no other acquisitions or dispositions. Despite two known vacates in our non Sunbelt properties totaling 102,000 square feet in the first half of the year, we are anticipating an increase in overall portfolio occupancy by year end. Driven largely by leasing momentum in our Sunbelt markets that Jamie described.

Overall, we are anticipating a healthy increase in same store cash NOI with a range of 2.5% to 4.5% growth as compared to the prior year. That concludes our prepared remarks. And we will open up the line for questions. Operator?

Thank you very much. Our first question comes from Upal Rana with KeyBanc. Upal, your line is now open. Please go ahead.

Great. Thank you. So I wanted to kind of talk about the disposition of Superior Point What was the reasoning behind selling it? And could you characterize how the market is currently? In terms of the transaction market?

Sure. Thanks for the question. So as we've indicated in our prepared remarks, a real thrust for value creation and ability to grow rents in some of the top markets, including in the Sunbelt and some other markets are a lot slower. And Denver kind of is a mixed bag in that respect. So Superior is a bit of a challenged submarket, high vacancy. When we looked at the lease terms of what we could execute upon, we weren't thrilled. And we didn't see that changing for a long time. It's not a place where we wanted to invest capital. So we opted to exit that one and really focus our efforts on the best markets and the best submarkets were in great value.

In terms of what are we seeing overall, the capital markets for office have significantly improved. I mean, they were completely illiquid. So you're starting to see transactions now for the top of the market, the best assets. There's investor interest. But we're also starting to see more interest in smaller assets and smaller asset buyers just [indiscernible] Case in point would be our superior transaction. So I'd say the market is definitely improving in terms of liquidity and we think that's [indiscernible] Okay, great. That was helpful. And then I noticed you guys broke out the Sunbelt occupancy and the total portfolio occupancy in this quarter Any reason behind that? That you can maybe add some color to? Yes, if you think again back to where are we going to create the most value over time, it's going to be in our high growth Sunbelt markets. And it gets a bit lost when you look at portfolios we thought it was helpful [indiscernible] both. And we think Sunbelt, you're going to see significant rent growth over the few years as well as occupancy growth.

Okay. And then do you think that does this maybe suggest that those four assets that are in those in the other category could potentially be up for consideration for sale?

We didn't any dispositions beyond Superior in our guidance. I guess what I would say is Portland almost needs to be ignored. I mean it's a tiny asset. It's a really tough market. So we don't see significant value in that market. Seattle is different. Our asset there lease to Pfizer. That's one that at some point will find a way of exiting. We think it's a very good asset. It's a great tenant. It's a great location. So as capital markets improve, that's one that will take advantage of. I don't think it's near term, but longer term. And then in Denver, it's kind of a mixture. It's been a bit of a slower market with respect to our whole portfolio. We're looking at ways to creating value. We've had a lot of success at Circle Point The Denver Tech Center has been a little slower. We are seeing leasing activity starting to pick up there. We're trying to get our arms around how do we best create value overall, but they certainly aren't markets that we're going to expand in or grow over time.

Okay, great. And then last one for me would be just On your GSA exposure, City seems like you have the U. S. Attorney's Office as one of your tenants. And it makes about 1.9% of your portfolio. Do you have any expectations for this lease given the expiration is in '26 and you give any color on that, that'd be helpful.

Sure. So effectively, that's in our Park Tower Building.

You nailed the stats. It's the top seven floors, I believe. So phenomenal views, great location. Their lease rolls at the end of twenty twenty six. So we're at the natural point of having some discussions with them It's too early to say where that's going to land. But what I can say is [indiscernible] So it's logical that they'd like to be there long term, but obviously there's some uncertainty around that until we can advance Okay, great. Thank you for your help.

Our next question comes from Barry Oxford with Cuyahoga.

Barry, your line is now open. Please go ahead.

Great.

Thanks guys. Jamie, as you look [indiscernible] acquisition opportunities. Number one, are you seeing any distressed opportunities or Look, Barry, I'm not playing in the distressed opportunities. And then secondly, how do you balance the acquisition cap rate with your cost of capital?

So what are we seeing overall, Barry? We haven't seen huge amounts of lenders taking back properties yet and then turning them over and distressed sales. I do think that's going to pick up over the next few years. I don't know if those assets are going to be ones that we want to necessarily own, although we've had a lot of luck in the past buying value add assets and creating value and then monetizing them. So it's not something that I'd close completely. But right now, we look forward for the next year, we see good opportunities within our leasing to our best assets through renovations, other improvements pick up NOI at the the asset level, which translates to higher value for those assets. And so that's really where our focus is right now is in would say external growth will come down the road, if it makes sense.

Great. And Jimmy, how do you look at your spec space? Do you want to do more of it?

So we've got about 50,000 feet right now. A lot of it is in Phoenix, Tampa as well. I think Phoenix out of all of our markets as far as leasing activity right now is significantly picked up. It would be top of our list. So we're feeling good there as far as what we have in getting that leased. We're planning actually right now kind of the next phase of spec suites that we're going to do in 2025. And where we think we're going to be most successful based on the demand. So I think that's a question I can probably give you a little better color on the next call or two, but we still find particularly for smaller suites, if we build those out, we build up right product in the right location, we're getting great rents. So we'll be doing more over time.

Perfect. Thanks so much guys. [indiscernible] Thank you very much. Just as a reminder, if you would like to ask a question, Our next question comes from Craig Kucera with Lucid Capital Markets.

Craig, your line is now open. Please go ahead.

Yes, thanks. Good morning, guys. I'm curious about the buyer of Superior Point. Are they expecting to utilize that as office for the longer term or potentially convert it to another use. So City was a family office and my understanding is they're going to significantly invest in the property, build out a lot amenities and then maintain it as office. Got it.

Changing gears, you mentioned in your guidance there's no dispositions, but are you caught transfers? Hey, good morning, Craig. So we have two loans that are maturing at the end of this year.

Both in the fourth quarter And at this point, we've started discussions on both.

Advancing one that the Greenwood Boulevard property is 100% leased. So those discussions are going more more or a little more of advanced stage. And then starting discussions on the other loans. So at this point, we have not assumed in our guidance [indiscernible] we are making any dispositions including the assets with mortgages that are maturing this year.

Just to jump on and add to that because you raised a good point. The asset Greenwood Boulevard in Lake Mary that Tony mentioned is leased long term. That's actually a submarket that started to pick back up. And we are in discussions with potential tenant to come in and take down some of that space on a very long term basis, which could position us to [indiscernible] balance of the space as well. So it's one example where it's been an asset in the past, I think we've talked about that had a little bit of lack of utilization that could be completely changed.

Got it.

You mentioned the large known vacates in the first half of twenty twenty five, but when do you anticipate the least but not commenced will begin paying rent in 2025? So they're spread out pretty evenly through the year. We have 122,000 square feet you mentioned. A lot of that is in Phoenix, as Jamie talked about some market that's that's been picking up. But it is spread to the end of the year. We have a deal in Dallas later in the year. We're still figuring out the timing of how long the tenant improvement work will work. So it's pretty evenly spread.

Okay, great. Just one more for me. I just wanted to follow-up on St. Petersburg.

Can you talk or give us any color about what the anticipated economic of a deal there might look like and given that there's condo sales that might start '25 is there any impact to guidance or in the guidance?

There is no impact in the guidance Sumit will just touch on that The way we are contemplating the structure and we can't give too many details on who our development partner is yet, it's at a late stage. We hope that that will change soon where we can provide a little more color, but think of a very experienced developer leading the development. The way we're participating is rolling in our parking garage at a certain point when the project has been de risked, and then we share the economics going forward. It's too early to talk about project economics.

Okay, fair enough.

Thanks. Thanks for the question. Thanks, Craig.

I will now hand back over to Jamie for any closing remarks.

Thank you for joining today. We look forward to updating you further next quarter. Thank That concludes You may now disconnect your lines.