Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number:

001-36409

CITY OFFICE REIT, INC.

(Exact name of registrant as specified in its charter)


Maryland		98-1141883
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

666 Burrard Street

Suite 3210

Vancouver, BC

V6C 2X8

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (604)

806-3366

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of each Exchange on Which Registered
Common Stock, $0.01 par value 6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share	“CIO” “CIO.PrA”	New York Stock Exchange New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒

Yes No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes ☐ ☒ No

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at May

, 2022 was 43,554,375.

Table of Contents

City Office REIT, Inc.

Quarterly Report on Form

10-Q

For the Quarter Ended March 31, 2022

Table of Contents


PART I. FINANCIAL INFORMATION			1

Item 1. Financial Statements			1

Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021			1

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021			2

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021			3

Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2022 and 2021			4

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021			5

Notes to Condensed Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15

Item 3. Quantitative and Qualitative Disclosures about Market Risk			24

Item 4. Controls and Procedures			24

PART II. OTHER INFORMATION			25

Item 1. Legal Proceedings			25

Item 1A. Risk Factors			25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25

Item 3. Defaults Upon Senior Securities			25

Item 4. Mine Safety Disclosures			25

Item 5. Other Information			25

Item 6. Exhibits			2 6

Signatures			2 7

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

City Office REIT, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except par value and share data)


	March 31, 2022			December 31, 2021
Assets
Real estate properties
Land	$	200,686		$	204,801
Building and improvement		1,228,976			1,244,177
Tenant improvement		122,604			119,011
Furniture, fixtures and equipment		664			664

		1,552,930			1,568,653
Accumulated depreciation		(160,188	)		(157,356	)

		1,392,742			1,411,297

Cash and cash equivalents		26,742			21,321
Restricted cash		20,903			20,945
Rents receivable, net		35,466			30,415
Deferred leasing costs, net		19,516			20,327
Acquired lease intangible assets, net		65,285			68,925
Sales-type lease receivable		42,599			—
Other assets		28,930			28,283

Total Assets	$	1,632,183		$	1,601,513

Liabilities and Equity
Liabilities:
Debt	$	662,462		$	653,648
Accounts payable and accrued liabilities		33,423			27,101
Deferred rent		11,164			11,600
Tenant rent deposits		6,458			6,165
Acquired lease intangible liabilities, net		10,463			10,872
Other liabilities		21,086			21,532

Total Liabilities		745,056			730,918

Commitments and Contingencies (Note 9)
Equity:
6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares authorized, 4,480,000 issued and outstanding as of March 31, 2022 and December 31, 2021		112,000			112,000
Common stock, $0.01 par value, 100,000,000 shares authorized, 43,554,375 s hares issued and outstanding as of March 31, 2022 and December 31, 2021		435			435
Additional paid-in capital		483,033			482,061
Retained earnings		289,388			275,502
Accumulated other comprehensive income/(loss)		1,372			(382	)

Total Stockholders’ Equity		886,228			869,616
Non-controlling interests in properties		899			979

Total Equity		887,127			870,595

Total Liabilities and Equity	$	1,632,183		$	1,601,513

The accompanying notes are an integral part of these condensed consolidated financial statements

Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)


	Three Months Ended March 31,
	2022			2021
Rental and other revenues	$	44,852		$	39,516
Operating expenses:
Property operating expenses		16,489			14,118
General and administrative		3,456			2,801
Depreciation and amortization		15,815			14,415

Total operating expenses		35,760			31,334

Operating income		9,092			8,182
Interest expense:
Contractual interest expense		(5,747	)		(6,243	)
Amortization of deferred financing costs and debt fair value		(312	)		(330	)

		(6,059	)		(6,573	)
Net gain on sale of real estate property		21,658			47,400

Net income		24,691			49,009
Less:
Net income attributable to non-controlling interests in properties		(171	)		(192	)

Net income attributable to the Company		24,520			48,817
Preferred stock distributions		(1,855	)		(1,855	)

Net income attributable to common stockholders	$	22,665		$	46,962

Net income per common share:
Basic	$	0.52		$	1.08

Diluted	$	0.51		$	1.07

Weighted average common shares outstanding:
Basic		43,554			43,397

Diluted		44,406			44,043

Dividend distributions declared per common share	$	0.20		$	0.15

The accompanying notes are an integral part of these condensed consolidated financial statements

Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)


	Three Months Ended March 31,
	2022			2021
Net income	$	24,691		$	49,009
Other comprehensive income:
Unrealized cash flow hedge gain		1,614			527
Amounts reclassified to interest expense		140			142

Other comprehensive income		1,754			669

Comprehensive income		26,445			49,678
Less:
Comprehensive income attributable to non-controlling interests in properties		(171	)		(192	)

Comprehensive income attributable to the Company	$	26,274		$	49,486

The accompanying notes are an integral part of

these

condensed consolidated financial statements

Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Changes in Equity

(Unaudited)

(In thousands)


	Number of shares of preferred stock		Preferred stock		Number of shares of common stock		Common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive (loss)/income			Total stockholders’ equity			Non-controlling interests in properties			Total equity
Balance—December 31, 2021		4,480	$	112,000		43,554	$	435	$	482,061	$	275,502		$	(382	)	$	869,616		$	979		$	870,595
Restricted stock award grants and vesting		—		—		—		—		972		(68	)		—			904			—			904
Common stock dividend distribution declared		—		—		—		—		—		(8,711	)		—			(8,711	)		—			(8,711	)
Preferred stock dividend distribution declared		—		—		—		—		—		(1,855	)		—			(1,855	)		—			(1,855	)
Contributions		—		—		—		—		—		—			—			—			3			3
Distributions		—		—		—		—		—		—			—			—			(254	)		(254	)
Net income		—		—		—		—		—		24,520			—			24,520			171			24,691
Other comprehensive income		—		—		—		—		—		—			1,754			1,754			—			1,754

Balance—March 31, 2022		4,480	$	112,000		43,554	$	435	$	483,033	$	289,388		$	1,372		$	886,228		$	899		$	887,127


	Number of shares of preferred stock		Preferred stock		Number of shares of common stock		Common stock		Additional paid-in capital		Accumulated deficit			Accumulated other comprehensive loss			Total stockholders’ equity			Non-controlling interests in properties			Total equity
Balance—December 31, 2020		4,480	$	112,000		43,397	$	433	$	479,411	$	(172,958	)	$	(1,960	)	$	416,926		$	949		$	417,875
Restricted stock award grants and vesting		—		—		—		—		695		(50	)		—			645			—			645
Common stock dividend distribution declared		—		—		—		—		—		(6,510	)		—			(6,510	)		—			(6,510	)
Preferred stock dividend distribution declared		—		—		—		—		—		(1,855	)		—			(1,855	)		—			(1,855	)
Distributions		—		—		—		—		—		—			—			—			(220	)		(220	)
Net income		—		—		—		—		—		48,817			—			48,817			192			49,009
Other comprehensive income		—		—		—		—		—		—			669			669			—			669

Balance—March 31, 2021		4,480	$	112,000		43,397	$	433	$	480,106	$	(132,556	)	$	(1,291	)	$	458,692		$	921		$	459,613

The accompanying notes are an integral part of these condensed consolidated financial statements

Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Three Months Ended March 31,
	2022			2021
Cash Flows from Operating Activities:

Net income	$	24,691		$	49,009
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		15,815			14,415
Amortization of deferred financing costs and debt fair value		312			330
Amortization of above and below market leases		63			105
Straight-line rent/expense		(2,050	)		(61	)
Non-cash stock compensation		904			645
Net gain on sale of real estate property		(21,658	)		(47,400	)
Changes in non-cash working capital:
Rents receivable, net		(3,844	)		1,014
Other assets		534			(531	)
Accounts payable and accrued liabilities		35			(1,807	)
Deferred rent		(436	)		(47	)
Tenant rent deposits		293			(148	)

Net Cash Provided By Operating Activities		14,659			15,524

Cash Flows (to)/from Investing Activities:
Additions to real estate properties		(6,476	)		(6,248	)
Net proceeds from sale of real estate		1,000			93,303
Deferred leasing costs		(1,423	)		(1,934	)

Net Cash (Used in)/Provided By Investing Activities		(6,899	)		85,121

Cash Flows to Financing Activities:
Proceeds from borrowings		14,000			45,000
Repayment of borrowings		(5,564	)		(149,826	)
Dividend distributions paid to stockholders		(10,566	)		(8,365	)
Distributions to non-controlling interests in properties		(254	)		(220	)
Contributions from non-controlling interests in properties		3			—

Net Cash Used In Financing Activities		(2,381	)		(113,411	)

Net Increase/(Decrease) in Cash, Cash Equivalents and Restricted Cash		5,379			(12,766	)
Cash, Cash Equivalents and Restricted Cash, Beginning of Period		42,266			45,951

Cash, Cash Equivalents and Restricted Cash, End of Period	$	47,645		$	33,185

Reconciliation of Cash, Cash Equivalents and Restricted Cash:
Cash and Cash Equivalents, End of Period		26,742			14,890
Restricted Cash, End of Period		20,903			18,295

Cash, Cash Equivalents and Restricted Cash, End of Period	$	47,645		$	33,185

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	5,374		$	6,322
Purchase of additions in real estate properties included in accounts payable	$	10,465		$	4,145
Purchase of deferred leasing costs included in accounts payable	$	3,627		$	493

The accompanying notes are an integral part of these condensed consolidated financial statements

Table of Contents

City Office REIT, Inc.

Notes to the Condensed Consolidated Financial Statements

1. Organization and Description of Business

City Office REIT, Inc. (the “Company”) was organized in the state of Maryland on November 26, 2013. On April 21, 2014, the Company completed its initial public offering (“IPO”) of shares of the Company’s common stock. The Company contributed the net proceeds of the IPO to City Office REIT Operating Partnership, L.P., a Maryland limited partnership (the “Operating Partnership”), in exchange for common units of limited partnership interest in the Operating Partnership (“common units”).

The Company’s interest in the Operating Partnership entitles the Company to share in distributions from, and allocations of profits and losses of, the Operating Partnership in proportion to the Company’s percentage ownership of common units. As the sole general partner of the Operating Partnership, the Company has the exclusive power under the Operating Partnership’s partnership agreement to manage and conduct the Operating Partnership’s business, subject to limited approval and voting rights of the limited partners.

The Company has elected to be taxed and will continue to operate in a manner that will allow it to continue to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Subject to qualification as a REIT, the Company will be permitted to deduct dividend distributions paid to its stockholders, eliminating the U.S. federal taxation of income represented by such distributions at the Company level. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and, for tax years beginning before 2018, any applicable alternative minimum tax.

2. Summary of Significant Accounting Policies

Basis of Preparation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with Securities and Exchange Commission (“SEC”) rules and regulations and generally accepted accounting principles in the United States of America (“US GAAP”) and in the opinion of management contain all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form

10-K

for the year ended December 31, 202

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (the “FASB”) established Topic 848, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, by issuing Accounting Standards Update (“ASU”)

No. 2020-04

(“ASU

2020-04”).

ASU

2020-04

provides companies with optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. For contracts affected by reference rate reform, if certain criteria are met, companies can elect to not remeasure contracts at the modification date or reassess a previous accounting conclusion. Companies can also elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met. Further, in January 2021, the FASB issued ASU

No. 2021-01,

Reference Rate Reform (Topic 848) (“ASU

2021-01”).

ASU

2021-01

clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848.

ASU

2020-04

and ASU

2021-01

can be applied as of the beginning of the interim period that includes March 12, 2020, however, the guidance will only be available for optional use through December 31, 2022. The new standard applies prospectively to contract modifications and hedging relationships and may be elected over time as reference rate reform activities occur. The Company has not yet adopted the standard and continues to evaluate the impact of ASU

2020-04

and ASU

2021-01

on its consolidated financial statements and may elect optional expedients in future periods as reference rate reform activities occur.

Table of Contents

In July 2021, the FASB issued ASU

No. 2021-05

(“ASU

2021-05”),

Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. ASU

2021-05

requires lessors to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease if the lease would have been classified as a sales-type lease or a direct financing lease under the

pre-ASU

classification criteria, and sales-type or direct financing classification would result in a Day 1 loss. The ASU is effective for fiscal years beginning after December 15, 2021. The ASU may be early adopted and can be applied either retrospectively to leases that commenced or were modified on or after the adoption of ASU

No. 2016-02

or prospectively to leases that commence or are modified on or after the date that an entity first applies the amendments. The Company adopted ASU

2021-05

prospectively on January 1, 2022. The adoption of ASU

2021-05

did not have a material impact on the Company’s consolidated financial statements.

3. Real Estate Investments

Sale of Real Estate Property

During the three months ended March 31, 2022, the sole tenant at the Lake Vista Pointe property exercised its lease option to purchase the building and the Company signed a purchase and sale agreement with the tenant with the sale expected to close in June 2022. As of March 31, 2022, the Company received a deposit of $1.0 million. At the time the tenant exercised the option, the Company reassessed the lease classification of the lease, in accordance with ASC 842 – Leases, and determined the lease should be reclassified from an operating lease to a sales-type lease. Therefore, the Company derecognized the net book value of the property and recorded a sales-type lease receivable

of $

42.6

million

which represents the discounted present value of the remaining lease payments and the purchase option price. This reclassification resulted in a gain on sale

of $

21.7 million.

On February 10, 2021, the Company sold the Cherry Creek property in Denver, Colorado for $95.0 million, resulting in an aggregate gain of $47.4 million net of disposal-related costs, which has been classified as net gain on sale of real estate property in the condensed consolidated statements of operations

4. Lease Intangibles

Lease intangibles and the value of assumed lease obligations as of March 31, 2022 and December 31, 2021 were comprised of the following (in thousands):

Lease Intangible Assets

Lease Intangible Liabilities

March 31, 2022

Above

Market
Leases

SEC Form 10-Q filed by City Office REIT Inc.