Company Overview
City Office REIT, Inc. (NYSE:CIO) is an internally managed real estate investment trust (REIT) that focuses on acquiring, owning, and operating high-quality office properties in metropolitan areas across the Southern and Western United States. With a diversified portfolio of 23 properties comprising 56 office buildings totaling approximately 5.6 million square feet of net rentable area, City Office REIT has established itself as a prominent player in the dynamic office sector.
History and Structure
Founded in 2013 and headquartered in Vancouver, British Columbia, City Office REIT went public in 2014, raising net proceeds of approximately $198.9 million from its initial public offering. The company was formed as a Maryland corporation on November 26, 2013, and both the company and its operating partnership commenced operations upon completion of the IPO and certain related formation transactions. City Office REIT has elected to be taxed and operate as a real estate investment trust (REIT), which allows it to deduct dividend distributions paid to stockholders, eliminating U.S. federal taxation of income represented by such distributions at the company level. As a REIT, City Office REIT is subject to a number of organizational and operational requirements.
Strategic Expansion and Portfolio
Since its inception, the company has strategically expanded its footprint, leveraging its market expertise and strong relationships to identify and acquire high-quality office assets in desirable Sun Belt markets, such as Dallas, Denver, Phoenix, Raleigh, and Tampa. In 2021, the company achieved a significant milestone by entering into an amended and restated credit agreement that increased its total authorized borrowings from $300 million to $350 million, providing enhanced financial flexibility.
City Office REIT's diversified portfolio boasts a well-balanced tenant mix, with a strong focus on creditworthy tenants across various industries, including technology, healthcare, and professional services. As of September 30, 2024, the company's in-place occupancy stood at 83.4%, with an additional 3.6% of the portfolio occupied by tenants with signed leases not yet commenced. This occupancy level, coupled with the company's proactive leasing efforts, has allowed City Office REIT to maintain a steady stream of rental and other revenues, which totaled $179.1 million in the fiscal year ended December 31, 2023.
Financial Performance
The company's financial performance has remained resilient, despite the challenges posed by the evolving work-from-home trends and the broader economic landscape. For the fiscal year 2023, City Office REIT reported a net loss of $2.68 million, or $0.25 per diluted share, largely attributable to the impact of the COVID-19 pandemic on its operations. This decline was also driven by the disposition of two properties - 190 Office Center in May 2023 and Cascade Station in June 2024 - which resulted in losses on deconsolidation. However, the company's core funds from operations (Core FFO), a widely used metric in the REIT industry, stood at $92.96 million, or $2.33 per diluted share, showcasing its ability to generate consistent cash flow.
In the most recent quarter (Q3 2024), City Office REIT reported revenue of $42.37 million, representing a 4% year-over-year decrease. This decline was primarily due to the disposition of the Cascade Station property in June 2024, which reduced revenue by $1 million. Additionally, revenue decreased at Intellicenter and 2525 McKinnon due to lower occupancy. These decreases were partially offset by increases at Mission City and Bloc 83 due to higher occupancy. The company reported a net loss of $2.64 million for the quarter.
For the first nine months of 2024, rental and other revenues decreased by 4% year-over-year to $129.21 million. This decline was primarily attributed to the disposition of the Cascade Station property and lower occupancy and rental rates at certain other properties.
Liquidity and Balance Sheet
City Office REIT's balance sheet remains solid, with a net debt to EBITDA ratio of 7.0x as of September 30, 2024. The company maintains a well-laddered debt maturity profile, with no significant maturities until October 2025, providing ample financial flexibility to navigate the current market environment. Additionally, the company has unencumbered properties, such as Block 83 in Raleigh and City Center in Tampa, which could serve as potential sources of liquidity if needed.
As of September 30, 2024, the company reported cash and restricted cash of $43.03 million. City Office REIT also has approximately $42 million undrawn and authorized on its $325 million unsecured credit facility. The company's debt-to-equity ratio stands at 0.87, while its current ratio and quick ratio are both 0.31, indicating a relatively tight liquidity position.
Product Segments
City Office REIT's operations are organized into two main product segments: Office Properties and Leasing.
The Office Properties segment forms the core of City Office REIT's business, encompassing the company's portfolio of 23 properties across major metropolitan areas. These properties are generally well-located, have good functionality and access, are new or in new condition, and cater to high-quality tenants. The segment generates revenue primarily through leasing office space to tenants, with leases typically on a full-service gross or net lease basis. The majority of leases include contractual rent escalations and the ability to pass through property operating expense increases to tenants.
The Leasing segment includes the company's leasing of office space to tenants, as well as associated activities such as tenant improvements and leasing commissions. This segment's performance is closely tied to the company's ability to maintain high occupancy rates, renew expiring leases, and lease available space at favorable rental rates.
During the three months ended September 30, 2024, the company signed 141,000 square feet of new and renewal leases at an average effective rent of $33.44 per square foot, demonstrating its ongoing leasing momentum.
Future Outlook and Strategic Initiatives
Looking ahead, City Office REIT's management team remains cautiously optimistic about the company's prospects, as it continues to execute on its strategic leasing initiatives. The company has made upward revisions to several guidance categories, driven by the significant number of signed leases that have or are expected to commence in the fourth quarter of 2024. This positive momentum is further bolstered by the company's proactive approach to renovating and repositioning select properties within its portfolio, such as Pima Center in Phoenix and 2525 McKinnon in Dallas, which have resulted in improved leasing traction.
City Office REIT expects its year-end occupancy to be higher than previously guided, and anticipates its same-store cash NOI change to improve further in Q4 2024 compared to the 0.2% increase reported in Q3 2024. The company highlighted several key signed leases set to commence in Q4 2024, including 74,000 square feet in Phoenix, 33,000 square feet in Raleigh, 50,000 square feet in Orlando, and a 42,000 square foot lease at the Ingenuity Drive property, which will bring that property to 100% occupied.
Furthermore, City Office REIT is actively exploring potential value-enhancing opportunities, including the redevelopment of the parking garage at its City Center property in downtown St. Petersburg, Florida, into a residential and mixed-use condominium tower. This potential project, which is currently advancing through the approval process, could unlock additional value for the company and its shareholders.
Industry Trends
The office real estate sector has seen improving leasing conditions in 2024, with national office availability declining for the first time since 2019. While leasing activity remains about 20% below pre-pandemic levels, the Sun Belt markets where City Office operates have experienced an outsized recovery. However, office capital markets activity continues to be suppressed due to limited debt availability. These trends underscore the importance of City Office REIT's strategic focus on high-quality assets in attractive Sun Belt markets.
Conclusion
Despite the ongoing challenges in the office sector, City Office REIT has demonstrated its resilience and its ability to navigate the evolving market dynamics. By leveraging its market expertise, strategic leasing efforts, and prudent capital management, the company remains well-positioned to continue creating value for its shareholders in the years to come. With its strong portfolio of properties in desirable Sun Belt markets, improving leasing momentum, and strategic initiatives underway, City Office REIT is poised to capitalize on the gradual recovery in the office sector and drive long-term growth for its investors.