Executive Summary / Key Takeaways

• City Office REIT is strategically focused on high-quality office properties in Sun Belt growth markets, leveraging favorable demographic and employment trends to counter broader office sector challenges.
• Recent operational performance shows positive momentum, with Q1 2025 same-store cash NOI increasing 4.4% and a robust 8.5% cash releasing spread on renewals over the last 12 months, driven by strong leasing activity in key markets like Phoenix and Raleigh.
• The company is actively managing its portfolio through targeted dispositions of non-core assets and significant investments in property upgrades and spec suites to enhance leasing competitiveness and drive occupancy.
• A major long-term value creation opportunity is the planned mixed-use redevelopment of the City Center parking garage in St. Petersburg, Florida, into a residential condominium and mixed-use tower, positioning CIO to participate in development profits alongside an experienced partner.
• While facing risks from economic uncertainty, interest rates, and evolving work-from-home trends, the company's focus on high-quality assets in growing markets and proactive debt management (including expected credit facility extension and addressing property maturities) supports its outlook for increased occupancy and same-store NOI growth in 2025.

The Sunbelt Anchor: Forging a Path in a Shifting Office Landscape

City Office REIT, Inc. (CIO) operates as a real estate investment trust specializing in the ownership and operation of office properties. Since its IPO in 2014, the company has honed a strategy centered on acquiring and managing assets in dynamic 18-hour cities, primarily within the Sun Belt region. This focus is predicated on the belief that these markets, characterized by growing populations, robust employment forecasts, diversified economies, and a high quality of life, offer a more favorable environment for office demand compared to traditional gateway cities. This strategic geographic concentration forms the bedrock of CIO's investment thesis, positioning it to capitalize on regional tailwinds even as the broader office sector grapples with structural shifts.

The competitive landscape for office REITs is diverse, ranging from large, diversified players focused on major urban centers like Boston Properties (BXP), SL Green Realty (SLG), and Vornado Realty Trust (VNO), to regional specialists and even indirect competitors like coworking providers (e.g., WeWork (WE)) and remote work technologies. Compared to its larger, urban-focused peers, CIO operates at a different scale and targets markets that, while growing, may not command the same premium rents as primary CBDs.

CIO's competitive positioning is rooted in its regional expertise and operational agility, facilitated by its internal management structure. This structure is intended to enable faster decision-making and potentially quicker leasing cycles compared to larger, more bureaucratic organizations. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, CIO's targeted approach aims to achieve higher operating margins in its chosen regional markets by maintaining a more cost-efficient operational footprint. However, CIO's smaller scale can result in lower throughput in areas like property acquisitions compared to larger rivals.

Financially, CIO's metrics reflect its market positioning and the current sector environment. Its TTM Gross Profit Margin stands at 59.74%, Operating Profit Margin at 10.57%, and EBITDA Margin at 44.05%. While these margins provide insight into operational efficiency, they must be viewed in the context of the broader market and compared to peers. For instance, BXP, with its focus on premium urban assets, reported a 2024 Gross Profit Margin of 61% and Operating Margin of 30%, suggesting higher profitability per revenue dollar in its core markets, albeit potentially with higher operating costs in absolute terms. SLG and VNO, also heavily concentrated in major urban centers, showed 2024 Gross Margins of 49% and 100% (likely reflecting specific accounting treatments) and Operating Margins of 29% and 15% respectively, highlighting the varied performance across different urban strategies. KRC (KRC), with a West Coast focus, reported a 2024 Gross Margin of 69% and Operating Margin of 29%. This comparison indicates that while CIO's regional focus aims for efficiency, its profitability metrics, particularly Operating and Net Margins, are currently lower than some larger peers, reflecting the challenges in its market segment and potentially higher vacancy-related costs. CIO's TTM Net Profit Margin is negative at -11.11%, underscoring the impact of recent market conditions and non-cash charges.

In terms of operational technology, CIO's core business model relies on the physical real estate assets and traditional property management and leasing processes rather than proprietary technological differentiators in the sense of a tech company. The company mentions using standard financial reporting systems and evaluating disclosure controls, but no specific PropTech or innovative building technologies are highlighted as a competitive edge. Their operational differentiation appears to stem from strategic initiatives like investing in modern spec suites and property renovations to enhance the physical appeal and functionality of their assets, rather than through unique technological platforms.

Performance and Strategic Responses

The macro environment, marked by elevated inflation, rising interest rates, and evolving work patterns, has significantly impacted the office sector. CIO's recent financial performance reflects these dynamics alongside its strategic responses. For the three months ended March 31, 2025, rental and other revenues were $42.3 million, a decrease from $44.5 million in the prior year period. This decline was primarily attributed to the strategic dispositions of the Superior Pointe property in January 2025 and Cascade Station in June 2024, as well as lower occupancy at specific properties like 2525 McKinnon and Intellicenter. However, these decreases were partially offset by revenue growth at Bloc 83 and Mission City, demonstrating the uneven impact of market conditions across the portfolio. Property operating expenses also decreased, falling from $17.7 million in Q1 2024 to $16.3 million in Q1 2025, largely due to the aforementioned dispositions and lower property tax accruals.

Despite the top-line revenue decrease, operational performance showed signs of strength in core assets. Net operating income (NOI) for Q1 2025 was $26.0 million, slightly lower than $26.7 million in Q1 2024. However, sequential performance improved, with Q1 2025 NOI increasing by $500,000 compared to Q4 2024, driven by higher revenue from strong same-store results and lower operating expenses. Same-store cash NOI, a key metric for evaluating the performance of existing assets, saw a healthy 4.4% increase in Q1 2025 compared to the prior year, building on the 3.3% growth reported in Q4 2024. This growth was significantly influenced by Bloc 83 in Raleigh, where signed leases have commenced, highlighting the success of leasing efforts in this key market.

Leasing activity remains a critical operational focus. In Q1 2025, the company completed 144,000 square feet of total leasing. Over the last 12 months, CIO has achieved an impressive 8.5% positive cash releasing spread on renewals, indicating their ability to capture higher rents on expiring leases. This follows a 5.9% cash rent roll-up reported for the full year 2024. These figures underscore the demand for CIO's properties in their target markets and the effectiveness of their leasing strategy, particularly in securing favorable terms on renewals.

The company's strategic initiatives are directly aimed at enhancing portfolio value and competitiveness. Since 2021, CIO has invested in significant property upgrades and amenity enhancements across nine properties, with recent major projects at Pima Center and 5090 in Phoenix, 2525 McKinnon in Dallas, and City Center in St. Petersburg. These $10 million in planned renovations are designed to make assets more attractive to tenants and provide a competitive edge, particularly against older or less amenitized stock in their markets. Furthermore, the proactive development of 231,000 square feet of modern spec suites since 2021, with over 75% already leased, demonstrates an operational strategy to reduce downtime and appeal to tenants seeking ready-to-occupy space.

Liquidity, Debt, and Future Opportunities

Managing liquidity and debt is paramount in the current interest rate environment. As of March 31, 2025, CIO had $22.0 million in cash and cash equivalents and $14.6 million in restricted cash, totaling $36.6 million. Total debt stood at $646 million, resulting in a net debt to EBITDA ratio of 6.7 times. This leverage metric is higher than some peers, for example, BXP's 2024 Debt/Equity Ratio was 3.14, SLG's was 1.15, VNO's was 1.74, and KRC's was 0.88 (note: Debt/Equity and Net Debt/EBITDA are different metrics, but generally indicate leverage levels). CIO's higher leverage exposes it to greater risk from rising interest rates and challenging refinancing conditions.

The company has been actively addressing its debt maturity profile. The Unsecured Credit Facility, with $255 million outstanding as of March 31, 2025, matures in November 2025. However, the company expects to exercise its 12-month extension option in August 2025, contingent on meeting debt covenants, which they project they will comfortably do. Beyond this, they plan to pursue a longer-term renewal. Two property-level loans mature in Q4 2025 (Greenwood Blvd and Intellicenter). CIO is in advanced discussions for a three-year extension at Greenwood Blvd and has initiated discussions for a short-term extension at Intellicenter. These efforts are critical to navigating upcoming maturities and maintaining financial flexibility.

Recent debt management actions include the transfer of the Cascade Station property to the lender in Q2 2024, which reduced debt by approximately $21 million, and securing extensions for the Central Fairwinds (five years) and FRP Ingenuity Drive (two years) loans. Despite these successes, cash sweep periods have been triggered at SanTan, Intellicenter, and FRP Ingenuity Drive due to not meeting debt service coverage or debt yield covenants, resulting in property cash flows being directed to lender-controlled accounts. This highlights the ongoing challenges some assets face in the current market.

To enhance liquidity, CIO is exploring placing financing on its unencumbered, high-value assets, Bloc 83 in Raleigh and City Center in Tampa. Management noted improvements in the office debt capital markets, particularly the CMBS market, which could facilitate these efforts.

A significant long-term value creation initiative is the planned redevelopment of the City Center property's parking garage in downtown St. Petersburg, Florida. The company has partnered with Property Markets Group (PMG) to develop a 49-story residential condominium and mixed-use tower. PMG is investing $17 million in predevelopment costs, and CIO will contribute the land for a 50% partnership interest, participating in future development profits. Presales are expected to begin shortly, with construction anticipated to take about three years after conditions are met. This project represents a strategic move to unlock the value of a well-located asset in a high-demand market by diversifying into a different asset class, although it introduces new risks associated with development and joint ventures.

Outlook and Risks

CIO's outlook for 2025 anticipates continued operational improvement, albeit with some near-term headwinds. The company is maintaining its previously provided guidance ranges. Occupancy is expected to decrease in Q2 2025 due to known tenant vacates, including a significant downsizing at Greenwood Blvd and a vacate at AmberGlen. However, the company anticipates an overall increase in portfolio occupancy by year-end 2025, landing within the 85% to 87% range. This expected recovery is driven by the commencement of 143,000 square feet of signed leases that had not yet taken occupancy as of Q1 2025, with the majority expected to move in over the next two quarters, and continued leasing momentum, particularly in the Sunbelt markets.

The company projects a healthy increase in same-store cash NOI for 2025, with a growth range of 2.5% to 4.5% compared to 2024. The core FFO per share guidance for 2025 is expected to be effectively in line with the annualized Q4 2024 results. Management anticipates that the projected improvements in occupancy and same-store results will drive core FFO per share growth over time. The guidance assumes no further acquisitions or dispositions beyond the Superior Point sale.

Key risks to this outlook include the persistent uncertainty surrounding work-from-home trends and their long-term impact on office demand, the ability to successfully renew or replace expiring leases on favorable terms, and the financial health of tenants. The challenging debt market and potential for continued high interest rates pose risks to refinancing efforts and the cost of capital. Furthermore, the new risk factor related to the St. Petersburg development highlights potential challenges in executing this project, including unforeseen costs, permitting issues, and reliance on the development partner. The risk of failing debt covenants, already evident at some properties, could also impact financial flexibility.

Conclusion

City Office REIT is navigating a complex office market by doubling down on its strategy of focusing on high-quality assets in resilient Sun Belt growth markets. Recent operational performance, marked by strong same-store NOI growth and positive rent spreads on renewals, validates this approach. The company is actively enhancing its portfolio through targeted renovations and spec suites while strategically exiting non-core assets. The planned St. Petersburg redevelopment offers a compelling long-term value creation opportunity, leveraging the company's land holdings in a high-demand market. While challenges remain, particularly concerning debt maturities and the uncertain demand environment, CIO's proactive management of its balance sheet and focus on executing its leasing and asset management strategies position it for potential occupancy and same-store NOI growth in 2025. Investors should monitor the execution of the St. Petersburg project, progress on debt refinancings, and continued leasing momentum in key Sunbelt markets as critical indicators of the company's ability to deliver on its investment thesis.