Business Overview and History
City Office REIT, Inc. (CIO) is an internally-managed real estate investment trust (REIT) that focuses on acquiring, owning, and operating high-quality office properties located primarily in metropolitan areas across the Southern and Western United States. With a strategic footprint in some of the nation's fastest-growing markets, the company has positioned itself to capitalize on the robust demand for office space in these dynamic Sunbelt regions.
City Office REIT was organized in the state of Maryland on November 26, 2013, and completed its initial public offering (IPO) of shares of common stock on April 21, 2014. As part of the IPO, the company contributed the net proceeds to its operating partnership, City Office REIT Operating Partnership, L.P., in exchange for common units. The company elected and intends to continue to operate in a manner that will allow it to qualify as a real estate investment trust (REIT) for U.S. federal income tax purposes.
In the years following its IPO, City Office REIT grew its portfolio through acquisitions of office properties located predominantly in Sun Belt markets. By the end of 2021, the company owned 56 office buildings with a total of approximately 5.6 million square feet of net rentable area in metropolitan areas across the country.
The company faced some challenges in 2022 and 2023 as the COVID-19 pandemic impacted demand for office space. In 2022, the company recognized impairment charges related to two of its properties due to reduced occupancy. It also had to deal with the departure of a major tenant, WeWork, from one of its properties.
To weather these headwinds, City Office REIT focused on proactive asset management, including renovating and upgrading its properties to meet evolving tenant demands. The company also diversified its tenant base, reducing its exposure to any single large tenant. By the end of 2023, the company's portfolio was approximately 84.5% leased.
From its inception, City Office has maintained a clear focus on acquiring and operating office assets in high-growth Sunbelt markets. These regions have consistently demonstrated favorable demographic and employment trends, which have translated into strong demand for office space. The company's strategy of targeting well-located, amenity-rich properties has allowed it to attract and retain a diverse tenant base, including federal and state government agencies as well as national and regional businesses.
Financials and Operational Performance
For the fiscal year ended December 31, 2024, City Office reported total revenue of $171.13 million, a decrease of 4.5% compared to the prior year. This decline was primarily attributable to the disposition of the Cascade Station property in Portland, Oregon and the 190 Office Center property in Dallas, Texas, which reduced revenue by $2.8 million and $2.3 million, respectively. Additionally, lower occupancy at several other properties, including 2525 McKinnon, Superior Pointe, and Intellicenter, contributed to the year-over-year revenue decrease.
Despite the revenue decline, the company's net operating income (NOI) remained relatively stable, decreasing by only 6.8% to $101.67 million. This was primarily due to the company's effective cost management, as total operating expenses increased by just 3.1% to $152.44 million. Within this, property operating expenses actually decreased by 0.7% to $69.46 million, while general and administrative expenses increased by 2.4% to $15.20 million.
City Office's core funds from operations (Core FFO), a key metric for REITs, was $47.8 million, or $1.12 per diluted share, for the full year 2024. This represented a 4.9% decrease compared to the prior year, largely due to the aforementioned revenue decline and higher interest expense.
The company's net income for the fiscal year 2024 was -$17.68 million, reflecting the challenging market conditions and property dispositions. Operating cash flow remained strong at $58.86 million, providing the company with sufficient liquidity to fund its operations and strategic initiatives.
In the fourth quarter of 2024, City Office reported revenue of $41.92 million, representing a year-over-year decrease of 5.4%. The net loss for the quarter was $12.56 million, primarily due to the factors affecting the full-year results.
Liquidity and Balance Sheet
The company's balance sheet remains well-capitalized, with total debt of $646.97 million as of December 31, 2024. The weighted average interest rate on this debt was 4.52%, and the company maintained a net debt to EBITDA ratio of 6.9x. City Office has access to ample liquidity, with $34 million in cash and cash equivalents and an additional $42 million available under its $325 million unsecured credit facility.
The company's debt-to-equity ratio stood at 0.88, indicating a balanced capital structure. The current ratio and quick ratio were both 0.32, reflecting the company's ability to meet its short-term obligations. City Office had $34 million in cash and restricted cash as of December 31, 2024, providing additional financial flexibility.
Operational Highlights and Strategic Initiatives
A key focus for City Office in 2024 was enhancing the quality and appeal of its office properties through strategic renovations and the addition of modern, amenity-rich spaces. The company completed significant upgrades at nine of its properties, including the addition of 231,000 square feet of new spec suites, which were over 75% leased as of year-end.
These proactive efforts have contributed to strong leasing results, with the company executing 806,000 square feet of new and renewal leases during 2024 – a 35% increase compared to the prior year. Notably, the company signed a 60,000 square foot lease expansion with an existing tenant at its Terraces property in Dallas, where the negotiated rental rate for the new space was 17% higher than the tenant's existing lease.
City Office achieved a robust 5.9% cash rent roll-up upon renewal in 2024, demonstrating the company's ability to capture higher rents in its target markets. The company's same-store cash NOI trended higher in Q4 2024, with a healthy increase of 3.3% or $760,000 compared to Q4 2023.
Portfolio occupancy ended Q4 2024 at 85.4%, an increase of 2 percentage points from the prior quarter. Occupancy was 87.6% inclusive of signed leases not yet commenced, indicating potential for further revenue growth as these leases take effect.
Looking ahead, City Office's management team remains focused on driving long-term cash flow growth through continued leasing momentum, active asset management, and value-creation opportunities. The company's 2025 guidance calls for 2.5% to 4.5% growth in same-store cash NOI, supported by anticipated occupancy gains, particularly in its Sunbelt markets.
One such value-creation project is the potential redevelopment of the company's City Center property in downtown St. Petersburg, Florida. The site plan for this mixed-use waterfront development has received unanimous approval from the city, and City Office is advancing agreements with an experienced development partner to lead the execution. While still subject to various conditions, this project represents a promising opportunity to unlock additional value for shareholders.
Office Properties Segment
City Office REIT's primary business is its Office Properties segment, which encompasses its portfolio of office buildings. As of December 31, 2024, the company owned 56 office buildings with a total of approximately 5.6 million square feet of net rentable area (NRA) across 23 office complexes in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, Raleigh, San Diego, Seattle, and Tampa.
The office properties are primarily leased on a full-service gross or net lease basis. Full-service gross leases generally have a base year expense stop, where the company pays a stated amount of expenses as part of the rent payment, while future increases above the base year stop in property operating expenses are billed to the tenant based on their proportionate square footage. In a triple-net lease, the tenant is typically responsible for all property taxes and operating expenses.
As of December 31, 2024, the operating properties in the company's portfolio were 85.4% leased, with a weighted average remaining lease term of 4.5 years. The leases typically include rent escalation provisions designed to provide annual growth in rental income, as well as the ability to pass through cost escalations to tenants.
2025 Guidance and Outlook
For 2025, City Office provided guidance that reflects its confidence in the continued strength of its Sunbelt markets and the effectiveness of its strategic initiatives. The company's Core FFO per share guidance range is effectively in line with Q4 2024 results on an annualized basis, indicating stability in its core operations.
City Office expects occupancy growth to occur primarily in its Sunbelt markets, which have the strongest leasing dynamics and value creation potential. The company is anticipating a healthy increase in same-store cash NOI, with a range of 2.5% to 4.5% growth compared to the prior year.
The 2025 guidance assumes no acquisitions or dispositions beyond the recent sale of Superior Point in Denver. City Office has two property debt maturities in 2025 and plans to discuss refinancing options on the next earnings call, demonstrating proactive management of its debt profile.
Risks and Challenges
As with any real estate investment, City Office faces various risks and challenges that could impact its financial and operational performance. These include:
1. Tenant concentration risk: Approximately 24.3% of the company's base rental revenue is derived from its ten largest tenants. The loss of a significant tenant could adversely affect the company's results.
2. Competition in target markets: City Office operates in highly competitive office markets, which could pressure occupancy rates and rental rates, particularly in regions experiencing new supply.
3. Macroeconomic and industry headwinds: Factors such as rising interest rates, inflation, and changes in work-from-home trends could negatively impact demand for office space and the company's ability to renew or re-lease vacant space.
4. Regulatory and compliance risks: As a REIT, City Office must adhere to various organizational and operational requirements to maintain its tax-advantaged status, which could become more burdensome over time.
Conclusion
City Office REIT has established a strong foothold in some of the country's most dynamic Sunbelt office markets, positioning the company to capitalize on the robust demand for high-quality office space in these fast-growing regions. Despite facing some near-term headwinds, the company's strategic focus on enhancing its portfolio, driving leasing activity, and pursuing value-creation opportunities underscores its commitment to delivering long-term value for shareholders.
The company's solid operational performance in 2024, including strong leasing activity and improving occupancy rates, provides a foundation for continued growth in 2025. With a well-capitalized balance sheet, ample liquidity, and a clear strategic vision, City Office REIT appears well-positioned to navigate the evolving office market landscape and capitalize on opportunities in its target Sunbelt markets.
As City Office continues to execute on its strategic initiatives and benefit from the positive demographic and economic trends in its core markets, investors may find the company's growth prospects and attractive valuation compelling. The company's focus on high-quality, amenity-rich office properties in fast-growing Sunbelt markets should continue to drive demand from a diverse tenant base, supporting long-term cash flow growth and shareholder value creation.