City Office REIT, Inc. (CIO) is an internally-managed real estate investment trust (REIT) focused on acquiring, owning and operating high-quality office properties in the Sun Belt region of the United States. Since its inception in 2013, the company has strategically assembled a diversified portfolio of office assets located in fast-growing metropolitan areas known for their favorable business climates, strong population growth, and high quality of life.
Business Overview and History
City Office REIT was formed as a Maryland corporation on November 26, 2013, and completed its initial public offering (IPO) on April 21, 2014. The company raised net proceeds from the IPO which were contributed to its operating partnership, City Office REIT Operating Partnership, L.P., in exchange for common units. Both the company and its operating partnership commenced operations upon completion of the IPO and certain related formation transactions.
Over the past decade, City Office has grown its portfolio to 23 properties comprising 56 office buildings with approximately 5.6 million square feet of net rentable area (NRA) as of September 30, 2024. The company’s properties are located in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, Raleigh, San Diego, Seattle and Tampa. Key markets for the REIT include Phoenix, Tampa, Denver and Raleigh, which collectively account for over 70% of the portfolio’s NRA.
The company’s investment strategy has focused on acquiring well-located, high-quality office assets in markets experiencing favorable demographic and economic trends. City Office looks for properties with characteristics such as new or recently renovated condition, functional design, and the ability to attract and retain high-quality tenants. The REIT’s in-house management team utilizes their market-specific knowledge and relationships to identify attractive acquisition opportunities.
In 2018, City Office REIT entered into a credit agreement for an unsecured credit facility that initially provided for commitments of up to $250 million, with an accordion feature allowing the company to borrow up to $500 million, subject to customary terms and conditions. Over the years, the company has amended and restated the credit agreement to increase its total authorized borrowings.
Historically, most of the leases for the company’s properties have been on a full-service gross or net lease basis. However, the company has faced some challenges in recent years. In 2023, City Office consented to the appointment of a receiver to assume possession and control of one of its properties, the 190 Office Center, as a result of an event of default as defined in the property’s non-recourse loan agreement. Additionally, in 2024, the company entered into an assignment in lieu of foreclosure agreement to transfer possession and control of another property, the Cascade Station, to the lender as a result of an event of default.
Financial Performance and Liquidity
For the trailing twelve months ended September 30, 2024, City Office reported total revenues of $179.1 million and a net loss of $2.7 million. The company’s core funds from operations (Core FFO), a key metric for REITs, was $45.6 million or $1.12 per share. Adjusted funds from operations (AFFO), which adjusts FFO for certain non-cash items, was $20.3 million or $0.50 per share.
In the most recent quarter ended September 30, 2024, City Office reported revenue of $42.37 million, representing a 4.0% decrease compared to the same quarter in the previous year. This decline was primarily attributed to the disposition of the Cascade Station property in June 2024, as well as lower occupancy and the write-off of straight-line rent associated with WeWork leases at certain properties. The company reported a net loss of $2.64 million for the quarter, compared to a net income of $0.13 million in Q3 2023. This decrease was mainly due to higher interest expenses and the loss on disposition of Cascade Station.
As of September 30, 2024, City Office had total debt of $648.2 million, resulting in a net debt to EBITDA ratio of 7.0x. The company maintained $43.0 million in cash and cash equivalents, along with $17.1 million in restricted cash. Additionally, the REIT had approximately $42 million of undrawn capacity on its $325 million unsecured credit facility, which matures in November 2025 with a one-year extension option.
The company’s debt-to-equity ratio stood at 0.87 as of September 30, 2024. City Office reported a current ratio and quick ratio of 0.31, indicating potential short-term liquidity challenges. However, the company’s operating cash flow (OCF) and free cash flow (FCF) for the quarter were both $18.28 million, demonstrating its ability to generate cash from operations.
Portfolio Performance and Leasing Activity
City Office’s portfolio occupancy was 83.4% as of September 30, 2024. Including signed leases not yet commenced, the occupancy rate increased to 87.0%. The company executed 141,000 square feet of new and renewal leases during the third quarter, with new leases accounting for 78,000 square feet.
Notable leasing highlights for the quarter included a 26-month lease extension with WeWork at the Bloc 83 property in Raleigh, North Carolina. This extended the occupancy of a 28,000 square foot space that was previously set to expire. City Office also signed two new leases totaling 26,000 square feet at the Pima Center property in Phoenix, Arizona.
The company’s same-store cash net operating income (NOI) increased 0.2% year-over-year in the third quarter, marking a return to positive territory after a 2.0% decrease in the prior quarter. This improvement represented an increase of $55,000 compared to Q3 2023. Management expects further improvement in this metric in the fourth quarter of 2024.
Guidance and Outlook
For the full year 2024, City Office provided the following updated guidance ranges:
The company cited the significant number of signed leases that have or are expected to commence in the fourth quarter of 2024 as a key driver behind the improved guidance. Management remains optimistic about continuing leasing momentum and positive trends in the office sector, particularly in Sun Belt markets.
In the most recent quarter (Q3 2024), City Office reported Core FFO of $11.1 million or $0.27 per share, which was $0.4 million lower than the prior quarter’s $11.5 million or $0.27 per share. Despite this slight decline, the company has narrowed several of its guidance ranges and increased its expected year-end occupancy as well as same-store cash NOI change due to strong leasing results year-to-date.
Management expects to reach an occupancy level of 87.0% by the end of Q3 2024, including signed leases that have not yet commenced. The bulk of the remaining occupancy gains are anticipated to occur in early 2025, as construction schedules for new tenants are finalized.
Risks and Challenges
City Office REIT faces several risks and challenges that investors should be aware of. The company’s performance is heavily dependent on broader economic conditions, including employment levels, business confidence, and the pace of office space demand recovery in its target markets.
Additionally, the ongoing evolution of remote and hybrid work trends could potentially impact tenant space requirements and occupancy levels in the company’s portfolio. City Office also faces competition from newer, more amenitized office properties in its markets, which could pressure rental rates and leasing activity.
Liquidity risk is another consideration, as the REIT will need to refinance debt maturities in 2025 and beyond. While the company currently has ample liquidity, any tightening in credit markets or rising interest rates could make refinancing more challenging.
Conclusion
City Office REIT has established itself as a differentiated office REIT focused on high-growth Sun Belt markets. The company’s strategic portfolio additions, active asset management, and strong liquidity position have helped it navigate the evolving office market environment. Despite facing challenges such as the disposition of properties and lower occupancy in certain assets, City Office has shown resilience by returning to positive same-store cash NOI growth and maintaining a steady Core FFO performance.
The company’s focus on leasing activity and occupancy improvements, particularly in its key markets, demonstrates its commitment to enhancing shareholder value. However, investors should closely monitor the company’s ability to maintain occupancy, rental rates, and leasing momentum in the face of macroeconomic uncertainties and structural changes within the office sector. The success of City Office REIT will largely depend on its ability to capitalize on the ongoing recovery in Sun Belt office markets while effectively managing its debt and liquidity position in the coming years.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.