Table of Contents
 
 
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,September 30, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
to
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
of
incorporation
 or organi
z
ation
)
(I.R.S. Employer
Identificatio
nof 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
“CIO”
New York Stock Exchange
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.     
Large accelerated filer ☐  Accelerated filer ☒
Large accelerated Non-accelerated
filer
 
☐
  
Accelerated filer
☒
Non-accelerated
filer
☐
Smaller reporting company
 ☐
   
Emerging growth company
 ☐
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 4,November 2, 2020 was 47,571,517.43,397,117.
 
Table of Contents
City Office REIT, Inc.
Quarterly Report on Form
10-Q
For the Quarter Ended March 31,September 30, 2020
Table of Contents
PART I. FINANCIAL INFORMATION
   
3
 
Item 1. Financial Statements
   
3
 
Condensed Consolidated Balance Sheets as of March 31,September 30, 2020 and December 31, 2019
   
3
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31,September 30, 2020 and 2019
   
4
 
Condensed Consolidated Statements of Comprehensive IncomeIncome/(Loss) for the Three and Nine Months Ended March 31,September 30, 2020 and 2019
   
5
 
Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended March 31,September 30, 2020 and 2019
   
6
 
Condensed Consolidated Statements of Cash Flows for the ThreeNine Months Ended March 31,September 30, 2020 and 2019
   
7
8		 
Notes to Condensed Consolidated Financial Statements
   
8
9		 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
17
19		 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
26
31		 
Item 4. Controls and Procedures
   
26
31		 
PART II. OTHER INFORMATION
   
27
32		 
Item 1. Legal Proceedings
   
27
32		 
Item 1A. Risk Factors
   
27
32		 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
28
33		 
Item 3. Defaults Upon Senior Securities
   
29
34		 
Item 4. Mine Safety Disclosures
   
29
34		 
Item 5. Other Information
   
29
34		 
Item 6. Exhibits
   
29
35		 
Signatures
   
31
36		 
 
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
City Office REIT, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, ex
c
ept par value and share data)
         
 
March 31,
2020
  
December 31,
2019
 
Assets
      
Real estate properties
      
Land
 $
230,034
  $
230,034
 
Building and improvement
  
786,939
   
784,636
 
Tenant improvement
  
97,474
   
94,218
 
Furniture, fixtures and equipment
  
285
   
285
 
         
  
1,114,732
   
1,109,173
 
Accumulated depreciation
  
(111,177
)  
(101,835
)
         
  
1,003,555
   
1,007,338
 
         
Cash and cash equivalents
  
146,509
   
70,129
 
Restricted cash
  
18,328
   
17,394
 
Rents receivable, net
  
32,875
   
32,112
 
Deferred leasing costs, net
  
14,249
   
12,393
 
Acquired lease intangibles assets, net
  
62,104
   
67,533
 
Other assets
  
16,054
   
17,061
 
Assets held for sale
  
4,543
   
4,514
 
         
Total Assets
 $
1,298,217
  $
1,228,474
 
         
Liabilities and Equity
      
Liabilities:
  
 
   
 
 
Debt
 $
706,031
  $
607,250
 
Accounts payable and accrued liabilities
  
27,354
   
28,786
 
Deferred re
nt
  
5,298
   
6,593
 
Tenant rent deposits
  
5,660
   
5,658
 
Acquired lease intangible liabilities, net
  
7,604
   
8,194
 
Other liabilities
  
19,711
   
22,794
 
Liabilities related to assets held for sale
  
87
   
67
 
         
Total Liabilities
  
771,745
   
679,342
 
         
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
  
112,000
   
112,000
 
Common stock, $0.01 par value, 100,000,000 shares authorized, 53,175,051 and 54,591,047 shares issued and outstanding
  
531
   
545
 
Additional
paid-in
capital
  
566,122
   
577,131
 
Accumulated deficit
  
(151,264
)  
(142,383
)
Accumulated other comprehensive
(loss)/
income
  
(2,026
)  
715
 
         
Total Stockholders’ Equity
  
525,363
   
548,008
 
Non-controlling
interests in properties
  
1,109
   
1,124
 
         
Total Equity
  
526,472
   
549,132
 
         
Total Liabilities and Equity
 $
1,298,217
  $
1,228,474
 
         
Subsequent Events (Note 11)
      
The accompanying notes are an integral part of these condensed consolidated financial statement
s
.
3
City Office REIT, Inc.
Condensed Consolidated Statements of OperationsBalance Sheets
(Unaudited)
(In thousands, except perpar value and share data)
         
 
 
Three Months Ended
March 31,
 
 
2020
  
2019
 
Rental and other revenues
 $
40,122
  $
37,120
 
Operating expenses:
      
Property operating expens
es
  
14,694
   
13,844
 
General and administrative
  
2,783
   
2,299
 
Depreciation and amortization
  
14,953
   
14,417
 
         
Total operating expenses
  
32,430
   
30,560
 
         
Operating income
  
7,692
   
6,560
 
Interest expense:
      
Contractual interest expense
  
(6,362
)  
(7,143
)
Amortization of deferred financing costs and debt fair value
  
(324
)  
(337
)
         
  
(6,686
)  
(7,480
)
         
Net income/(loss)
  
1,006
   
(920
)
Less:
      
Net income attributable to
non-controlling
interests in properties
  
(182
)  
(169
)
         
Net income/(loss) attributable to the Company
  
824
   
(1,089
)
Preferred stock distributions
  
(1,855
)  
(1,855
)
         
Net loss attributable to common stockholders
 $
(1,031
) $
(2,944
)
         
Net loss per common share:
      
Basic
 $
(0.02
) $
(0.07
)
         
Diluted
 $
(0.02
) $
(0.07
)
         
Weighted average common shares outstanding:
      
Basic
  
54,458
   
39,565
 
         
Diluted
  
54,458
   
39,565
 
         
Dividends distributions declared per common share
 $
0.150
  $
0.235
 
         
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
   
September 30,

2020
  
December 31,
2019
 
Assets
   
Real estate properties
   
Land
  $230,034  $230,034 
Building and improvement
   790,981   784,636 
Tenant improvement
   107,335   94,218 
Furniture, fixtures and equipment
   285   285 
  
 
 
  
 
 
 
   1,128,635   1,109,173 
Accumulated depreciation
   (129,620)   (101,835) 
  
 
 
  
 
 
 
   999,015   1,007,338 
  
 
 
  
 
 
 
Cash and cash equivalents
   38,399   70,129 
Restricted cash
   17,962   17,394 
Rents receivable, net
   34,756   32,112 
Deferred leasing costs, net
   14,954   12,393 
Acquired lease intangible assets, net
   51,552   67,533 
Other assets
   16,174   17,061 
Assets held for sale
   —     4,514 
  
 
 
  
 
 
 
Total Assets
  $1,172,812  $1,228,474 
  
 
 
  
 
 
 
Liabilities and Equity
   
Liabilities:
   
Debt
  $678,533  $607,250 
Accounts payable and accrued liabilities
   32,633   28,786 
Deferred rent
   6,103   6,593 
Tenant rent deposits
   5,418   5,658 
Acquired lease intangible liabilities, net
   6,484   8,194 
Other liabilities
   18,523   22,794 
Liabilities related to assets held for sale
   —     67 
  
 
 
  
 
 
 
Total Liabilities
   747,694   679,342 
  
 
 
  
 
 
 
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
   112,000   112,000 
Common stock, $0.01 par value, 100,000,000 shares authorized, 43,397,117 and 54,591,047 shares issued and outstanding
   433   545 
Additional
paid-in
capital
   478,774   577,131 
Accumulated deficit
   (164,917)   (142,383) 
Accumulated other comprehensive (loss)/income
   (2,190)   715 
  
 
 
  
 
 
 
Total Stockholders’ Equity
   424,100   548,008 
Non-controlling
interests in properties
   1,018   1,124 
  
 
 
  
 
 
 
Total Equity
   425,118   549,132 
  
 
 
  
 
 
 
Total Liabilities and Equity
  $1,172,812  $1,228,474 
  
 
 
  
 
 
 
4
City Office REIT, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
         
 
Three Months
 
Ended
March 31,
 
 
2020
  
2019
 
Net income/(loss)
 $
1,006
  $
(920
)
Other comprehensive loss:        
Unrealized cash flow hedge loss
  
(2,690
)  
—  
 
Amounts reclassified to interest expense
  
(51
)  
—  
 
         
Other comprehensive loss  (2,741)  —   
         
Comprehensive loss
  
(1,735
)  
(920
)
Less:
      
Comprehensive income attributable to
non-controlling
interests in properties
  
(182
)  
(169
)
         
Comprehensive loss attributable to the Company
  
(1,917
)  
(1,089
)
Preferred stock distributions
  
(1,855
)  
(1,855
)
         
Comprehensive loss attributable to common stockholders
 $
(3,772
) $
(2,944
)
         
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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
 
 
Accumulated
deficit
 
 
Accumulated
other
comprehensive
(loss)/income
 
 
Total
stockholders’
equity
 
 
Non-
controlling
interests in
properties
 
 
Total
equity
 
Balance—December 31, 2019
 
 
4,480
 
 
$
112,000
 
 
 
54,591
 
 
$
545
 
 
$
577,131
 
 
$
(142,383
)
 
$
715
 
 
$
548,008
 
 
$
1,124
 
 
$
 
 
549,132
 
Restricted stock award grants and vesting
 
 
—
 
 
 
—
 
 
 
35
 
 
 
—
   
599
   
(79
)
  
—
 
 
 
520
 
 
 
—
 
 
 
520
 
Common stock repurchased
 
 
—
 
 
 
—
 
 
 
(1,451
)
 
 
(14
)
 
 
(11,608
)
 
 
—
 
 
 
—
 
 
 
(11,622
)
 
 
—
 
 
 
(11,622
)
Common stock dividend distribution declared
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(7,771
)
 
 
—
 
 
 
(7,771
)
 
 
—
 
 
 
(7,771
)
Preferred stock dividend distribution declared
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(1,855
)
 
 
—
 
 
 
(1,855
)
 
 
—
 
 
 
(1,855
)
Contributions
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
3
 
 
 
3
 
Distributions
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(200
)
 
 
(200
)
Net income
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
824
 
 
 
—
 
 
 
824
 
 
 
182
 
 
 
1,006
 
Other comprehensive loss
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
 
(2,741
)
 
 
(2,741
)
 
 
—
 
 
 
 
(2,741
)
                                         
Balance—March 31, 2020
  
4,480
  $
112,000
   
53,175
  $
531
  $
566,122
  $
(151,264
) $
(2,026
) $
525,363
  $
1,109
  $
526,472
 
                                         
 
 
Nu
mber
 
of
shares of
preferred
 
stock
 
 
Preferred
stock
 
 
Number
of
shares
 
o
f
common
 
stock
 
 
Common
stock
 
 
Additional
paid-in
capital
 
 
Accumulated
deficit
 
 
Accumulated
other
comprehensive
(loss)/income
 
 
Total
stockholders’
equity
 
 
Non
-
controlling
interests
 
in
properties
 
 
Total
equity
 
Balance—December 31, 2018
  
4,480
  $
112,000
   
39,544
  $
395
  $
377,126
  $
(92,108
) $
  —  
  $
397,413
  $
964
  
$
 
 
398,377
 
Restricted stock award grants and vesting
  
—  
   
—  
   
92
   
1
   
302
   
(83
)  
—  
   
220
   
—  
   
220
 
Common stock dividend distribution declared
  
—  
   
—  
   
—  
   
—  
   
—  
   
(9,314
)  
—  
   
(9,314
)  
—  
   
(9,314
)
Preferred stock dividend distribution declared
  
—  
   
—  
   
—  
   
—  
   
—  
   
(1,855
)  
—  
   
(1,855
)  
—  
   
(1,855
)
Contributions
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
12
   
12
 
Distributions
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
(134
)  
(134
)
Net income
  
—  
   
—  
   
—  
   
—  
   
—  
   
(1,089
)  
—  
   
(1,089
)  
169
   
(920
)
                                         
Balance—March 31, 2019
  
4,480
  $
112,000
   
39,636
  $
396
  $
377,428
  $
(104,449
) $
  —  
  $
385,375
  $
1,011
  $
386,386
 
                                         
The accompanying notes are an integral part of these condensed consolidated financial statements
.
6
3
Table of Contents
City Office REIT, Inc.
Condensed Consolidated Statements of Cash FlowsOperations
(Unaudited)
(In thousands)thousands, except per share data)
         
 
Three Months Ended
March 31,
 
 
2020
  
2019
 
Cash Flows from Operating Activities:
      
Net income/(loss)
 $
1,006
  $
(920
)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
      
Depreciation and amortization
  
14,953
   
14,417
 
Amortization of deferred financing costs and debt fair value
  
324
   
337
 
Amortization of above/below market leases
  
14
   
(27
)
Increase in straight-line rent/expense
  
(704
)  
(1,454
)
Non-cash
stock compensation
  
569
   
444
 
Changes in
non-cash
working capital:
      
Rents receivable, net
  
(38
)  
(225
)
Other assets
  
190
   
(1,710
)
Accounts payable
 
and
accrued liabilities
  
(4,282
)  
(7,506
)
Deferred rent
  
(1,295
)  
(485
)
Tenant rent deposits
  
2
   
(45
)
         
Net Cash Provided By Operating Activities
  
10,739
   
2,826
 
         
Cash Flows to Investing Activities:
      
Additions to real estate properties
  
(3,137
)  
(2,292
)
Acquisition of real estate
  
—
   
(51,070
)
Net proceeds from sale of real estate
  
—
   
17,426
 
Deferred leasing costs
  
(2,195
)  
(811
)
         
Net Cash Used In Investing Activities
  
(5,332
)  
(36,747
)
         
Cash Flows from Financing Activities:
      
Repurchases of common stock
  
(11,622
)  
—  
 
Debt issuance and extinguishment costs
  
—
   
(516
)
Proceeds from borrowings
  
100,000
   
75,950
 
Repayment of borrowings
  
(1,541
)  
(26,137
)
Shares withheld for payment of taxes on restricted stock unit vesting
  
(49
)  
(224
)
Contributions from
non-controlling
interests in properties
  
3
   
12
 
Distributions to
non-controlling
interests in properties
  
(200
)  
(134
)
Dividend distributions paid to stockholders
  
(14,684
)  
(11,148
)
         
Net Cash Provided By Financing Activities
  
71,907
   
37,803
 
         
Net Increase in Cash, Cash Equivalents and Restricted Cash
  
77,314
   
3,882
 
Cash, Cash Equivalents and Restricted Cash, Beginning of Period
  
87,523
   
33,145
 
         
Cash, Cash Equivalents and Restricted Cash, End of Period
 $
164,837
  $
37,027
 
         
Reconciliation of Cash, Cash Equivalents and Restricted Cash:
      
Cash and Cash Equivalents, End of Period
  
146,509
   
15,314
 
Restricted Cash, End of Period
  
18,328
   
21,713
 
         
Cash, Cash Equivalents and Restricted Cash, End of Period
 $
164,837
  $
37,027
 
         
Supplemental Disclosures of Cash Flow Information:
      
Cash paid for interest
 $
6,111
  $
6,679
 
Purchase of additions in real estate properties included in accounts payable
 $
2,587
  $
4,161
 
Purchase of deferred leasing costs included in accounts payable
 $
284
  $
192
 
 
   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
   
2020
  
2019
  
2020
  
2019
 
Rental and other revenues
  $41,261  $38,946  $121,000  $117,236 
Operating expenses:
     
Property operating expenses
   14,886   14,384   43,666   42,754 
General and administrative
   2,546   2,775   8,025   8,435 
Depreciation and amortization
   15,189   15,035   45,222   44,057 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total operating expenses
   32,621   32,194   96,913   95,246 
  
 
 
  
 
 
  
 
 
  
 
 
 
Operating income
   8,640   6,752   24,087   21,990 
Interest expense:
     
Contractual interest expense
   (6,620)   (7,378)   (19,773)   (22,022) 
Amortization of deferred financing costs and debt fair value
   (328)   (321)   (993)   (992) 
  
 
 
  
 
 
  
 
 
  
 
 
 
   (6,948)   (7,699)   (20,766)   (23,014) 
Net gain on sale of real estate property
   1,347   —     1,347   478 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income/(loss)
   3,039   (947)   4,668   (546) 
Less:
     
Net income attributable to
non-controlling
interests in properties
   (153)   (164)   (514)   (498) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income/(loss) attributable to the Company
   2,886   (1,111)   4,154   (1,044) 
Preferred stock distributions
   (1,855)   (1,855)   (5,565)   (5,565) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income/(loss) attributable to common stockholders
  $1,031  $(2,966)  $(1,411)  $(6,609) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income/(loss) per common share:
     
Basic
  $0.02  $(0.07)  $(0.03)  $(0.16) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Diluted
  $0.02  $(0.07)  $(0.03)  $(0.16) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted average common shares outstanding:
     
Basic
   43,593   42,591   48,508   40,610 
  
 
 
  
 
 
  
 
 
  
 
 
 
Diluted
   44,014   42,591   48,508   40,610 
  
 
 
  
 
 
  
 
 
  
 
 
 
Dividend distributions declared per common share
  $0.150  $0.235  $0.450  $0.705 
  
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
7
4
Table of Contents
City Office REIT, Inc.
Condensed Consolidated Statements of Comprehensive Income/(Loss)
(Unaudited)
(In thousands)
   
Three Months Ended

September 30,
  
Nine Months Ended

September 30,
 
   
2020
  
2019
  
2020
  
2019
 
Net income/(loss)
  $3,039  $(947)  $4,668  $(546) 
Other comprehensive income/(loss):
     
Unrealized cash flow hedge (loss)/gain
   (7)   279   (3,091)   279 
Amounts reclassified to interest expense
   141   (32)   186   (32) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Other comprehensive income/(loss)
   134   247   (2,905)   247 
  
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive income/(loss)
   3,173   (700)   1,763   (299) 
Less:
     
Comprehensive income attributable to
non-controlling
interests in properties
   (153)   (164)   (514)   (498) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive income/(loss) attributable to the Company
   3,020   (864)   1,249   (797) 
Preferred stock distributions
   (1,855)   (1,855)   (5,565)   (5,565) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive income/(loss) attributable to common stockholders
  $1,165  $(2,719)  $(4,316)  $(6,362) 
  
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
5
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
  
Accumulated
deficit
  
Accumulated
other
comprehensive
(loss)/income
  
Total
stockholders’
equity
  
Non-

controlling
interests in
properties
  
Total
equity
 
Balance—December 31, 2019
   4,480   $112,000    54,591  $ 545  $577,131  $ (142,383)  $715  $548,008  $1,124  $549,132 
Restricted stock award grants and vesting
   —      —      35   —     599   (79)   —     520   —     520 
Common stock repurchased
   —      —      (1,451)   (14)   (11,608)   —     —     (11,622)   —     (11,622) 
Common stock dividend distribution declared
   —      —      —     —     —     (7,771)   —     (7,771)   —     (7,771) 
Preferred stock dividend distribution declared
   —      —      —     —     —     (1,855)   —     (1,855)   —     (1,855) 
Contributions
   —      —      —     —     —     —     —     —     3   3 
Distributions
   —      —      —     —     —     —     —     —     (200)   (200) 
Net income
   —      —      —     —     —     824   —     824   182   1,006 
Other comprehensive loss
   —      —      —     —     —     —     (2,741)   (2,741)   —     (2,741) 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance—March 31, 2020
   4,480   $112,000    53,175  $531  $566,122  $(151,264)  $(2,026)  $525,363  $1,109  $ 526,472 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Restricted stock award grants and vesting
   —      —      135   2   659   (66)   —     595   —     595 
Common stock repurchased
   —      —      (8,799)   (88)   (77,961)   —     —     (78,049)   —     (78,049) 
Common stock dividend distribution declared
   —      —      —     —     —     (6,649)   —     (6,649)   —     (6,649) 
Preferred stock dividend distribution declared
   —      —      —     —     —     (1,855)   —     (1,855)   —     (1,855) 
Distributions
   —      —      —     —     —     —     —     —     (184)   (184) 
Net income
   —      —      —     —     —     444   —     444   179   623 
Other comprehensive loss
   —      —      —     —     —     —     (298)   (298)   —     (298) 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance—June 30, 2020
   4,480   $112,000    44,511  $445  $488,820  $(159,390)  $(2,324)  $439,551  $1,104  $440,655 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Restricted stock award grants and vesting
   —      —      —     0     636   (49)   —     587   —     587 
Common stock repurchased
   —      —      (1,114)   (12)   (10,682)   —     —     (10,694)   —     (10,694) 
Common stock dividend distribution declared
   —      —      —     —     —     (6,509)   —     (6,509)   —     (6,509) 
Preferred stock dividend distribution declared
   —      —      —     —     —     (1,855)   —     (1,855)   —     (1,855) 
Distributions
   —      —      —     —     —     —     —     —     (239)   (239) 
Net income
   —      —      —     —     —     2,886   —     2,886   153   3,039 
Other comprehensive income
   —      —      —     —     —     —     134   134   —     134 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance—September 30, 2020
   4,480   $112,000    43,397  $433  $478,774  $(164,917)  $(2,190)  $424,100  $1,018  $425,118 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
6
Table of Contents
   
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)/income
   
Total
stockholders’
equity
  
Non-

controlling
interests in
properties
  
Total
equity
 
Balance—December 31, 2018
   4,480   $112,000    39,544   $ 395   $377,126   $ (92,108)  $ —     $397,413  $964  $398,377 
Restricted stock award grants and vesting
   —      —      92    1    302    (83)   —      220   —     220 
Common stock dividend distribution declared
   —      —      —      —      —      (9,314)   —      (9,314)   —     (9,314) 
Preferred stock dividend distribution declared
   —      —      —      —      —      (1,855)   —      (1,855)   —     (1,855) 
Contributions
   —      —      —      —      —      —     —      —     12   12 
Distributions
   —      —      —      —      —      —     —      —     (134)   (134) 
Net income
   —      —      —      —      —      (1,089)   —      (1,089)   169   (920) 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Balance—March 31, 2019
   4,480   $112,000    39,636   $396   $377,428   $ (104,449)  $—     $385,375  $1,011  $386,386 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Restricted stock award grants and vesting
   —      —      11    —      509    (99)   —      410   —     410 
Common stock dividend distribution declared
   —      —      —      —      —      (9,318)   —      (9,318)   —     (9,318) 
Preferred stock dividend distribution declared
   —      —      —      —      —      (1,855)   —      (1,855)   —     (1,855) 
Contributions
   —      —      —      —      —      —     —      —     10   10 
Distributions
   —      —      —      —      —      —     —      —     (156)   (156) 
Net income
   —      —      —      —      —      1,156   —      1,156   165   1,321 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Balance—June 30, 2019
   4,480   $112,000    39,647   $396   $377,937   $ (114,565)  $—     $375,768  $1,030  $ 376,798 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Restricted stock award grants and vesting
   —      —      —      —      527    (95)   —      432   —     432 
Net proceeds from sale of common stock
   —      —      8,000    80    104,736    —     —      104,816   —     104,816 
Common stock dividend distribution declared
   —      —      —      —      —      (11,197)   —      (11,197)   —     (11,197) 
Preferred stock dividend distribution declared
   —      —      —      —      —      (1,855)   —      (1,855)   —     (1,855) 
Contributions
   —      —      —      —      —      —     —      —     46   46 
Distributions
   —      —      —      —      —      —     —      —     (180)   (180) 
Net income
   —      —      —      —      —      (1,111)   —      (1,111)   164   (947) 
Other comprehensive income
   —      —      —      —      —      —     247    247   —     247 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Balance—September 30, 2019
   4,480   $112,000    47,647   $476   $483,200   $ (128,823)  $247   $467,100  $1,060  $    468,160 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
7
Table of Contents
City Office REIT, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
   
Nine Months Ended

September 30,
 
   
2020
  
2019
 
Cash Flows from Operating Activities:
   
Net income/(loss)
  $4,668  $(546) 
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
     
Depreciation and amortization
   45,222   44,057 
Amortization of deferred financing costs and debt fair value
   993   992 
Amortization of above and below market leases
   (70)   (67) 
Straight-line rent/expense
   (2,354)   (4,591) 
Non-cash
stock compensation
   1,745   1,310 
Net gain on sale of real estate property
   (1,347)   (478) 
Changes in
non-cash
working capital:
     
Rents receivable, net
   (235)   (1,512) 
Other assets
   (110)   (337) 
Accounts payable and accrued liabilities
   (151)   (1,217) 
Deferred rent
   (490)   73 
Tenant rent deposits
   (240)   (421) 
  
 
 
  
 
 
 
Net Cash Provided By Operating Activities
   47,631   37,263 
  
 
 
  
 
 
 
Cash Flows to Investing Activities:
     
Additions to real estate properties
   (17,105)   (13,855) 
Acquisition of real estate
   —     (108,358) 
Net proceeds from sale of real estate.
   6,340   33,941 
Deferred leasing costs
   (4,479)   (2,474) 
  
 
 
  
 
 
 
Net Cash Used In Investing Activities
   (15,244)   (90,746) 
  
 
 
  
 
 
 
Cash Flows (to)/from Financing Activities:
     
Repurchases of common stock
   (100,365)   —   
Proceeds from sale of common stock
   —     104,816 
Debt issuance and extinguishment costs
   —     (995) 
Proceeds from borrowings
   130,000   154,750 
Repayment of borrowings
   (59,707)   (171,575) 
Shares withheld for payment of taxes on restricted stock unit vesting
   (43)   (246) 
Contributions from non-controlling interests in properties .
   3   68 
Distributions to
non-controlling
interests in properties
   (623)   (470) 
Dividend distributions paid to stockholders
   (32,814)   (33,489) 
  
 
 
  
 
 
 
Net Cash (Used In)/Provided By Financing Activities
   (63,549)   52,859 
  
 
 
  
 
 
 
Net Decrease in Cash, Cash Equivalents and Restricted Cash
   (31,162)   (624) 
Cash, Cash Equivalents and Restricted Cash, Beginning of Period
   87,523   33,145 
  
 
 
  
 
 
 
Cash, Cash Equivalents and Restricted Cash, End of Period
  $56,361  $32,521 
  
 
 
  
 
 
 
Reconciliation of Cash, Cash Equivalents and Restricted Cash:
     
Cash and Cash Equivalents, End of Period
   38,399   12,281 
Restricted Cash, End of Period
   17,962   20,240 
  
 
 
  
 
 
 
Cash, Cash Equivalents and Restricted Cash, End of Period
  $56,361  $32,521 
  
 
 
  
 
 
 
Supplemental Disclosures of Cash Flow Information:
     
Cash paid for interest
  $19,681  $22,262 
Purchase of additions in real estate properties included in accounts payable
  $9,778  $2,264 
Purchase of deferred leasing costs included in accounts payable
  $797  $298 
Debt assumed on acquisition of real estate
  $—    $22,473 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
8
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
.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 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, 2019.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board 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
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. ASU
2020-04
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 continues to evaluate the impact of ASU
2020-04
on its consolidated financial statements and may elect optional expedients in future periods as reference rate reform activities occur.
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Table of Contents
On April 10, 2020, the Financial Accounting Standards Board (the “FASB”) issued a Staff Q&A to respond to some frequently asked questions about accounting for rent relief related to the effects of the
COVID-19
pandemic. Consequently, for rent relief related to the effects of the
COVID-19
pandemic, an entity will not be required to analyze each contract to determine whether enforceable rights and obligations for abatements exist in the contract and can elect to apply or not apply the lease modification guidance to those contracts. Entities may make the elections for any lessor-provided rent relief related to the effects of the
COVID-19
pandemic (e.g., deferrals of lease payments, reduced future lease payments, etc.) as long as the rent relief does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. To date, the Company granted rent relief to certain tenants, most often in the form of a rent deferral or rent abatement. For rent relief granted that did not result in a substantial increase in the rights of the lessor or the obligations of the lessee, the Company elected to not apply the lease modification guidance and instead account for the rent relief as though the enforceable rights and obligations for the relief existed in the original contract. For rent relief granted that resulted in a substantial increase in the rights of the lessor or the obligations of the lessee, the Company applied the lease modification guidance to the applicable contracts.
3. Real Estate Investments
Acquisitions
During the threenine months ended March 31,September 30, 2020 and 2019 the Company acquired the following properties:
Property
  
Date
Acquired
   
Percentage
Owned
7601 Tech
September 2019100% 
Cascade Station
June
2019		100% 
Canyon Park
   
February 2019
    100%
The foregoing acquisition wasacquisitions were accounted fo
r
for as
an
asset acquisition.
acquisitions.
The following table summarizes the Company’s allocation of the purchase price of assets acquired and liabilities assumed during the threenine months ended March 31,September 30, 2019 (in thousands):
     
 
Canyon
 
Park
 
Land
 $
7,098
 
Buildings and improvements
  
36,619
 
Tenant improvements
  
1,797
 
Lease intangible assets
  
8,109
 
Other assets
  
10
 
Accounts payable and other liabilities
  
(1,266
)
Lease intangible liabilities
  
(1,297
)
     
Net assets acquired
 $
51,070
 
     
 
 
  
Canyon
Park
 
  
Cascade
Station
 
  
7601
Tech
 
  
Total 
Sept. 
30, 2019
 
Land
  
$
7,098
 
  
$
—  
 
  
$
10,865
 
  
$
17,963
 
Building and improvement
  
 
36,619
 
  
 
25,141
 
  
 
25,677
 
  
 
87,437
 
Tenant improvement
  
 
1,797
 
  
 
2,080
 
  
 
3,858
 
  
 
7,735
 
Lease intangible assets
  
 
8,109
 
  
 
3,134
 
  
 
7,401
 
  
 
18,644
 
Other assets
  
 
10
 
  
 
3,164
 
  
 
293
 
  
 
3,467
 
Debt
  
 
—  
 
  
 
(697
) 
  
 
—  
 
  
 
(697
) 
Accounts payable and other liabilities
  
 
(1,266
) 
  
 
(186
) 
  
 
(668
) 
  
 
(2,120
) 
Lease intangible liabilities
  
 
(1,297
) 
  
 
(220
) 
  
 
(79
) 
  
 
(1,596
) 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Net assets acquired
  
$
51,070
 
  
$
32,416
 
  
$
47,347
 
  
$
130,833
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
The acquisition of the Cascade Station property was partially funded through an assumption of debt in the amount of $22.5 million.
Sale of Real Estate Property
On July 23, 2020, the Company sold a land parcel at the Circle Point property in Denver, Colorado for $6.5 million, resulting in an aggregate gain of $1.3 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.
10
Table of Contents
On May 7, 2019, the Company sold the 10455 Pacific Center building of the Sorrento Mesa property in San Diego, California for $16.5 million, resulting in an aggregate gain of $0.5 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.
On February 7, 2019, the Company sold the Plaza 25 property in Denver, Colorado for $17.9 million. No gain or loss was recognized on the sale as the property was carried at fair value less cost to sell on the date of disposition.
Assets Held for Sale
On May 10, 2019, the Company entered into a purchase and sale agreement to sell a land parcel at the Circle Point property for $6.5 million. The Company determined that the land parcel met the criteria for classification as held for sale as of March 31, 2020 and December 31, 2019. The transaction is anticipated to close in the third quarter of 2020, subject to customary closing conditions. As of March 31,On July 23, 2020, the Company has received a $0.5 millioncompleted the sale of the land parcel at the Circle Point property.
non-refundable
deposit.
The property has been was
classified as held for sale as of March 31, 2020 and December 31, 2019 (in thousands):
         
Circle Point Land
 
   March 31,   
2020
  
December 31,
2019
 
Real estate properties, net
 $
  4,543
  $
  4,514
 
         
Assets held for sale
 $
4,543
  $
4,514
 
         
Accounts payable, accrued expenses, deferred rent and tenant rent deposits
 $
(87
) $
(67
)
         
Liabilities related to assets held for sale
 $
(87
) $
(67
)
         
 
9
Circle Point Land
  
December 31,
2019
 
Real estate properties, net
  $ 4,514 
  
 
 
 
Assets held for sale
  $4,514 
  
 
 
 
Accounts payable, accrued expenses, deferred rent and tenant rent deposits
  $(67) 
  
 
 
 
Liabilities related to assets held for sale
  $(67) 
  
 
 
 
4. Lease Intangibles
Lease intangibles and the value of assumed lease obligations as of March 31,September 30, 2020 and December 31, 2019 were comprised as follows (in thousands):
                             
 
Lease Intangible Assets
  
Lease Intangible Liabilities
 
March 31, 2020
 
Above
Market
Leases
  
In Place
Leases
  
Leasing
Commissions
  
Total
  
Below
Market
Leases
  
Below
 
Market
Ground
 
Lease
  
Total
 
Cost
 $
14,985
  $
87,320
  $
35,988
  $
138,293
  $
(13,878
) $
  (138
) $
(14,016
)
Accumulated amortization
  
(7,051
)  
(51,847
)  
(17,291
)  
(76,189
)  
6,371
   
41
   
6,412
 
                             
 $
7,934
  $
35,473
  $
18,697
  $
62,104
  $
(7,507
) $
(97
) $
(7,604
)
                             
 
 
  
Lease Intangible Assets
 
 
Lease Intangible Liabilities
 
September 30, 2020
  
Above

Market
Leases
 
 
In Place

Leases
 
 
Leasing
Commissions
 
 
Total
 
 
Below
Market
Leases
 
 
Below
Market
Ground
Lease
 
 
Total
 
Cost
  
$
14,870
 
 
$
87,163
 
 
$
35,885
 
 
$
137,918
 
 
$
(13,862
) 
 
$
(138
) 
 
$
(14,000
) 
Accumulated amortization
  
 
(7,972
) 
 
 
(58,947
) 
 
 
(19,447
) 
 
 
(86,366
) 
 
 
7,473
 
 
 
43
 
 
 
7,516
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
$
6,898
 
 
$
28,216
 
 
$
16,438
 
 
$
51,552
 
 
$
(6,389
) 
 
$
(95
) 
 
$
(6,484
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Intangible Assets
  
Lease Intangible Liabilities
 
December 31, 2019
 
Above
Market
Leases
  
In Place
Leases
  
Leasing
Commissions
  
Total
  
Below
Market
Leases
  
Below
 
Market
Ground
 
Lease
  
Total
 
Cost
 $
15,242
  $
87,320
  $
36,048
  $
138,610
  $
(13,878
) $
(138
) $
(14,016
)
Accumulated amortization
  
(6,704
)  
(48,229
)  
(16,144
)  
(71,077
)  
5,782
   
40
   
5,822
 
                             
 $
8,538
  $
39,091
  $
19,904
  $
67,533
  $
(8,096
) $
(98
) $
(8,194
)
                             
 
  
Lease Intangible Assets
 
 
Lease Intangible Liabilities
 
December 31, 2019
  
Above

Market
Leases
 
 
In Place

Leases
 
 
Leasing
Commissions
 
 
Total
 
 
Below
Market
Leases
 
 
Below
Market
Ground
Lease
 
 
Total
 
Cost
  
$
15,242
 
 
$
87,320
 
 
$
36,048
 
 
$
138,610
 
 
$
(13,878
) 
 
$
(138
) 
 
$
(14,016
) 
Accumulated amortization
  
 
(6,704
) 
 
 
(48,229
) 
 
 
(16,144
) 
 
 
(71,077
) 
 
 
5,782
 
 
 
40
 
 
 
5,822
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
$
8,538
 
 
$
39,091
 
 
$
19,904
 
 
$
67,533
 
 
$
(8,096
) 
 
$
(98
) 
 
$
(8,194
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The estimated aggregate amortization expense for lease intangibles for the next five years and in the aggregate are as follows (in thousands):
2020
 $
14,129
 
2021
  
15,894
 
2022
  
8,233
 
2023
  
5,359
 
2024
  
3,191
 
Thereafter
  
7,694
 
     
 $
54,500
 
     
2020
  $4,702 
2021
   15,890 
2022
   8,229 
2023
   5,355 
2024
   3,077 
Thereafter
   7,815 
  
 
 
 
  $45,068 
  
 
 
 
11
Table of Contents
5. Debt
The following table summarizes the indebtedness as of March 31,September 30, 2020 and December 31, 2019 (dollars in thousands):
Property
 
March 31,
2020
  
December 31,
2019
  
Interest Rate as
of March 31,
2020
(1)
  
Maturity
 
Unsecured Credit Facility
 (3)(4)
 $
100,000
  $
—  
   
LIBOR +1.50
%
(2)
  
March 2022
 
Term Loan
 (4)
  
50,000
   
50,000
   
LIBOR +1.40
%
(2)
  
September 2024
 
Midland Life Insurance
 (5)
  
84,861
   
85,293
   
4.34
   
May 2021
 
Mission City
  
47,000
   
47,000
   
3.78
   
November 2027
 
Canyon Park
 
(6)
  
40,950
   
40,950
   
4.30
   
March 2027
 
190 Office Center
  
40,700
   
40,854
   
4.79
   
October 2025
 
Circle Point
  
39,650
   
39,650
   
4.49
   
September 2028
 
SanTan
  
33,903
   
34,053
   
4.56
   
March 2027
 
Intellicenter
  
32,839
   
32,971
   
4.65
   
October 2025
 
The Quad
  
30,600
   
30,600
   
4.20
   
September 2028
 
FRP Collection
  
28,795
   
28,969
   
3.10
   
September 2023
 
2525 McKinnon
  
27,000
   
27,000
   
4.24
   
April 2027
 
10
Property
  
September 30,

2020
   
December 31,
2019
   
Interest Rate as
of September 30,

2020
(1)
  
Maturity
 
Unsecured Credit Facility 
(3)(4)
  
$
75,000
 
  
$
—  
 
  
 
LIBOR +1.50
%
(2)
 
 
 
March 2022
 
Term Loan 
(4)
  
 
50,000
 
  
 
50,000
 
  
 
LIBOR +1.40
%
(2)
 
 
 
September 2024
 
Midland Life Insurance 
(5)
  
 
83,983
 
  
 
85,293
 
  
 
4.34
% 
 
 
May 2021
 
Mission City
  
 
47,000
 
  
 
47,000
 
  
 
3.78
% 
 
 
November 2027
 
Canyon Park
(6)
  
 
40,950
 
  
 
40,950
 
  
 
4.30
% 
 
 
March 2027
 
190 Office Center
  
 
40,396
 
  
 
40,854
 
  
 
4.79
% 
 
 
October 2025
 
Circle Point
  
 
39,650
 
  
 
39,650
 
  
 
4.49
% 
 
 
September 2028
 
SanTan
  
 
33,599
 
  
 
34,053
 
  
 
4.56
% 
 
 
March 2027
 
Intellicenter
  
 
32,579
 
  
 
32,971
 
  
 
4.65
% 
 
 
October 2025
 
The Quad
  
 
30,600
 
  
 
30,600
 
  
 
4.20
% 
 
 
September 2028
 
FRP Collection
  
 
28,442
 
  
 
28,969
 
  
 
3.10
% 
 
 
September 2023
 
2525 McKinnon
  
 
27,000
 
  
 
27,000
 
  
 
4.24
% 
 
 
April 2027
 
Greenwood Blvd
  
 
22,425
 
  
 
22,425
 
  
 
3.15
% 
 
 
December 2025
 
Cascade Station
  
 
22,043
 
  
 
22,304
 
  
 
4.55
% 
 
 
May 2024
 
5090 N 40
th
St
  
 
21,740
 
  
 
22,000
 
  
 
3.92
% 
 
 
January 2027
 
AmberGlen
  
 
20,000
 
  
 
20,000
 
  
 
3.69
% 
 
 
May 2027
 
Lake Vista Pointe
  
 
17,461
 
  
 
17,717
 
  
 
4.28
% 
 
 
August 2024
 
Central Fairwinds
  
 
17,230
 
  
 
17,534
 
  
 
3.15
% 
 
 
June 2024
 
FRP Ingenuity Drive
  
 
16,804
 
  
 
17,000
 
  
 
4.44
% 
 
 
December 2024
 
Carillon Point
  
 
15,683
 
  
 
15,972
 
  
 
3.10
% 
 
 
October 2023
 
 
  
 
 
 
  
 
 
 
  
   
 
   
Total Principal
  
 
682,585
 
  
 
612,292
 
  
   
 
   
Deferred financing costs, net
  
 
(4,563
) 
  
 
(5,660
) 
  
   
 
   
Unamortized fair value adjustments
  
 
511
 
  
 
618
 
  
   
 
   
 
  
 
 
 
  
 
 
 
  
   
 
   
Total
  
$
678,533
 
  
$
607,250
 
  
   
 
   
 
  
 
 
 
  
 
 
 
  
   
 
   
                 
Property
 
March 31,
2020
  
December 31,
2019
  
Interest Rate as
of March 31,
2020
(1)
  
Maturity
 
Greenwood Blvd
  
22,425
   
22,425
   
3.15
   
December 2025
 
Cascade Station
  
22,216
   
22,304
   
4.55
   
May 2024
 
5090 N 40
th
St
  
21,936
   
22,000
   
3.92
   
January 2027
 
AmberGlen
  
20,000
   
20,000
   
3.69
   
May 2027
 
Lake Vista Pointe
  
17,632
   
17,717
   
4.28
   
August 2024
 
Central Fairwinds
  
17,433
   
17,534
   
3.15
   
June 2024
 
FRP Ingenuity Drive
  
16,934
   
17,000
   
4.44
   
December 2024
 
Carillon Point
  
15,877
   
15,972
   
3.10
   
October 2023
 
Total Principal
  
710,751
   
612,292
       
Deferred financing costs, net
  
(5,302
)  
(5,660
)      
Unamortized fair value adjustments
  
582
   
618
       
Total
 $    
  706,031
  $
  607,250
       
(1
(1)
)
A
ll
All interest rates are fixed interest rates with the exception of the
U
nsecured
C
redit
F
acility Unsecured Credit Facility (“Unsecured Credit Facility”) and the Term Loan (as defined herein), as explained in footnotes 3
and 4 below.
below.
(2)
As of March 31,September 30, 2020, the one
-one-month
month LIBOR rate was 0.99%0.15%.
(3)
In March 2018, the Company entered into
the
Credit Agreement
for
the
Unsecured Credit Facility that provides for commitments of up to $250 million, which includes an accordion feature that allows the Company to borrow up to $500 million, subject to customary terms and conditions. The Unsecured Credit Facility matures in
March March 2022
and may be extended to March 2023 at the Company’s option upon meeting certain conditions. Borrowings under the Unsecured Credit Facility bear interest at a rate equal to the LIBOR rate plus a margin of between 140 to 225 basis points depending upon the Company’s consolidated leverage ratio.
During the three months ended March 31, 2020,
the Company
drew approximately $100 million under the Unsecured Credit Facility. As of March 31,September 30, 2020, the Unsecured Credit Facility had $100$75.0 million drawn and $7.0 million of letters of credit to satisfy escrow requirements for mortgage lenders.
The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.
(4)
In September 2019, the Company entered into a five-year $50 million
Term Loan (the “Term Loan”)
increasing its authorized borrowings under the Unsecured Credit Facility from $250 million to $300 million. Borrowings under the Term Loan bear interest at a rate equal to the LIBOR rate plus a margin between 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the Company also entered into a five-year interest rate swap for a notional amount of $50 million (the “Interest Rate Swap”). Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate
30-day
LIBOR payments.
(5)
The mortgage loan is cross-collateralized by Cherry Creek, City Center and 7595 Tech (formerly “DTC Crossroads”).
(6)
The mortgage loan anticipated repayment date (“ARD”) is March 1, 2027. The final scheduled maturity date can be extended up to 5 years beyond the ARD. If the loan is not paid off at ARD, loan’s interest rate shall be adjusted to the greater of (i) the initial interest rate plus 200 basis points or (ii) the yield on the five year “on the run” treasury reported by Bloomberg market data service plus 450 basis points.
12
Table of Contents
The scheduled principal repayments of debt as of March 31,September 30, 2020 are as follows (in thousands):
2020
 $
4,738
 
2021
  
89,355
 
2022
  
106,529
 
2023
  
48,529
 
2024
  
124,725
 
Thereafter
  
336,875
 
     
 $
710,751
 
     
2020
  $1,571 
2021
   89,356 
2022
   81,529 
2023
   48,529 
2024
   124,725 
Thereafter
   336,875 
  
 
 
 
  $682,585 
  
 
 
 
6. Fair Value of Financial Instruments
Fair value measurements are based on assumptions that market participants would use in pricing an asset or a liability. The hierarchy for inputs used in measuring fair value is as follows:
Level 1 Inputs – quoted prices in active markets for identical assets or liabilities
Level 2 Inputs – observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 Inputs – unobservable inputs
11
In September 2019, the Company entered into
a
five-year Interest Rate Swap for a notional amount of $50.0$50 million. Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate
30-day
LIBOR payments. Accordingly, the fair value of the Interest Rate Swap has been classified as a Level 2 fair value measurement.
The Interest Rate Swap has been designated and qualifies as a cash flow hedge and has been recognized on the condensed consolidated balance sheets at fair value. Gains and losses resulting from changes in the fair value of derivatives that have been designated and qualify as cash flow hedges are reported as a component of other comprehensive income income/(loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.
As of March 31,September 30, 2020, the Interest Rate Swap was reported as a liability at its fair value of approximately $2.0$2.2 million, which is included in other
liabilities on the Company’s condensed
consolidated balance sheet. For the threenine months ended March 31,September 30, 2020 the amountapproximately $0.2 million of realized losses were reclassified to interest expense due to payments received by
made to
the swap counterparty were nominal.counterparty.
As of December 31, 2019, the Interest Rate Swap was reported as an asset at its fair value of approximately $0.7 million, which is included in other assets on the
Company’s condensed
consolidated balance sheet.
Cash, Cash Equivalents, Restricted Cash, Rents Receivable, Accounts Payable and Accrued Liabilities
The Company estimates that the fair value approximates carrying value due to the relatively short-term nature of these instruments.
13
Table of Contents
Fair Value of Financial Instruments Not Carried at Fair Value
With the exception of fixed rate mortgage loans payable, the carrying amounts of the Company’s financial instruments approximate their fair value. The Company determines the fair value of its fixed rate mortgage loan payable based on a discounted cash flow analysis using a discount rate that approximates the current borrowing rates for instruments of similar maturities. Based on this, the Company has determined that the fair value of these instruments was $610.3$579.8 million and $576.9 million as of March 31,September 30, 2020 and December 31, 2019, respectively. Accordingly, the fair value of mortgage loans payable have been classified as Level 3 fair value measurements.
7. Related Party Transactions
Administrative Services Agreement
For the threenine months ended March 31,September 30, 2020 and 2019, the Company earned $0.1$0.3 million and $0.1$0.4 million, respectively, in administrative services performed for Second City Real Estate II Corporation and its affiliates (“Second City”). Also during the nine months ended September 30, 2019, the Company was assigned a purchase contract which had been entered into by an entity affiliated with principals of Second City, which principals are also officers of the Company. The Company subsequently assigned the purchase contract to a third party during the nine months ended September 30, 2019. The Company paid no consideration to the related party for the contract other than return of deposits which the Company subsequently recovered from a third party in addition to an assignment fee. The Company recognized income of $2.6 million on the assignment of the purchase contract to the third party, which was recorded in rental and other revenues on the condensed consolidated statement of operations.
On July 31, 2019, an indirect, wholly-owned subsidiary of the Company entered into an
Administrative Services Agreement
(the (the “Administrative Services Agreement”) with Clarity Real Estate III GP, Limited Partnership and Clarity Real Estate Ventures GP, Limited Partnership (together, “Clarity”), entities affiliated with principals of Second City and officers of the Company. Pursuant to the Administrative Services Agreement, the Company will provide various administrative services and support to the related entities managing the Clarity funds. During the threenine months ended March 31,September 30, 2020, the Company earned $0.2 million in administrative services performed for Clarity. During the nine months ended September 30, 2019, the amounts earned by the Company for the administrative services performed for Clarity were nominal.
8. Leases
Lessor Accounting
The Company is focused on acquiring, owning and operating high-quality office properties for lease to a stable and diverse tenant base. Our properties have both full-service gross and net leases which are generally classified as operating leases. Rental income related to such leases is recognized on a straight-line basis over the remaining lease term. The Company’s total revenue includes fixed base rental payments provided under the lease and variable payments which principally consist of tenant expense reimbursements for certain property operating expenses.
12
ForThe Company recognized fixed and variable lease payments for the three and nine months ended March 31,September 30, 2020 and March 31,the three and nine months ended September 30, 2019 the Company recognized $40.1 million and $37.1 million, respectively, of rental and other revenue related to its operating leasesas follows (in thousands):
 
Three Months Ended
March 31,
 
 
2020
  
2019
 
Fixed payments
 $
34,092
  $
32,199
 
Variable payments
  
6,016
   
4,880
 
         
 $
40,108
  $
37,079
 
         
   
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Fixed payments
  $
 
35,071   $33,495   $103,070   $98,555 
Variable payments
   6,151    5,441    17,864    15,967 
  
 
 
   
 
 
   
 
 
   
 
 
 
  $41,222   $38,936   $120,934   $114,522 
  
 
 
   
 
 
   
 
 
   
 
 
 
14
Table of Contents
Future minimum lease payments to be received by the Company as of March 31,September 30, 2020 under
non-cancellable
operating leases for the next five years and thereafter are as follows (in thousands):
2020
 $
90,339
 
2021
  
113,927
 
2022
  
95,518
 
2023
  
77,243
 
2024
  
57,558
 
Thereafter
  
115,327
 
     
 $
549,912
 
     
2020
  $30,755 
2021
   122,511 
2022
   104,734 
2023
   86,989 
2024
   67,752 
Thereafter
   175,205 
  
 
 
 
  $587,946 
  
 
 
 
The Company’s leases may include various provisions such as scheduled rent increases, renewal options and termination options. The majority of the Company’s leases include defined rent increase rather than variable payments based on an index or unknown rate. One state government tenant currently has the exercisable right to terminate their lease if the applicable state legislature does not appropriate rent in its annual budget. The Company has determined that the occurrence of any government tenant not being appropriated the rent in the applicable annual budget is a remote contingency and accordingly recognizes lease revenue on a straight-line basis over the respective lease term. This tenant represents approximately 7.2% of the Company’s total future minimum lease payments as of March 31, 2020.
Lessee Accounting
As a lessee, the Company has ground and office leases which
are classified as operating and financing leases
.leases. As of March 
31
,
September 30, 2020,
, these leases had remaining terms of
2
1 to
68
years and a weighted average remaining lease term of 56 years.
Right-of-use
56
years.
R
ight-of-use assets and lease liabilities have been included within other assets and other liabilities on the Company’s condensed consolidated balance sheet as follows (in thousands):
 
As of
March 31,
2020
  
As of
December 31,
2019
 
Right-of-use
asset – operating leases
 $
 13,031
  $
  13,130
 
Lease liability – operating leases
 $
7,985
  $
8,033
 
Right-of-use
asset – financing leases
 $
73
  $
79
 
Lease liability – financing leases
 $
73
  $
79
 
13
 
  
September 30,
2020
 
  
December 31,
2019
 
Right-of-use
asset – operating leases
  
$
12,838
 
  
$
13,130
 
Lease liability – operating leases
  
$
7,908
 
  
$
8,033
 
Right-of-use
asset – financing leases
  
$
61
 
  
$
79
 
Lease liability – financing leases
  
$
61
 
  
$
79
 
Lease liabilities are measured at the commencement date based on the present value of future lease payments. One of the Company’s operating ground leases includes rental payment increases over the lease term based on increases in the Consumer Price Index (“CPI”). Changes in the CPI were not estimated as part of the measurement of the operating lease liability. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The Company used a weighted average discount rate
of
6.3
% 6.3% in determining its lease liabilities. The discount rates were derived from the Company’s assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments.
Right-of-use
assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.
Operating lease expense for each of the three months ended March 31, 2020 and March 31, 2019 was $0.2 million. Financing lease expenseexpenses for the three and nine months ended March 31,September 30, 2020 was nominal. The Company did not have any financing leases as ofwere $0.2 million and $0.6 
million,
respectively. Operating lease expenses for the three and nine months ended March 31, 2019.September 30, 2019 were $0.2 million and $0.6 million
,
respectively. Financing lease expenses for the three and nine months ended September 30, 2020 and 2019 were nominal.
15
Table of Contents
Future minimum lease payments to be paid by the Company as a lessee for operating and financing leases as of March 31,September 30, 2020 for the next five years and thereafter are as follows (in thousands):
 
Operating
Leases
  
Financing
Leases
 
2020
 $
364
  $
20
 
2021
  
817
   
27
 
2022
  
798
   
27
 
2023
  
663
   
4
 
2024
  
597
   
—  
 
Thereafter
  
26,680
   
—  
 
         
Total future minimum lease payments
  
29,919
   
78
 
Discount
  
(21,934
)  
(5
)
         
Total
 $
7,985
  $
73
 
         
   
Operating

Leases
   
Financing
Leases
 
2020
  $45   $7 
2021
   817    27 
2022
   798    27 
2023
   663    4 
2024
   597    0   
Thereafter
   26,680    0   
  
 
 
   
 
 
 
Total future minimum lease payments
   29,600    65 
Discount
   (21,692)    (4) 
  
 
 
   
 
 
 
Total
  $7,908   $61 
  
 
 
   
 
 
 
9. Commitments and Contingencies
The Company is obligated under certain tenant leases to fund tenant improvements and the expansion of the underlying leased properties.
Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. As such, the Company may be potentially liable for costs associated with any potential environmental remediation at any of its formerly or currently owned properties.
The Company believes that it is in compliance in all material respects with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. Management is not aware of any environmental liability that it believes would have a material adverse impact on the Company’s financial position or results of operations. Management is unaware of any instances in which the Company would incur significant environmental costs if any or all properties were sold, disposed of or abandoned. However, there can be no assurance that any such
non-compliance,
liability, claim or expenditure will not arise in the future.
The Company is involved from time to time in lawsuits and other disputes which arise in the ordinary course of business. As of March 31,September 30, 2020,
,
management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Company’s financial position or results of operations.
14
10. Stockholders’ Equity
Share Repurchase Plan
On March 
9,
, 2020, the Company’s Board of Directors approved a share repurchase plan authorizing the Company to repurchase up to $100 million of its outstanding shares of common stock. In July 2020, the Company completed the full March 2020 share repurchase plan. On August 5, 2020, the Company’s Board of Directors approved an additional share repurchase plan authorizing the Company to repurchase up to an additional aggregate amount of $50 million of its outstanding shares of common stock. Under the share repurchase program,programs, the shares may be repurchased from time to time using a variety of methods, which may include open market transactions, privately negotiated transactions or otherwise, all in accordance with the rules of the Securities and Exchange Commission and other applicable legal requirements.
Repurchased shares of common stock will be classified as authorized and unissued shares. The Company recognizes the cost of shares of common stock it repurchases, including direct costs incurred, as a reduction in stockholders’ equity. Such reductions of stockholders equity due to the repurchases of shares of common stock will be applied first, to reduce common stock in the amount of the par value associated with the shares of common stock repurchased and second, to reduce additional
paid-in
capital by the amount that the purchase price for the shares of common stock repurchased exceed the par value.
16
Table of Contents
During the threenine months ended March 31,September 30, 2020, the Company completed the repurchase of 1,451,24911,363,851 shares of its common stock for approximately $11.6$100.0 million. There were 0 shares repurchased during the threenine months ended March 31,September 30, 2019.
Common Stock and Common Unit Distributions
On March 25,September 15, 2020, the Company’s Board of Directors approved and the Company declared a cash dividend distribution of $0.15 per
comm
o
n
common share for the quarterly period ended March 31,September 30, 2020. The dividend was paid subsequent to quarter end on April 24,October 22, 2020 to common stockholders and common unitholders of record as of the close of business on April 9,October 8, 2020, resulting in an aggregate payment of $7.8$6.5 million.
Preferred Stock Distributions
On March 25,September 15, 2020 the Company’s Board of Directors approved and the Company declared a cash dividend of $0.4140625
per share of the Company’s 6.625% Series A Preferred Stock (“Series A Preferred Stock”)
for an aggregate amount of $1.9 million for the quarterly period ended March 31,September 30, 2020. The dividend was paid subsequent to quarter end on April 24,October 22, 2020
to the holders of record of Series A Preferred Stock as of the close of business on October 8, 2020.
 April 9, 2020.
Equity Incentive Plan
The Company has an
equity incentive plan (“Equity Incentive Plan”) for executive officers, directors and certain
non-executive
employees, and with approval of the Board of Directors, for subsidiaries and their respective affiliates. The Equity Incentive Plan provides for grants of restricted common stock, restricted stock units, phantom shares, stock options, dividend equivalent rights and other equity-based awards (including LTIP Units), subject to the total number of shares available for issuance under the plan. The Equity Incentive Plan is administered by the compensation committee of the Board of Directors (the “Plan Administrator”).
On May 2, 2019, the Company’s stockholders approved an amendment to the Equity Incentive Plan increasing the maximum number of shares of common stock that may be issued under the Equity Incentive Plan from 1,263,580 shares to 2,263,580 shares. To the extent an award granted under the Equity Incentive Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards.
On January 27, 2020, each of the Board of Directors and the Compensation Committee approved a new form of performance-based restricted unit award agreement (the “Performance RSU Award Agreement”) that will be used to grant performance-based restricted stock unit awards (“Performance RSU Awards”) pursuant to the Equity Incentive Plan. The Performance RSU Awards are based upon the total stockholder return (“TSR”) of the Company’s common stock over a three-yearthree-year measurement period beginning January 1, 2020 and ending on December 31, 2022 (the “Measurement Period”) relative to the TSR of the companies in the SNL US REIT Office
15
index as of January 2, 2020 (the “2020 RSU Peer Group”). The payouts under the Performance RSU Awards are evaluated on a sliding scale as follows: TSR below the 30th percentile of the 2020 RSU Peer Group would result in a 50% payout; TSR at the 50th percentile of the 2020 RSU Peer Group would result in a 100% payout; and TSR at or above the 75th percentile of the 2020 RSU Peer Group would result in a 150% payout. Payouts are mathematically interpolated between these stated percentile targets, subject to a 150% maximum.
To the extent earned, the payouts of the Performance RSU Awards are intended to be settled in the form of shares of the Company’s common stock, pursuant to the Equity Incentive Plan. Upon satisfaction of the vesting conditions, dividend equivalents in an amount equal to all regular and special dividends declared with respect to the Company’s common stock during each annual measurement period during the Measurement Period are determined and paid on a cumulative, reinvested basis over the term of the applicable Performance RSU Award, at the time such award vests and based on the number of shares of the Company’s common stock that are earned.
During the threenine months ended March 31,September 30, 2020, 147,050 restricted stock units (“RSUs”) were granted to executive officers, directors and certain
non-executive
employees with a fair value of $2.0 million. The
RSU
awards will vest in three equal, annual installments on each of the first three anniversaries of the date of grant. For the three and nine months ended March 31,September 30, 2020,
,
the Company recognized net compensation expense of $0.5 and $1.4 million, respectively, related to the RSUs. For the three and nine months ended March 31,September 30, 2019, the Company recognized net compensation expense of $0.4 million and $1.3 
million, respectively, related to the RSUs.
17
Table of Contents
During the threenine months ended March 31,September 30, 2020, 97,500
Performance RSU Awards were granted to executive officers with a fair value
of $1.3 
million. The Performance RSU Awards will vest on the last day of
the three-year measurement period of January 1, 2020 through December 31, 2022.
For the three and nine months ended March 31,September 30, 2020, the Company recognized net compensation expense of $0.1 million and $0.3 million, respectively, related to the Performance RSU Awards. There was
0
compensation expense related to the Performance RSU Awards for the three and nine months ended March 31,September 30, 2019.
18
11. Subsequent Events
Table of Contents
Subsequent to quarter end through May 5, 2020, the Company settled on the repurchase of 5,872,328 shares of its common stock for approximately $48.9 million.
COVID-19
The recent
COVID-19
pandemic has caused significant disruption in global financial markets and economies. The Company is closely monitoring the impact of the recent
COVID-19
pandemic on all aspects of its business and geographies, including government actions in response to the outbreak and the impact on its tenants. While the Company did not experience any significant disruptions during the three months ended March 31, 2020, as a result of the
COVID-19
pandemic or governmental or tenant actions in response thereto, the extent to which
COVID-19
will impact the Company is highly uncertain and cannot be predicted with confidence at this time.
Since March 2020, the Company received certain rent relief requests, most often in the form of rent deferral requests, as a result of
COVID-19.
The Company is evaluating each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modification agreements, nor is the Company forgoing its contractual rights under its lease agreements.
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based on, and should be read in conjunction with, the condensed, consolidated financial statements and the related notes thereto of the City Office REIT, Inc. contained in this Quarterly Report on Form
10-Q
(this “Report”).
As used in this section, unless the context otherwise requires, references to “we,” “our,” “us,” and “our company” refer to City Office REIT, Inc., a Maryland corporation, together with our consolidated subsidiaries, including City Office REIT Operating Partnership L.P., a Maryland limited partnership, of which we are the sole general partner and which we refer to in this section as our Operating Partnership, except where it is clear from the context that the term only means City Office REIT, Inc.
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report on Form
10-Q,
including “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition,” contains both historical and forward-looking statements. All statements, other than statements of historical fact are, or may be deemed to be, forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have used the words “approximately,” “anticipate,” “assume,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this Report. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including:
adverse economic or real estate developments in the office sector or the markets in which we operate;
 
changes in local, regional, national and international economic conditions, including as a result of the recentongoing
COVID-19
pandemic;
 
requests from tenants for rent deferrals, rent abatement or relief from other contractual obligations, or a failure to pay rent, as a result of changes in business behavior stemming from the ongoing
COVID-19
pandemic or the availability of government assistance programs;
our inability to compete effectively;
 
our inability to collect rent from tenants or renew tenants’ leases on attractive terms if at all;
 
demand for and market acceptance of our properties for rental purposes;
 
defaults on or
non-renewal
of leases by tenants;tenants, including as a result of the ongoing
COVID-19
pandemic;
 
increased interest rates and any resulting increase in financing or operating costs;
 
decreased rental rates or increased vacancy rates;rates, including as a result of changes in business behavior or market dynamics related to the ongoing
COVID-19
pandemic;
 
our failure to obtain necessary financing or access the capital markets on favorable terms or at all;
 
changes in the availability of acquisition opportunities;
 
availability of qualified personnel;
 
our inability to successfully complete real estate acquisitions or dispositions on the terms and timing we expect, or at all;
 
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Table of Contents
our failure to successfully operate acquired properties and operations;
 
changes in our business, financing or investment strategy or the markets in which we operate;
 
our failure to generate sufficient cash flows to service our outstanding indebtedness;
 
17
environmental uncertainties and risks related to adverse weather conditions and natural disasters;
 
our failure to qualify and maintain our status as a real estate investment trust (“REIT”);
 
government approvals, actions and initiatives, including the need for compliance with environmental requirements or actions in response to the recent global
COVID-19
pandemic;
 
outcome of claims and litigation involving or affecting us;
 
financial market fluctuations;
 
changes in real estate, taxation and zoning laws and other legislation and government activity and changes to real property tax rates and the taxation of REITs in general; and
 
other factors described in our news releases and filings with the Securities and Exchange Commission (the “SEC”), including but not limited to those described in our Annual Report on Form
10-K
for the year ended December 31, 2019 under the heading “Risk Factors” and in our subsequent reports filed with the SEC.
The forward-looking statements contained in this Report are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to the factors, risks and uncertainties described above, changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors described in our news releases and filings with the SEC, including but not limited to those described in our Annual Report on Form
10-K
for the year ended December 31, 2019 under the heading “Risk Factors” and in our subsequent reports filed with the SEC, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Report speaks only as of the date of this Report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.
Overview
Company
We were formed as a Maryland corporation on November 26, 2013. On April 21, 2014, we completed our initial public offering (“IPO”) of shares of common stock. We contributed the net proceeds of the IPO to our Operating Partnership in exchange for common units in our Operating Partnership. Both we and our Operating Partnership commenced operations upon completion of the IPO and certain related formation transactions.
Revenue Base
As of March 31,September 30, 2020, we owned 25 properties comprised of 65 office buildings with a total of approximately 5.8 million square feet of net rentable area (“NRA”). As of March 31,September 30, 2020, our properties were approximately 92.2%93.1% leased.
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Table of Contents
Office Leases
Historically, most leases for our properties were on a full-service gross or net lease basis, and we expect to continue to use such leases in the future. A full-service gross lease generally has a base year expense “stop”, whereby we pay 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 such tenant’s proportionate square footage in
18
the property. The property operating expenses are reflected in operating expenses; however, only the increased property operating expenses above the base year stop recovered from tenants are reflected as tenant recoveries within rental and other revenues in our statements of operations. In a triple net lease, the tenant is typically responsible for all property taxes and operating expenses. As such, the base rent payment does not include any operating expenses, but rather all such expenses are billed to or paid by the tenant. The full amount of the expenses for this lease type is reflected in operating expenses, and the reimbursement is reflected in tenant recoveries.recoveries within rental and other revenues. All tenants in the Lake Vista Pointe, 2525 McKinnon, Sorrento Mesa and Canyon Park properties have triple net leases. Certain tenants at AmberGlen, Cherry Creek, Superior Pointe, Florida Research Park, Circle Point, The Quad, Cascade Station and Denver Tech have leases on a triple net basis. We are also a lessor for a fee simple ground lease at the AmberGlen property. All of our remaining leases are full-service gross leases.
Factors That May Influence Our Operating Results and Financial Condition
COVID-19
During the first quarter of 2020, the World Health Organization declared the
COVID-19
outbreak a pandemic. There have been mandates from international, federal, state and local authorities requiring forced closures of businesses and other facilities, and most of the markets in which our buildings are located are subject to some form of quarantine or
shelter-in-place
ongoing pandemic-related restrictions. These forced closures and restrictions have had a material adverse effect on the global economy and the regional U.S. economies in which we operate, including negatively impacting some of our tenants’ ability to pay their rent.
It is still too early to predict the extent and timing of the full impact on businesses from the severe dislocations caused by the effective shutdown of large segments of our economy. While the
COVID-19
pandemic did not have a meaningful impact on our financial results for the first quarter of 2020, we believe it is likely our future financial results will be adversely impacted by the
COVID-19
pandemic. Given the fluidity of the pandemic and its uncertain impact on economic activity, losses related to tenant financial difficulties are difficult to predict.
All of our buildings are open and continue to operate. We have adopted new policies and procedures to incorporate best practices for the safety of our tenants, our vendors and our employees. However, the usage of our assets in March and April ofthe third quarter 2020 was significantly lower than normal due to the
COVID-19
pandemic.normal. Usage of our assets forin the remainder of 2020, however,near future depends on the duration of the pandemic and pace of economic
re-opening,
which is impossible to estimate.
We continue to closely monitor the impact of the
COVID-19
pandemic on all aspects of our business and geographies. While we did not experience any significant disruptions during the nine months ended September 30, 2020, as a result of
COVID-19
or governmental or tenant actions in response thereto, the Company granted rent relief to nine tenants comprising approximately 1.0% of the Company’s NRA, most often in the form of a rent deferral or rent abatement. Subsequent to September 30, 2020, the Company granted additional rent abatements to two tenants who previously received relief, which combined comprises approximately 0.1% of the Company’s NRA. Although the rent deferrals and rent abatements granted to date did not have a material impact on our net rental revenue, the long-term impact of the pandemic on our tenants and the world-wide economy is difficultuncertain and impossible to estimate.estimate, and will depend on the scope, severity and duration of the pandemic.
We believe that some of the industries that will be most impacted by
COVID-19
are coworking, retail, restaurant and café, travel and accommodation, live event related and energy. We generally have limited exposure to these industries, with these sectors comprising approximately 3% of our portfolio by square footage. However, the impact of
COVID-19
extends to all sectors of the U.S. economy and as such, we expect that tenants outside of these select industries will also face significant challenges. Rating agencies have downgraded the credit rating and outlook of many businesses, including twoone of our ten largest tenants.
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Table of Contents
Through May 4,November 2, 2020, we have collected approximately 98%over 99% of our contractually required base rents from our tenants for the monththree months ended September 30, 2020 and granted rent relief for another approximately 0.5% of Aprilcontractually required base rents from our tenants for the three months ended September 30, 2020. We expect that theThe rate of collections in May 2020 and future months may be lower, as the length of the economic downturn continues to impact tenants. We have received rent relief requests from certain tenants, and we have developed dedicated teams and processes to evaluate
non-payments
and rent relief requests. We evaluate each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests ultimately result in modification agreements, nor are we foregoing our contractual rights under our lease agreements. We believe many of these requests received were from tenants who havehad the ability to pay rent at the time and were seeking opportunistic deferral opportunities. We are workingcontinue to work efficiently to find tailored resolutions in each case where warranted, including potential deferrals of rent, lease term extensions in lieu of short termwith short-term rent relief, temporary percentage rent opportunities, for hospitality entities, or, in limited circumstances, rent abatement particularly when the tenant is viewed as an amenity to the building. We assume we willmay incur additional losses in future periods due to tenants that default on their leases, file for bankruptcy and/or otherwise experience significant financial difficulty as a result of the duration of the
COVID-19
pandemic, but the extent of those losses is difficultimpossible to predict.predict given the fluidity of the pandemic and its uncertain impact on economic activity.
19
We also believe that leasingLeasing activity has been slow and we believe it will continue to be impacted by
COVID-19.
We have experienced and we expect that we will experience slower than originally anticipated speculative new leasing which we expect will be partially offset by higher renewal activity.and there remains uncertainty over existing tenants’ long-term space requirements. Overall, this would reduce our anticipated rental revenues. In addition, we anticipate that as the
COVID-19
pandemic continues, certain tenants in our markets may explore opportunities to sublease all or a portion of their leased square footage to other tenants or third parties. While subleasing generally does not impact the ability to collect payment from the original lessee and will not result in any decrease in the rental revenues expected to be received from the primary tenant, this trend could reduce our ability to lease incremental square footage to new tenants, could increase the square footage of our properties that “goes dark”, reduce anticipated rental revenue should tenants determine their long-term needs for square footage are lower than originally anticipated and potentially impact the pricing and competitiveness for lease office space in our markets. Because construction activities have generally been classified as essential activities throughout our markets during the
COVID-19
pandemic, we do not currently expect meaningful delays in customers taking occupancy under recently signed leases.
Strategically, we have made adjustments to our business operations as a result of
COVID-19.
We have ceased acquisition activities, allocated capital towards our share repurchase program,programs and adjusted our common stock dividend and are operatingwhich will allow us to operate with lower leverage and higher levels of liquidity.liquidity than previously planned. For a discussion of the impact of the
COVID-19
pandemic on our liquidity and balance sheet, see “Liquidity and Capital Resources” below.
The situation surrounding
COVID-19
remains fluid and we will continue to monitor and actively manage our response in collaboration with tenants, government officials and other third parties to optimally position the Company.
Business and Strategy
We focus on owning and acquiring office properties in our target markets. Our target markets generally possess what we believe are favorable economic growth trends, growing populations with above-average employment growth forecasts, a large number of government offices, large international, national and regional employers across diversified industries, are generally
low-cost
centers for business operations, and exhibit favorable occupancy trends. We utilize our management’s market-specific knowledge and relationships as well as the expertise of local real estate operators and our investment partners to identify acquisition opportunities that we believe will offer cash flow stability and long-term value appreciation. Our target markets are attractive, among other reasons, because we believe that ownership is often concentrated among local real estate operators that typically do not benefit from the same access to capital as public REITs and there is a relatively low level of participation of large institutional investors. We believe that these factors result in attractive pricing levels and risk-adjusted returns. Although there have been higher
COVID-19
cases in some of our markets, the long-term impact of the pandemic on these markets is uncertain and impossible to estimate, and will depend on the scope, severity and duration of the pandemic.
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Table of Contents
Rental Revenue and Tenant Recoveries
The amount of net rental revenue generated by our properties will depend principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space that becomes available from lease terminations. The amount of rental revenue generated also depends on our ability to maintain or increase rental rates at our properties. We believe that the average rental rates for our portfolio of properties are generally
in-line
or slightly below the current average quoted market rates. Negative trends in one or more of these factors could adversely affect our rental revenue in future periods. Future economic downturns or regional downturns affecting our markets or submarkets or downturns in our tenants’ industries, including as a result of the
COVID-19
pandemic, that impair our ability to renew or
re-let
space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. In addition, growth in rental revenue will also partially depend on our ability to acquire additional properties that meet our investment criteria.
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Table of Contents
Our Properties
As of March 31,September 30, 2020, we owned 25 properties comprised of 65 office buildings with a total of approximately 5.8 million square feet of NRA in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, San Diego, Seattle and Tampa. The following table presents an overview of our portfolio as of March 31,September 30, 2020.
                           
Metropolitan Area
 
Property
 
Economic
Interest
  
NRA
(000s Square
Feet)
  
In Place
Occupancy
  
Annualized Base
Rent per Square
Foot
  
Annualized Gross
Rent per Square
Foot
(1)
  
Annualized Base Rent
(2)

($000s)
 
Phoenix, AZ

(20.8% of NRA)
 
Pima Center
  
100.0
%  
272
   
87.0
% $
27.44
  $
27.44
  $
6,491
 
 
SanTan
  
100.0
%  
267
   
91.7
% $
28.11
  $
28.11
  $
6,868
 
 
5090 N 40
th
St
  
100.0
%  
174
   
94.6
% $
28.58
  $
28.58
  $
4,714
 
 
Camelback Square
  
100.0
%  
174
   
78.8
% $
31.25
  $
31.25
  $
4,284
 
 
The Quad
  
100.0
%  
163
   
100.0
% $
29.20
  $
29.51
  $
4,759
 
 
Papago Tech
  
100.0
%  
163
   
90.9
% $
22.46
  $
22.46
  $
3,322
 
Denver, CO

(19.9%)
 
Cherry Creek
  
100.0
%  
356
   
100.0
% $
18.59
  $
19.31
  $
6,612
 
 
Circle Point
  
100.0
%  
272
   
94.3
% $
17.88
  $
31.76
  $
4,583
 
 
Denver Tech 
(3)
  
100.0
%  
381
   
78.0
% $
22.96
  $
27.02
  $
6,591
 
 
Superior Pointe
  
100.0
%  
151
   
96.5
% $
18.08
  $
30.55
  $
2,641
 
Tampa, FL

(17.9%)
 
Park Tower
  
94.8
%  
471
   
89.8
% $
25.58
  $
25.58
  $
10,820
 
 
City Center
  
95.0
%  
242
   
93.1
% $
25.83
  $
25.83
  $
5,814
 
 
Intellicenter
  
100.0
%  
204
   
100.0
% $
23.99
  $
23.99
  $
4,881
 
 
Carillon Point
  
100.0
%  
124
   
100.0
% $
28.36
  $
28.36
  $
3,522
 
Orlando, FL

(12.4%)
 
Florida Research Park 
(4)
  
96.6
%  
397
   
96.9
% $
23.93
  $
27.39
  $
9,171
 
 
Central Fairwinds
  
97.0
%  
168
   
93.7
% $
25.10
  $
25.10
  $
3,956
 
 
Greenwood Blvd
  
100.0
%  
155
   
100.0
% $
23.25
  $
23.25
  $
3,605
 
San Diego, CA

(10.0%)
 
Sorrento Mesa
  
100.0
%  
296
   
85.3
% $
25.77
  $
33.77
  $
6,507
 
 
Mission City
  
100.0
%  
286
   
91.6
% $
35.43
  $
35.43
  $
9,276
 
Dallas, TX

(9.9%)
 
190 Office Center
  
100.0
%  
303
   
81.2
% $
25.55
  $
25.55
  $
6,288
 
 
Lake Vista Pointe
  
100.0
%  
163
   
100.0
% $
16.00
  $
25.00
  $
2,613
 
 
2525 McKinnon
  
100.0
%  
111
   
88.5
% $
28.23
  $
45.23
  $
2,782
 
Portland, OR

(5.6%)
 
AmberGlen
  
76.0
%  
203
   
98.4
% $
21.78
  $
24.32
  $
4,342
 
 
Cascade Station
  
100.0
%  
128
   
100.0
% $
26.69
  $
28.06
  $
3,403
 
Seattle, WA

(3.5%)
 
Canyon Park
  
100.0
%  
207
   
100.0
% $
21.84
  $
29.84
  $
4,515
 
                           
Total / Weighted Average – March 31, 2020 
(5)
  
5,831
   
92.2
% $
24.66
  $
27.58
  $
132,360
 
                           
 
Metropolitan Area
  
Property
  
Economic
Interest
  
NRA

(000s Square
Feet)
   
In Place

Occupancy
  
Annualized Base
Rent per Square
Foot
   
Annualized Gross
Rent per Square
Foot
(1)
   
Annualized
Base Rent
(2)

($000s)
 
Phoenix, AZ
(20.8% of NRA)
  Pima Center   100.0%   272    85.0%  $27.58   $27.58   $6,371 
  
SanTan
   100.0%   267    93.1%  $28.75   $28.75   $7,133 
  
5090 N 40
th
St
   100.0%   175    95.8%  $29.79   $29.79   $4,998 
  
Camelback Square
   100.0%   174    79.8%  $29.50   $29.50   $4,098 
  
The Quad
   100.0%   163    100.0%  $30.11   $30.43   $4,909 
  
Papago Tech
   100.0%   163    90.9%  $22.63   $22.63   $3,347 
Denver, CO
(19.9%)
  Cherry Creek   100.0%   356    100.0%  $18.95   $19.67   $6,740 
  
Circle Point
   100.0%   272    94.3%  $18.16   $32.16   $4,658 
  
Denver Tech
(3)
   100.0%   381    93.7%  $23.02   $27.08   $8,213 
  
Superior Pointe
   100.0%   151    94.6%  $18.16   $30.62   $2,600 
Tampa, FL
(17.9%)
  Park Tower   94.8%   471    88.3%  $26.47   $26.47   $11,015 
  
City Center
   95.0%   242    90.3%  $26.26   $26.26   $5,748 
  
Intellicenter
   100.0%   204    100.0%  $24.53   $24.53   $4,993 
  
Carillon Point
   100.0%   124    100.0%  $28.77   $28.77   $3,572 
Orlando, FL
(12.4%)
  Florida Research Park
(4)
   96.6%   397    98.5%  $23.44   $26.87   $9,147 
  
Central Fairwinds
   97.0%   168    90.5%  $26.20   $26.20   $3,990 
  
Greenwood Blvd
   100.0%   155    100.0%  $23.25   $23.25   $3,605 
San Diego, CA
(9.9%)
  Sorrento Mesa   100.0%   296    85.3%  $26.02   $34.02   $6,570 
  
Mission City
   100.0%   281    91.1%  $36.35   $36.35   $9,316 
Dallas, TX
(9.9%)
  190 Office Center   100.0%   303    81.2%  $25.65   $25.65   $6,313 
  
Lake Vista Pointe
   100.0%   163    100.0%  $16.50   $25.50   $2,695 
  
2525 McKinnon
   100.0%   111    91.6%  $28.60   $45.60   $2,918 
Portland, OR
(5.7%)
  AmberGlen   76.0%   203    98.4%  $22.01   $24.55   $4,388 
  
Cascade Station
   100.0%   128    100.0%  $27.12   $28.49   $3,457 
Seattle, WA
(3.5%)
  Canyon Park   100.0%   207    100.0%  $21.84   $29.84   $4,515 
     
 
 
   
 
 
  
 
 
   
 
 
   
 
 
 
Total / Weighted Average – September 30, 2020
(5)
 
 
 
5,827
 
  
 
93.1
% 
 
$
24.95
 
  
$
27.91
 
  
$
135,309
 
     
 
 
        
 
 
 
(1)
Annualized gross rent per square foot includes adjustment for estimated expense reimbursements of triple net leases for the year ended March 31,September 30, 2020.
(2)
Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month ended March 31,September 30, 2020 by (ii) 12.
(3)
Denver Tech is comprised of 7601 Tech which was acquired during the third quarter of 2019, and 7595 Tech (formerly “DTC Crossroads”).
(4)
Florida Research Park is comprised of FRP Collection and FRP Ingenuity Drive.
(5)
Averages weighted based on the property’s NRA, adjusted for occupancy.
 
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Operating Expenses
Our operating expenses generally consist of utilities, property and ad valorem taxes, insurance and site maintenance costs. Increases in these expenses over tenants’ base years (until the base year is reset at expiration) are generally passed along to tenants in our full-service gross leased properties and are generally paid in full by tenants in our net leased properties.
Conditions in Our Markets
Positive or negative changes in economic or other conditions in the markets we operate in, including state budgetary shortfalls, employment rates, natural hazards and other factors, may impact our overall performance. In addition, the recent
COVID-19
pandemic has caused significant disruption in global financial markets and economies. This global disruption could have a material impact on the markets in which we operate, our tenants and our ability to successfully execute our business strategy. The extent to which
COVID-19
will impact the Company is highly uncertain and cannot be predicted with confidenceis not reasonably estimable at this time. Refer to “Item 1A. Risk Factors” in this Report for further information.
Summary of Significant Accounting Policies
The interim condensed consolidated financial statements follow the same policies and procedures as outlined in the audited consolidated financial statements for the year ended December 31, 2019 included in our Annual Report on Form
10-K
for the year ended December 31, 2019.
Results of Operations
Comparison of Three Months Ended March 31,September 30, 2020 to Three Months Ended March 31,September 30, 2019
Rental and Other Revenues.
Revenue includes net rental income, including parking, signage and other income, as well as the recovery of operating costs and property taxes from tenants. Rental and other revenues increased $3.0$2.4 million, or 8%6%, to $40.1$41.3 million for the three months ended March 31,September 30, 2020 compared to $37.1$38.9 million for the three months ended March 31,September 30, 2019. Of this increase, $0.9$1.1 million was attributable to the acquisition of Canyon Park in February 2019, $0.9 million was attributable to the acquisition of Cascade Station in June 2019 and $1.4 million was attributable to the acquisition of 7601 Tech property, part of our Denver Tech property, in September 2019. Rental Revenue also benefited from Park Towerhigher straight-line rent at our Denver Tech and Sorrento Mesa properties. Denver Tech revenue increased by $0.2$0.5 million asdue to the occupancy of a resultmajor tenant at the beginning of increased average occupancy over the prior yearJuly who is in a free rent period and 190 Office CenterSorrento Mesa revenue increased by $0.3$0.8 million primarily asdue to a resultsignificant lease renewal at higher rental rates relative to the expiring leases, which the tenant will begin paying in the fourth quarter of 2020. Our Cherry Creek property also benefited from a $0.5 million lease termination fee received inpayment during the current year.three months ended September 30, 2020. Partially offsetting these increases, Plaza 25rental revenue decreased overall revenue by $0.2 million due to the sale of the property in February 2019 and Logan Tower decreased overall revenue by $0.3 million due tofor the sale of the property in December 2019. In addition, revenue from the Sorrento Mesa portfolio decreased by $0.2 millionthree months ended September 30, 2020 as a result of the sale of the 10455 PacificLogan Tower property in December 2019. Further rental revenue decreases were a result of lower occupancy at the 190 Office Center buildingand Pima Center properties which resulted in May 2019.aggregate revenue decreases of $0.3 million, and $0.3 million, respectively. The remaining properties’ rental and other revenues were flat in comparison to the prior year.relatively unchanged.
Operating Expenses
Total Operating Expenses.
Total operating expenses consist of property operating expenses, general and administrative expenses and depreciation and amortization. Total operating expenses increased by $1.8$0.4 million, or 6%1%, to $32.4$32.6 million for the three months ended March 31,September 30, 2020, from $30.6$32.2 million for the three months ended March 31, 2019, primarily due to the acquisitions described above.September 30, 2019. Total operating expenses increased by $0.6 million, $0.7 million and $1.1 million, respectively, fromdue to the acquisitionsacquisition of Canyon Park, Cascade Station andthe 7601 Tech properties. Plaza property, part of our Denver Tech property in September 2019. Partially offsetting this increase, operating expenses were $0.3 million lower due to the sale of the Logan Tower property in December 2019 and $0.3 million lower due to lower general and administrative expenses. The remaining expenses were marginally higher in comparison to the prior-year period.
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Table of Contents
Property Operating Expenses.
Property operating expenses are comprised mainly of building common area and maintenance expenses, insurance, property taxes, property management fees, as well as certain expenses that are not recoverable from tenants, the majority of which are related to costs necessary to maintain the appearance and marketability of vacant space. In the normal course of business, property expenses fluctuate and are impacted by various factors including, but not limited to, occupancy levels, weather, utility costs, repairs, maintenance and
re-leasing
costs. Property operating expenses increased by $0.5 million, or 3%, to $14.9 million for the three months ended September 30, 2020, from $14.4 million for the three months ended September 30, 2019. Total operating expenses increased by $0.4 million, due to the acquisition of the 7601 Tech property, part of our Denver Tech property in September 2019. Partially offsetting these increases, property operating expenses decreased by $0.2 million due to itsthe sale in February 2019 andof the Logan Tower operating expenses decreased by $0.3 million due to its saleproperty in December 2019. OperatingThe remaining expenses were marginally higher in comparison to the prior-year period.
General and Administrative.
General and administrative expenses are comprised of public company reporting costs and the compensation of our management team and board of directors, as well as
non-cash
stock-based compensation expenses. General and administrative expenses decreased $0.3 million, or 8%, to $2.5 million for the Sorrento Mesa portfolio decreasedthree months ended September 30, 2020, from $2.8 million for the three months ended September 30, 2019. General and administrative expenses were lower primarily due to lower payroll, travel and professional expenses due to
COVID-19.
Depreciation and Amortization.
Depreciation and amortization increased $0.2 million, or 1%, to $15.2 million for the three months ended September 30, 2020, from $15.0 million for the three months ended September 30, 2019, primarily due to the acquisition of the 7601 Tech property, part of our Denver Tech property in September 2019. This increase was partially offset by $0.3 milliona decrease due to the sale of the Logan Tower property.
Other Expense (Income)
Interest Expense.
Interest expense decreased $0.8 million, or 10%, to $6.9 million for the three months ended September 30, 2020, from $7.7 million for the three months ended September 30, 2019. The decrease was primarily attributable to a decrease of interest expense on our Unsecured Credit Facility (as defined herein) primarily as a result of repayments using the net proceeds of the equity raises in the second half of 2019.
Net Gain on the Sale of Real Estate Property.
 We recorded a net gain on the sale of real estate property of $1.3 million for the three months ended September 30, 2020 related to the sale of the land parcel at the Circle Point property in July 2020. The gross gain on sale was reduced by disposal-related costs and taxes paid by our taxable REIT subsidiary.
Comparison of Nine Months Ended September 30, 2020 to Nine Months Ended September 30, 2019
Rental and Other Revenues.
Revenue includes net rental income, including parking, signage and other income, as well as the recovery of operating costs and property taxes from tenants. Rental and other revenues increased $3.8 million, or 3%, to $121.0 million for the nine months ended September 30, 2020 compared to $117.2 million for the nine months ended September 30, 2019. Of this increase, the acquisitions of 7601 Tech, Cascade Station and Canyon Park contributed increases of $3.8 million, $1.7 million and $1.3 million, respectively. Our Cherry Creek property also benefited from a $0.9 million lease termination fee payment during the nine months ended September 30, 2020. Partially offsetting these increases, other revenues benefited from a
one-time
payment of $2.6 million in the prior-year period received as consideration for the assignment of a purchase contract. The assignment fee originated through our administrative services relationship. Increases in rental revenue for the nine months ended September 30, 2020 were also partially offset as a result of the sale of Logan Tower in December 2019, the 10455 Pacific Center building in our Sorrento Mesa portfolio in May 2019 and Plaza 25 in February 2019, which decreased overall revenue by $1.0 million, $0.4 million and $0.2 million, respectively. The remaining properties’ rental and other revenues were relatively unchanged.
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Table of Contents
Operating Expenses
Total Operating Expenses.
Total operating expenses consist of property operating expenses, general and administrative expenses and depreciation and amortization. Total operating expenses increased by $1.7 million, or 2%, to $96.9 million for the nine months ended September 30, 2020, from $95.2 million for the nine months ended September 30, 2019. Total operating expenses increased by $2.8 million, $1.2 million and $1.0 million, respectively, from the acquisitions of 7601 Tech, Cascade Station and Canyon Park properties. Partially offsetting these increases, total operating expenses decreased by $1.0 million, $0.4 million and $0.2 million, respectively, due to the sale of Logan Tower, the 10455 Pacific Center building in our Sorrento Mesa portfolio and Plaza 25 properties. Operating expenses at our San Diego properties decreased by a combined $0.3 million primarily due to a property tax refund received during the nine months ended September 30, 2020 related to a prior-year appeal. General and administrative expenses increased by approximately $0.5were also lower in the current year period primarily because in the prior-year period, there were $1.1 million primarily attributable to higher payroll costs.of
one-time
expenses incurred as a result of the assignment fee income earned during the prior-year period. The remaining operating expenses were marginally lower in comparison to the prior-year period.
22
Property Operating Expenses.
Property operating expenses are comprised mainly of building common area and maintenance expenses, insurance, property taxes, property management fees, as well as certain expenses that are not recoverable from tenants, the majority of which are related to costs necessary to maintain the appearance and marketability of vacant space. In the normal course of business, property expenses fluctuate and are impacted by various factors including, but not limited to, occupancy levels, weather, utility costs, repairs, maintenance and
re-leasing
costs. Property operating expenses increased by $0.9 million, or 6%2%, to $14.7$43.7 million for the threenine months ended March 31,September 30, 2020, from $13.8$42.8 million for the threenine months ended March 31,September 30, 2019. The increase in propertyProperty operating expenses was primarily due toincreased by $1.6 million, $0.5 million and $0.5 million, respectively, from the acquisitions described above. The acquisition of the Canyon Park,7601 Tech, Cascade Station and 7601 Tech properties contributed an additional $0.2 million, $0.3 million, and $0.6 million, respectively, in additional property operating expenses.Canyon Park properties. Partially offsetting these increases, Plaza 25property operating expenses decreased by $0.6 million, $0.2 million and $0.2 million, respectively, due to the sale of that property in February 2019, the Sorrento Mesa portfolio decreased by $0.1 million due to the sale ofLogan Tower, the 10455 Pacific Center building in May 2019,our Sorrento Mesa portfolio and Logan TowerPlaza 25. Operating expenses at our San Diego properties decreased by $0.2a combined $0.3 million primarily due to a property tax refund received during the sale of that property in December 2019.nine months ended September 30, 2020 related to a prior-year appeal. The remaining property operating expenses aggregate to an increase of $0.3 millionwere marginally lower in comparison to the prior-year period.
General and Administrative.
General and administrative expenses are comprised of public company reporting costs and the compensation of our management team and board of directors, as well as
non-cash
stock-based compensation expenses. General and administrative expenses increased $0.5decreased $0.4 million, or 21%5%, to $2.8$8.0 million for the threenine months ended March 31,September 30, 2020, from $2.3$8.4 million for the threenine months ended March 31,September 30, 2019. The increasedecrease was primarily attributable tobecause in the prior-year period, there were $1.1 million of
one-time
expenses incurred as a result of the assignment fee income partially offset by higher payroll costs.and stock-based compensation costs for the current year.
Depreciation and Amortization.
Depreciation and amortization increased $0.6$1.1 million, or 4%3%, to $15.0$45.2 million for the threenine months ended March 31,September 30, 2020, from $14.4$44.1 million for the threenine months ended March 31,September 30, 2019, primarily due to the addition of the Canyon Park, Cascade Station and 7601 Tech properties. These increases were partially offset by a decrease at Plaza 25, Logan Tower and the 10455 Pacific Center building of the Sorrento Mesa propertyportfolio due to the sale of those properties.
Other Expense (Income)
Interest Expense.
Interest expense decreased $0.8$2.2 million, or 11%10%, to $6.7$20.8 million for the threenine months ended March 31,September 30, 2020, from $7.5$23.0 million for the threenine months ended March 31,September 30, 2019. The decrease was primarily attributable to a decrease of $1.1 million of interest expense on our Unsecured Credit Facility (as defined herein) primarily as a result of the repayments using the net proceeds of the equity raises during the year. Interest expense also decreased by $0.2 million due to the negotiated reduction in interest rate on four mortgages in the second half of 2019. Partially offsetting these decreases, interest expense
Net Gain on the Sale of Real Estate Property.
 We recorded a net gain on the sale of real estate property of $1.3 million for the Canyon Park and Cascade Station property level debt increased by $0.3 million, and $0.2 million, respectively, duenine months ended September 30, 2020 related to the acquisitionssale of those propertiesthe land parcel at the Circle Point property in July 2020. The gross gain on sale was reduced by disposal-related costs and taxes paid by our taxable REIT subsidiary. Net gain on the sale of real estate property of $0.5 million for the nine months ended September 30, 2019 related to the sale of the 10455 Pacific Center building of the Sorrento Mesa property in May 2019.
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Cash Flows
Comparison of ThreeNine Months Ended March 31,September 30, 2020 to ThreeNine Months Ended March 31,September 30, 2019
Cash, cash equivalents and restricted cash were $164.8$56.4 million and $37.0$32.5 million as of March 31,September 30, 2020 and March 31,September 30, 2019, respectively.
Cash flow from operating activities.
Net cash provided by operating activities increased by $7.9$10.3 million to $10.7$47.6 million for the threenine months ended March 31,September 30, 2020 compared to $2.8$37.3 million for the same period in 2019. The increase was primarily attributable to increased operating cash flows from acquired properties includingand changes in working capital.
Cash flow to investing activities.
Net cash used in investing activities decreased by $31.4$75.5 million to $5.3$15.2 million for the threenine months ended March 31,September 30, 2020 compared to $36.7$90.7 million for the same period in 2019. The decrease in cash used in investing activities was primarily due to no acquisitions or dispositionsof real estate and lower proceeds from the sale of real estate during the threenine months ended March 31,September 30, 2020 compared to aggregate $51.1$108.4 million of acquisitions and aggregate $17.4$33.9 million of dispositions for the same period in 2019.
Cash flow fromto financing activities.
Net cash provided byused in financing activities increased by $34.1$116.4 million to $71.9$63.5 million for the threenine months ended March 31,September 30, 2020 compared to $37.8$52.9 million provided by financing activities for the same period in 2019. Cash flow provided byThe increase in cash used in financing activities increasedwas primarily due to repurchases of our common stock and no proceeds from sale of our common stock for the nine months ended September 30, 2020. The increase was partially offset by higher net proceeds from our Unsecured Credit Facility borrowings for the three months ended March 31,in 2020 compared to the same period in 2019, partially offset by common stock repurchases during the three months ended March 31, 2020.2019.
23
Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources
We had approximately $146.5$38.4 million of cash and cash equivalents and $18.3$18.0 million of restricted cash as of March 31,September 30, 2020.
On March 15, 2018, the Company entered into a credit agreement for the Unsecured Credit Facility (our “Unsecured Credit Facility”) that provided for commitments of up to $250 million, which includes an accordion feature that allows the Company to borrow up to $500 million, subject to customary terms and conditions. The Company’s previous secured credit facility was replaced and repaid in full from the proceeds of our Unsecured Credit Facility. Our Unsecured Credit Facility matures in March 2022 and may be extended to March 2023 at the Company’s option upon meeting certain conditions. Borrowings under our Unsecured Credit Facility bear an interest at a rate equal to the LIBOR rate plus a margin of between 140 to 225 basis points depending upon the Company’s consolidated leverage ratio. During the three months ended March 31, 2020, we drew approximately $100 million under the Unsecured Credit Facility. At March 31,As of September 30, 2020, we had approximately $100$75.0 million outstanding under our Unsecured Credit Facility and a $7.0 million letter of credit to satisfy escrow requirements for a mortgage lender.
On September 27, 2019, the Company entered into the five-year $50 million Term Loan (the “Term Loan”), increasing its authorized borrowings under the Company’s Unsecured Credit Facility from $250 million to $300 million. Borrowings under the Term Loan bear interest at a rate equal to the LIBOR rate plus a margin between 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the Company also entered into the five-year interest rate swap for a notional amount of $50 million (the “Interest Rate Swap”). Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate
30-day
LIBOR payments.
On June 16, 2017, the Company and the Operating Partnership previously entered into equity distribution agreements (collectively, the “Initial Agreements”) with each of KeyBanc Capital Markets Inc., Raymond James & Associates, Inc. and BMO Capital Markets Corp., (collectively, the “Initial Sales Agents”), pursuant to which the Company may issue and sell from time to time shares of common stock and the Company’s 6.625% Series A Preferred Stock (“Series A Preferred Stock”) through the Initial Sales Agents, acting as agents or principals (the “Prior ATM Program”). On November 1, 2018, the Company and the Operating Partnership entered into amendments (the “Initial Amendments”) to the Initial Agreements (as amended by the Amendments, the “Prior EDAs”) with each of the Initial Sales Agents to increase the number of shares of common stock issuable under the Prior ATM Program. The Company terminated the Prior EDAs effective February 25, 2020. The Company did not issue any shares of common stock or Series A Preferred Stock under the Prior ATM Program for the period beginning on January 1, 2020 through the date the Prior EDAs were terminated or during the threenine months ended March 31,September 30, 2020.
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Table of Contents
On February 26, 2020, the Company and the Operating Partnership entered into equity distribution agreements (collectively, the “Agreements”) with each of KeyBanc Capital Markets Inc., Raymond James & Associates, Inc., BMO Capital Markets Corp., RBC Capital Markets, LLC, B. Riley FBR, Inc., D.A. Davidson & Co. and Janney Montgomery Scott LLC (the “Sales Agents”) pursuant to which the Company may issue and sell from time to time up to 15,000,000 shares common stock and up to 1,000,000 Series A Preferred Stock through the Sales Agents, acting as agents or principals (the “ATM Program”). The Company did not issue any shares of common stock or Series A Preferred Stock under the ATM Program during the threenine months ended March 31,September 30, 2020.
Our short-term liquidity requirements primarily consist of operating expenses and other expenditures associated with our properties, distributions to our limited partners and distributions to our stockholders required to qualify for REIT status, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash, proceeds from our public offerings, including under our at the market issuance program, and borrowings under our mortgage loans and our Unsecured Credit Facility.
Our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at maturity, property acquisitions and
non-recurring
capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness and the issuance of equity and debt securities. We also may fund property acquisitions and
non-recurring
capital improvements using our Unsecured Credit Facility pending longer term financing.
24
We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity securities. However, we cannot assure you that this is or will continue to be the case. Our ability to incur additional debt is dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets is dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us.
Contractual Obligations and Other Long-Term Liabilities
The following table provides information with respect to our commitments as of March 31,September 30, 2020, including any guaranteed or minimum commitments under contractual obligations. The table does not reflect available debt extension options.
                     
 
Payments Due by Period (in thousands)
 
Contractual Obligations
 
Total
  
2020
  
2021-2022
  
2023-2024
  
More than
5 years
 
Principal payments on mortgage loans
 $
710,751
  $
4,738
  $
195,884
  $
173,254
  $
336,875
 
Interest payments
(1)
  
134,628
   
20,302
   
45,789
   
37,089
   
31,448
 
Tenant-related commitments
  
12,530
   
11,904
   
626
   
—  
   
—  
 
Lease obligations
  
29,997
   
384
   
1,669
   
1,264
   
26,680
 
                     
Total
 $
887,906
  $
37,328
  $
243,968
  $
211,607
  $
395,003
 
                     
 
   
Payments Due by Period
(in thousands)		 
Contractual Obligations
  
Total
   
2020
   
2021-2022
   
2023-2024
   
More than

5 years
 
Principal payments on mortgage loans
  $ 682,585   $1,571   $ 170,885   $ 173,254   $ 336,875 
Interest payments
(1)
   119,184    6,425    44,222    37,089    31,448 
Tenant-related commitments
   7,467    2,310    5,157    —      —   
Lease obligations
   29,665    52    1,669    1,264    26,680 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $ 838,901   $ 10,358   $ 221,933   $ 211,607   $ 395,003 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
(1)
Contracted interest on the floating rate borrowings under our Unsecured Credit Facility was calculated based on the balance and interest rate at March 31,September 30, 2020. Contracted interest on the Term Loan was calculated based on the Interest Rate Swap rate fixing the LIBOR component of the borrowing rate to approximately 1.27%.
Off-Balance
Sheet Arrangements
As of March 31,September 30, 2020, we had a $7$7.0 million letter of credit outstanding under our Unsecured Credit Facility to satisfy escrow requirements for a mortgage lender.
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Table of Contents
Inflation
Substantially all of our office leases provide for real estate tax and operating expense escalations. In addition, most of the leases provide for fixed annual rent increases. We believe that inflationary increases may be at least partially offset by these contractual rent increases and expense escalations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We have used, and will use, derivative financial instruments to manage or hedge interest rate risks related to borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based upon their credit rating and other factors. See Note 6 to our consolidated financial statements in Item 1 of this Report for more information regarding our derivatives.
The primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure is LIBOR. We primarily use fixed interest rate financing to manage our exposure to fluctuations in interest rates. We consider our interest rate exposure to be minimal, because as of March 31,September 30, 2020, approximately $560.8$557.6 million, or 78.9%81.7%, of our debt had fixed interest rates and approximately $150$125.0 million, or 21.1%18.3%, had variable interest rates. Of the $150$125.0 million variable rate debt, $50$50.0 million relates to the Term Loan against which we have applied the Interest Rate Swap. The Interest Rate Swap effectively fixes the
30-day
LIBOR rate at approximately 1.27% until maturity of the Term Loan. When factoring in the Term Loan as fixed rate debt through the Interest Rate Swap, approximately 85.9%89.0% of our debt was fixed rate debt and 14.1%11.0% was variable rate debt as of March 31,September 30, 2020. A 10% increase in LIBOR would result in a nominal increase to our annual interest costs by approximately $0.1 million on debt outstanding as of March 31,September 30, 2020, and would decrease the fair value of our outstanding debt, as well as increase interest costs associated with future debt issuances or borrowings under our Unsecured Credit Facility. A 10% decrease in LIBOR would result in a nominal decrease to our annual interest costs by approximately $0.1 million on debt outstanding as of March 31,September 30, 2020 and would increase the fair value of our outstanding debt, as well as decrease interest costs associated with future debt issuances or borrowings under our Unsecured Credit Facility.
Interest risk amounts are our management’s estimates based on our Company’s capital structure and were determined by considering the effect of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. We may take actions to further mitigate our exposure to changes in interest rates. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our Company’s financial structure. In addition, the uncertainty that exists with respect to the economic impact of the recent
COVID-19
pandemic has introduced significant volatility in global financial markets and economies during and subsequent to the threenine months ended March 31,September 30, 2020. The long-term impacts of such volatility on the Company cannot be predicted with confidence or reasonably estimated at this time.are uncertain and impossible to estimate, and will depend on the scope, severity and duration of the pandemic.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on the most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer determined that the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e)
and
15d-15(e)
under the Securities and Exchange Act of 1934, as amended) were effective as of March 31,September 30, 2020.
Management’s Report on Internal Control Over Financial Reporting
There have been no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of business. As of March 31,September 30, 2020, management does not believe that any such litigation will have a material adverse effect, individually or in the aggregate, on our financial position or results of operations.
Item 1A. Risk Factors
The following risk factor updates the risk factor in Part II, Item 1A of our Quarterly Report on Form
10-Q
for the quarterly report ended June 30, 2020 and supplements the risk factors disclosed in the section entitled “Risk Factors” of our Annual Report on Form
10-K
for the year ended December 31, 2019. Except as presented below or in the section titled “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition” in this Quarterly Report on Form
10-Q,
there have been no material changes from the risk factors set forth in such Annual Report.
The current pandemic of the novel coronavirus
(“COVID-19”),
and the future outbreak of other highly infectious or contagious diseases, could have an adverse effect on our financial condition, results of operations, cash flow, ability to pay dividends and the per share market price of our common stock or preferred stock.
Since being reported in December 2019,
COVID-19
has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared
COVID-19
a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to
COVID-19.
Since that time, the global impact of the outbreak has been rapidly evolving and, as cases of
COVID-19
have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel.
The
COVID-19
pandemic has had, and a future outbreak of other highly infectious or contagious diseases could have, repercussions across regional and global financial markets and economies. The outbreak of
COVID-19
in many countries, including the United States, has adversely impacted global economic activity and has contributed to significant volatility in financial markets.
Certain states and cities, including where we own properties and where our principal place of business is located, have also reacted by instituting quarantines, restrictions on travel,
“stay-at-home”
rules and restrictions on the types of businesses that may continue to operate. The Company cannot predict if additional states and cities will implement similar restrictions, whether or how the nature of these restrictions may evolve or when restrictions currently in place or modified restrictions in the future will expire. As a result, the
COVID-19
pandemic is negatively impacting many industries and governmental operations directly or indirectly, including the industries in which the Company and our tenants operate. A number of our tenants have announced temporary closures of their offices and other operations, and requested rent deferral or rent abatementabatements during this pandemic. In addition, many of our employees in our principal offices are currently working remotely. The effects of an extended period of remote work arrangements, could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. To date, we have provided temporary relief to certain tenants in the form of rent deferral and rent abatements, the financial impacts of which have been immaterial to the Company. However, it is impossible to predict the extent to which future requests from tenants for rent deferrals, rent abatements or relief from other contractual obligations, or a failure to pay rent, as a result of changes in business behavior stemming from the ongoing
COVID-19
pandemic, the availability of government assistance programs or otherwise, may impact our financial condition, results of operations and cash flow.
The
COVID-19
pandemic, or a future outbreak of other highly infectious or contagious diseases, could also have adverse effects on our financial condition, results of operations, cash flow, ability to pay dividends and the per share market price of our common stock or preferred stock, among other factors:
a complete or partial closure of, decline or cessation in the usage of, or other operational issues at, one or more of our properties resulting from government or tenant action;
 
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the reduced economic activity severely impacts our tenants’ businesses, financial condition, liquidity and creditworthiness, which may cause one or more of our tenants to be unable to meet their obligations to us in full, or at all, seek modifications of such obligations or exercise early termination rights;
 
a decrease in the usage of our properties or the demand for office space, or the Company’s ability to maintain or increase rents, which may have an adverse effect on our financial condition, results of operations and cash flow than if we owned a more diversified real estate portfolio;
 
27
difficulty accessing sources of capital on attractive terms, or at all, impacts to our credit ratings, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to debt or equity capital necessary to fund future capital needs (including redevelopment, acquisition, expansion and renovation activities, payments of principal and interest on and the refinancing of our existing debt, tenant improvements and leasing costs) or refinancings on a timely basis and our tenants’ ability to fund their business operations and meet their obligations to us;
 
the financial impact of the
COVID-19
pandemic could negatively impact our future compliance with financial covenants of our Unsecured Credit Facility, including the Term Loan, and other debt agreements and result in a default and potentially an acceleration of indebtedness, which
non-compliance
could negatively impact our ability to make additional borrowings and pay dividends on our common stock or preferred stock;
 
any impairment in value of our tangible or intangible assets which could be recorded as a result of a weaker economic conditions;
 
a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow our portfolio of properties due to a lack of suitable acquisition opportunities;
 
a general decline in the attractiveness of our properties due to changes in the demand for office space, which may adversely impact our ability to consummate pending or future dispositions on terms that allow us to recover expected carrying values of a real estate investment; and
 
the potential negative impact on the health of a significant number of our employees could result in a deterioration in our ability to ensure business continuity or maintain adequate disclosure reporting or internal controls through the duration of this disruption.
The extent to which the
COVID-19
pandemic impacts our financial condition, results of operations and cash flow, and those of our tenants, will depend on future developments, which arecontinue to be highly uncertain and cannot be predicted with confidence,are not reasonably estimable, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. In addition,
non-payment
of rent or early lease terminations by our tenants could reduce our cash flows, which could impact our ability to pay dividends to the holders of our common stock and preferred stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 9, 2020, the Company’s Board of Directors approved a share repurchase plan authorizing the Company to repurchase up to $100 million of its outstanding shares of common stock. In July 2020, the Company completed the full March 2020 share repurchase program. On August 5, 2020, the Company’s Board of Directors approved an additional share repurchase plan authorizing the Company to repurchase up to an additional aggregate amount of $50 million of its outstanding shares of common stock. Under the share repurchase program,programs, the shares may be repurchased from time to time using a variety of methods, which may include open market transactions, privately negotiated transactions or otherwise, all in accordance with the rules of the Securities and Exchange Commission and other applicable legal requirements.
Repurchased shares of common stock will be classified as authorized and unissued shares. The Company recognizes the cost of shares of common stock it repurchases, including direct costs incurred, as a reduction in stockholders’ equity. Such reductions of stockholders equity due to the repurchases of shares of common stock repurchased will be applied first, to reduce common stock in the amount of the par value associated with the shares of common stock repurchased and second, to reduce additional
paid-in
capital by the amount that the purchase price for the shares of common stock repurchased exceed the par value.
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Table of Contents
Share repurchase activity under our share repurchase plan,plans, on a trade date basis, for the three months ended March 31,September 30, 2020, was as follows:
28
                 
Issuer Purchases of Equity Securities
 
Period
 
Total
Number of
Shares of Common
Stock
Purchased
  
Average
Price Paid
per Share of
Common Stock
Repurchased
  
Total Number of
Shares of Common
Stock Purchased
as Part of Share
Repurchase Plan
  
Approximate Dollar 
Value of Shares of
Common Stock that
May Yet Be
Purchased Under the
Share Repurchase
Plan
(1)
(thousands)
 
January 1 – 31, 2020
  
—  
  $
—  
   
—  
  $
 —  
(2) 
February 1 – 29, 2020
  
—  
   
—  
   
—  
   
—  
(2) 
March 1 – 31, 2020
  
1,451,249
   
7.99
   
1,451,249
   
88,406
 
                 
Total
  
1,451,249
  $
7.99
   
1,451,249
  $
88,406
 
                 
 
Issuer Purchases of Equity Securities
 
Period
  
Total

Number of

Shares of Common

Stock

Purchased
   
Average

Price Paid

per Share of

Common Stock
Repurchased
   
Total Number of

Shares of Common

Stock Purchased

as Part of Share

Repurchase Plans
   
Approximate Dollar

Value of Shares of
Common Stock that

May Yet Be

Purchased Under the

Share Repurchase
Plans
(1)

(thousands)
 
July 1 – 31, 2020
   1,114,196   $9.58    1,114,196   $—   
August 1 – 31, 2020
   —      —      —      50,000 
September 1 – 30, 2020
   —      —      —      50,000 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
   1,114,196   $ 9.58    1,114,196   $ 50,000 
  
 
 
   
 
 
   
 
 
   
 
 
 
(1)
Represents approximate dollar value of shares that could have been purchased under the planplans in effect at the end of the month.
(2)The share repurchase plan was approved by the Company’s Board of Directors on March 9, 2020. Therefore, no purchases were authorized or made during this period.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Table of Contents
Item 6. Exhibits
Exhibit
Number
  
Description
3.1  
1.1
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City Office Operating Partnership, L.P. and KeyBanc Capital Markets Inc. (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2020).
1.2
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City Office Operating Partnership, L.P. and Raymond James & Associates, Inc. (incorporated by reference to Exhibit 1.2 to the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2020).
1.3
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City Office Operating Partnership, L.P. and BMO Capital Markets Corp. (incorporated by reference to Exhibit 1.3 to the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2020).
1.4
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City Office Operating Partnership, L.P. and RBC Capital Markets, LLC (incorporated by reference to Exhibit 1.4 to the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2020).
1.5
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City Office Operating Partnership, L.P. and B. Riley FBR, Inc. (incorporated by reference to Exhibit 1.5 to the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2020).
1.6
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City Office Operating Partnership, L.P. and D.A. Davidson & Co. (incorporated by reference to Exhibit 1.6 to the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2020).
29
1.7
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City Office Operating Partnership, L.P. and Janney Montgomery Scott LLC (incorporated by reference to Exhibit 1.7 to the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2020).
3.1
Articles of Amendment and Restatement of City Office REIT, Inc., as amended and supplemented (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on March 1, 2018).
3.2  
3.2
Second Amended and Restated Bylaws of City Office REIT, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 14, 2017).
4.1  
4.1
Certificate of Common Stock of City Office REIT, Inc. (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-11/A filed with the Commission on February 18, 2014).
4.2  
4.2
Form of certificate representing the 6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Commission on September 30, 2016).
31.1  
10.1
Form of Performance Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 28, 2020). **
10.2
Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of City Office REIT Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2020).
31.1
Certification by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †
31.2  
31.2
Certification by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †
32.1  
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
32.2  
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
101.INS  INSTANCE DOCUMENT*
101.SCH  SCHEMA DOCUMENT*
101.INS
101.CAL  
INSTANCECALCULATION LINKBASE DOCUMENT*
101.LAB  LABELS LINKBASE DOCUMENT*
101.PRE  PRESENTATION LINKBASE DOCUMENT*
101.SCH
101.DEF  
SCHEMADEFINITION LINKBASE DOCUMENT*
104  
101.CAL
CALCULATION LINKBASE DOCUMENT*
101.LAB
LABELS LINKBASE DOCUMENT*
101.PRE
PRESENTATION LINKBASE DOCUMENT*
101.DEF
DEFINITION LINKBASE DOCUMENT*
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*
†  Filed herewith.
*  
†
Filed herewith.
*
Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.
**
Compensatory Plan or arrangement
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CITY OFFICE REIT, INC.
Date: May 7,November 5, 2020
By:
 
/s/ James Farrar
 
James Farrar
 
Chief Executive Officer and Director
 
(Principal Executive Officer)
Date: May 7,November 5, 2020
By:
 
/s/ Anthony Maretic
 
Anthony Maretic
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
 
36
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