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 JuneSeptember 30, 2021
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
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 organization)
 
(I.R.S. Employer
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
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.days
.
   Yes  
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 ☒
    
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 August
2October 29
, 2021 was 43,554,375.
 
 
 
Table of Contents
City Office REIT, Inc.
Quarterly Report on Form
10-Q
For the Quarter Ended JuneSeptember 30, 2021
Table of Contents
 
PART I. FINANCIAL INFORMATION
   1 
  
Item 1. Financial Statements
   1 
  
Condensed Consolidated Balance Sheets as of JuneSeptember 30, 2021 and December 31, 2020
   1 
  
Condensed Consolidated Statements of Operations for the Three and SixNine Months Ended JuneSeptember 30, 2021 and 2020
   2 
  
Condensed Consolidated Statements of Comprehensive Income/(Loss)Income for the Three and SixNine Months Ended JuneSeptember 30, 2021 and 2020
   3 
  
Condensed Consolidated Statements of Changes in Equity for the Three and SixNine Months Ended JuneSeptember 30, 2021 and 2020
   4 
  
Condensed Consolidated Statements of Cash Flows for the SixNine Months Ended JuneSeptember 30, 2021 and 2020
   5 
  
Notes to Condensed Consolidated Financial Statements
   6 
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
   1516 
  
Item 3. Quantitative and Qualitative Disclosures about Market Risk
25
Item 4. Controls and Procedures
25
PART II. OTHER INFORMATION
   26 
  
Item 1. Legal Proceedings4. Controls and Procedures
   26 
  
Item 1A. Risk FactorsPART II. OTHER INFORMATION
26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
26
Item 3. Defaults Upon Senior Securities
26
Item 4. Mine Safety Disclosures
26
Item 5. Other Information
26
Item 6. Exhibits
   27 
  
Item 1. Legal Proceedings
27
SignaturesItem 1A. Risk Factors
27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
27
Item 3. Defaults Upon Senior Securities
27
Item 4. Mine Safety Disclosures
27
Item 5. Other Information
27
Item 6. Exhibits
   28 
Signatures
29
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
City Office REIT, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value and share data)
 
  
June 30,

2021
 
December 31,
2020
   
September 30,

2021
 
December 31,
2020
 
Assets
          
Real estate properties
          
Land
  $241,582  $204,289   $169,984  $204,289 
Building and improvement
   783,264  777,184    744,818   777,184 
Tenant improvement
   106,876  104,694    102,683   104,694 
Furniture, fixtures and equipment
   669  642    664   642 
  
 
  
 
   
 
  
 
 
   1,132,391  1,086,809    1,018,149   1,086,809 
Accumulated depreciation
   (149,087)  (131,220)    (149,901)   (131,220) 
  
 
  
 
   
 
  
 
 
   983,304  955,589    868,248   955,589 
  
 
  
 
   
 
  
 
 
Cash and cash equivalents
   13,394  25,305    17,697   25,305 
Restricted cash
   22,929  20,646    52,484   20,646 
Rents receivable, net
   32,448  32,968    29,221   32,968 
Deferred leasing costs, net
   20,253  16,829    18,415   16,829 
Acquired lease intangible assets, net
   37,363  44,143    30,183   44,143 
Other assets
   18,461  15,758    17,753   15,758 
Assets held for sale
   0  46,054    118,382   46,054 
  
 
  
 
   
 
  
 
 
Total Assets
  $1,128,152  $1,157,292   $1,152,383  $1,157,292 
  
 
  
 
   
 
  
 
 
Liabilities and Equity
          
Liabilities:
          
Debt
  $612,510  $677,242   $603,334  $677,242 
Accounts payable and accrued liabilities
   21,668  25,414    32,096   25,414 
Deferred rent
   10,208  7,295    10,460   7,295 
Tenant rent deposits
   5,921  4,801    5,542   4,801 
Acquired lease intangible liabilities, net
   5,352  6,035    3,868   6,035 
Other liabilities
   19,069  18,099    47,662   18,099 
Liabilities related to assets held for sale
   0  531    2,873   531 
  
 
  
 
   
 
  
 
 
Total Liabilities
   674,728  739,417    705,835   739,417 
  
 
  
 
   
 
  
 
 
Commitments and Contingencies (Note 9)
   0    0  0  0 
Equity:
          
6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares authorized, 4,480,000
shares issued
and outstanding as of June 30, 2021 and December 31, 2020
   112,000  112,000 
Common stock, $0.01
par value per share,
100,000,000 shares authorized, 43,554,375 and 43,397,117 shares issued and outstanding as of June 30, 2021 and December 31,
2020, respectively
   435  433 
6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares authorized, 4,480,000 shares issued and outstanding as of September 30, 2021 and December 31, 2020
   112,000   112,000 
Common stock, $0.01 par value per share, 100,000,000 shares authorized, 43,554,375 and 43,397,117 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
   435   433 
Additional
paid-in
capital
   480,629  479,411    481,345   479,411 
Accumulated deficit
   (139,358)  (172,958)    (146,930)   (172,958) 
Accumulated other comprehensive loss
   (1,191)  (1,960)    (1,063)   (1,960) 
  
 
  
 
   
 
  
 
 
Total Stockholders’ Equity
   452,515  416,926    445,787   416,926 
Non-controlling
interests in properties
   909  949    761   949 
  
 
  
 
   
 
  
 
 
Total Equity
   453,424  417,875    446,548   417,875 
  
 
  
 
   
 
  
 
 
Total Liabilities and Equity
  $1,128,152  $1,157,292   $1,152,383  $1,157,292 
  
 
  
 
   
 
  
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
1
Table of Contents
City Office REIT, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
   
Three Months Ended
June 30,
  
Six Months Ended

June 30,
 
   
2021
  
2020
  
2021
  
2020
 
Rental and other revenues
  $39,964  $39,617  $79,480  $79,739 
Operating expenses:
                 
Property operating expenses
   14,179   14,084   28,297   28,780 
General and administrative
   3,068   2,697   5,868   5,480 
Depreciation and amortization
   14,954   15,080   29,369   30,032 
   
 
 
  
 
 
  
 
 
  
 
 
 
Total operating expenses
   32,201   31,861   63,534   64,292 
   
 
 
  
 
 
  
 
 
  
 
 
 
Operating income
   7,763   7,756   15,946   15,447 
Interest expense:
                 
Contractual interest expense
   (5,639)   (6,792)   (11,883)   (13,153) 
Amortization of deferred financing costs and debt fair value
   (272)   (341)   (602)   (665) 
   
 
 
  
 
 
  
 
 
  
 
 
 
    (5,911)   (7,133)   (12,485)   (13,818) 
Net gain on sale of real estate property
   —   —   47,400   — 
   
 
 
  
 
 
  
 
 
  
 
 
 
Net income
   1,852   623   50,861   1,629 
Less:
                 
Net income attributable to
non-controlling
interests in properties
   (190)   (179)   (382)   (361) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Net income attributable to the Company
   1,662   444   50,479   1,268 
Preferred stock distributions
   (1,855)   (1,855)   (3,710)   (3,710) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Net (loss)/income attributable to common stockholders
  $(193)  $(1,411)  $46,769  $(2,442) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Net (loss)/income per common share:
                 
Basic
  $0.00  $(0.03)  $1.08  $(0.05) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Diluted
  $0.00  $(0.03)  $1.06  $(0.05) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Weighted average common shares outstanding:
                 
Basic
   43,482   47,542   43,440   50,993 
   
 
 
  
 
 
  
 
 
  
 
 
 
Diluted
   43,482   47,542   44,080   50,993 
   
 
 
  
 
 
  
 
 
  
 
 
 
Dividend distributions declared per common share
  $0.15  $0.15  $0.30  $0.30 
   
 
 
  
 
 
  
 
 
  
 
 
 
 
   
Three Months Ended

September 30,
  
Nine Months Ended

September 30,
 
   
2021
  
2020
  
2021
  
2020
 
Rental and other revenues
  $44,889  $41,261  $124,369  $121,000 
Operating expenses:
                 
Property operating expenses
   15,180   14,886   43,477   43,666 
General and administrative
   7,900   2,546   13,768   8,025 
Depreciation and amortization
   14,648   15,189   44,017   45,222 
   
 
 
  
 
 
  
 
 
  
 
 
 
Total operating expenses
   37,728   32,621   101,262   96,913 
   
 
 
  
 
 
  
 
 
  
 
 
 
Operating income
   7,161   8,640   23,107   24,087 
Interest expense:
                 
Contractual interest expense
   (5,650)   (6,620)   (17,533)   (19,773) 
Amortization of deferred financing costs and debt fair value
   (267)   (328)   (869)   (993) 
   
 
 
  
 
 
  
 
 
  
 
 
 
    (5,917)   (6,948)   (18,402)   (20,766) 
Net gain on sale of real estate property
   —     1,347   47,400   1,347 
   
 
 
  
 
 
  
 
 
  
 
 
 
Net income
   1,244   3,039   52,105   4,668 
Less:
                 
Net income attributable to
non-controlling
interests in properties
   (378)   (153)   (760)   (514) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Net income attributable to the Company
   866   2,886   51,345   4,154 
Preferred stock distributions
   (1,855)   (1,855)   (5,565)   (5,565) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Net (loss)/income attributable to common stockholders
  $(989)  $1,031  $45,780  $(1,411) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Net (loss)/income per common share:
                 
Basic
  $(0.02)  $0.02  $1.05  $(0.03) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Diluted
  $(0.02)  $0.02  $1.04  $(0.03) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Weighted average common shares outstanding:
                 
Basic
   43,554   43,593   43,478   48,508 
   
 
 
  
 
 
  
 
 
  
 
 
 
Diluted
   43,554   44,014   44,091   48,508 
   
 
 
  
 
 
  
 
 
  
 
 
 
Dividend distributions declared per common share
  $0.15  $0.15  $0.45  $0.45 
   
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
2
Table of Contents
City Office REIT, Inc.
Condensed Consolidated Statements of Comprehensive Income/(Loss)Income
(Unaudited)
(In thousands)
 
  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
   
Three Months Ended

September 30,
 
Nine Months Ended

September 30,
 
  
2021
 
2020
 
2021
 
2020
   
2021
 
2020
 
2021
 
2020
 
Net income
  $1,852  $623  $50,861  $1,629   $1,244  $3,039  $52,105  $4,668 
Other comprehensive income/(loss):
                  
Unrealized cash flow hedge (loss)/gain
   (47)  (394)  480  (3,084)    (22)   (7)   458   (3,091) 
Amounts reclassified to interest expense
   147  96  289  45    150   141   439   186 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
 
Other comprehensive income/(loss)
   100  (298)  769  (3,039)    128   134   897   (2,905) 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
 
Comprehensive income/(loss)
   1,952  325  51,630  (1,410) 
Comprehensive income
   1,372   3,173   53,002   1,763 
Less:
                  
Comprehensive income attributable to
non-controlling
interests in properties
   (190)  (179)  (382)  (361)    (378)   (153)   (760)   (514) 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
 
Comprehensive income/(loss) attributable to the Company
  $1,762  $146  $51,248  $(1,771) 
Comprehensive income attributable to the Company
  $994  $3,020  $52,242  $1,249 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
3
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
  
Total
stockholders’
equity
  
Non-controlling

interests in
properties
  
Total
equity
 
Balance—December 31, 2020
  4,480  $112,000   43,397  $433  $479,411  $(172,958)  $(1,960)  $416,926  $949  $
 
417,875 
Restricted stock award grants and vesting
  —     —     —     —     695   (50)   —     645   —     645 
Common stock dividend distribution declared
  —     —     —     —     —     (6,510)   —     (6,510)   —     (6,510) 
Preferred stock dividend distribution declared
  —     —     —     —     —     (1,855)   —     (1,855)   —     (1,855) 
Distributions
  —     —     —     —     —     —     —     —     (220)   (220) 
Net income
  —     —     —     —     —     48,817   —     48,817   192   49,009 
Other comprehensive income
  —     —     —     —     —     —     669   669   —     669 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance—March 31, 2021
  4,480  $112,000   43,397  $433  $480,106  $(132,556)  $(1,291)  $458,692  $921  $459,613 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted stock award grants and vesting
  —     —     157   2   523   (76)   —     449   —     449 
Common stock dividend distribution declared
  —     —     —     —     —     (6,533)   —     (6,533)   —     (6,533) 
Preferred stock dividend distribution declared
  —     —     —     —     —     (1,855)   —     (1,855)   —     (1,855) 
Contributions
  —     —     —     —     —     —     —     —     2   2 
Distributions
  —     —     —     —     —     —     —     —     (204)   (204) 
Net income
  —     —     —     —     —     1,662   —     1,662   190   1,852 
Other comprehensive income
  —     —     —     —     —     —     100   100   —     100 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance—June 30, 2021
  4,480  $112,000   43,554  $435  $480,629  $(139,358)  $(1,191)  $452,515  $909  $453,424 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
           
  
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
  
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   0     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 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
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
  
Total
stockholders’
equity
  
Non-controlling

interests in
properties
  
Total
equity
 
Balance—December 31, 2020
  4,480  $112,000   43,397  $433  $479,411  $(172,958)  $(1,960)  $416,926  $949  $417,875 
Restricted stock award grants and vesting
  —     —     —     —     695   (50)   —     645   —     645 
Common stock dividend distribution declared
  —     —     —     —     —     (6,510)   —     (6,510)   —     (6,510) 
Preferred stock dividend distribution declared
  —     —     —     —     —     (1,855)   —     (1,855)   —     (1,855) 
Distributions
  —     —     —     —     —     —     —     —     (220)   (220) 
Net income
  —     —     —     —     —     48,817   —     48,817   192   49,009 
Other comprehensive income
  —     —     —     —     —     —     669   669   —     669 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance—March 31, 2021
  4,480  $112,000   43,397  $433  $480,106  $(132,556)  $(1,291)  $458,692  $921  $459,613 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Restricted stock award grants and vesting
  —     —     157   2   523   (76)   —     449   —     449 
Common stock dividend distribution declared
  —     —     —     —     —     (6,533)   —     (6,533)   —     (6,533) 
Preferred stock dividend distribution declared
  —     —     —     —     —     (1,855)   —     (1,855)   —     (1,855) 
Contributions
  —     —     —   —     —     —     —     —   2   2 
Distributions
  —     —     —     —     —     —     —     —     (204)   (204) 
Net income
  —     —     —     —     —     1,662   —     1,662   190   1,852 
Other comprehensive income
  —     —     —     —     —     —     100   100   —     100 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance—June 30, 2021
  4,480  $112,000   43,554  $435  $480,629  $(139,358)  $(1,191)  $452,515  $909  $453,424 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Restricted stock award grants and vesting
  —     —     —     —
 
 
   716   (50)   —     666   —     666 
Common stock dividend distribution declared
  —     —     —     —     —     (6,533)   —     (6,533)   —     (6,533) 
Preferred stock dividend distribution declared
  —     —     —     —     —     (1,855)   —     (1,855)   —     (1,855) 
Contributions
  —     —     —     —     —     —     —     —     10   10 
Distributions
  —     —     —     —     —     —     —     —     (536)   (536) 
Net income
  —     —     —     —     —     866   —     866   378   1,244 
Other comprehensive income
  —     —     —     —     —     —     128   128   —     128 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance—September 30, 2021
  4,480  $112,000   43,554  $435  $481,345  $(146,930)  $(1,063)  $445,787  $761  $
 
446,548 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
           
  
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
  
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
  —     —     —     —     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 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
4
Table of Contents
City Office REIT, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
  
Six Months Ended

June 30,
   
Nine Months Ended

September 30,
 
  
2021
 
2020
   
2021
 
2020
 
Cash Flows from Operating Activities:
          
Net income
  $50,861  $1,629   $52,105  $4,668 
Adjustments to reconcile net income to net cash provided by operating activities:
          
Depreciation and amortization
   29,369  30,032    44,017   45,222 
Amortization of deferred financing costs and debt fair value
   602  665    869   993 
Amortization of above and below market leases
   301  (47)    281   (70) 
Straight-line rent/expense
   85  (1,002)    428   (2,354) 
Non-cash
stock compensation
   1,310  1,157    1,976   1,745 
Net gain on sale of real estate property
   (47,400)   —      (47,400)   (1,347) 
Changes in
non-cash
working capital:
          
Rents receivable, net
   635  6    635   (235) 
Other assets
   (1,048)  (673)    (560)   (110) 
Accounts payable and accrued liabilities
   (2,757)  (567)    8,558   (151) 
Deferred rent
   2,850  436    3,468   (490) 
Tenant rent deposits
   877  (300)    1,354   (240) 
  
 
  
 
   
 
  
 
 
Net Cash Provided By Operating Activities
   35,685  31,336    65,731   47,631 
  
 
  
 
   
 
  
 
 
Cash Flows from/(to) Investing Activities:
          
Additions to real estate properties
   (9,499)  (15,140)    (12,431)   (17,105) 
Acquisition of real estate.
   (43,256)   —   
Net proceeds from sale of real estate.
   93,303   —   
Acquisition of real estate
   (43,256)   —   
Net proceeds from sale of real estate
   122,103   6,340 
Deferred leasing costs
   (3,131)  (3,056)    (6,830)   (4,479) 
  
 
  
 
   
 
  
 
 
Net Cash Provided By/(Used In) Investing Activities
   37,417  (18,196)    59,586   (15,244) 
  
 
  
 
   
 
  
 
 
Cash Flows to Financing Activities:
          
Proceeds from borrowings
   98,000  130,000    106,000   130,000 
Repayment of borrowings
   (163,363)  (33,116)    (180,806)   (59,707) 
Dividend distributions paid to stockholder
s
 
(16,729
)
 
(24,310
)
Dividend distributions paid to stockholders
   (25,117)   (32,814) 
Distributions to
non-controlling
interests in properties
   (424)  (384)    (960)   (623) 
Shares withheld for payment of taxes on restricted stock unit vesting
   (216)  (42)    (216)   (43) 
Contributions from
non-controlling
interests in properties .
   2  3 
Repurchases of common stoc
k
  
—
   (89,671) 
Contributions from
non-controlling
interests in properties
   12   3 
Repurchases of common stock
   —     (100,365) 
  
 
  
 
 
Net Cash Used In Financing Activities
   (82,730)  (17,520)    (101,087)   (63,549) 
  
 
  
 
   
 
  
 
 
Net Decrease in Cash, Cash Equivalents and Restricted Cash
   (9,628)  (4,380) 
Net
Increase/(Decrease) in Cash, Cash Equivalents and Restricted Cash
   24,230   (31,162) 
Cash, Cash Equivalents and Restricted Cash, Beginning of Period
   45,951  87,523    45,951   87,523 
  
 
  
 
   
 
  
 
 
Cash, Cash Equivalents and Restricted Cash, End of Period
  $36,323  $83,143   $70,181  $56,361 
 
 
 
 
 
 
  
 
  
 
 
Reconciliation of Cash, Cash Equivalents and Restricted Cash:
          
Cash and Cash Equivalents, End of Period
   13,394  67,039    17,697   38,399 
Restricted Cash, End of Period
   22,929  16,104    52,484   17,962 
  
 
  
 
   
 
  
 
 
Cash, Cash Equivalents and Restricted Cash, End of Period
  $36,323  $83,143   $70,181  $56,361 
 
 
 
 
 
 
  
 
  
 
 
Supplemental Disclosures of Cash Flow Information:
          
Cash paid for interest
  $11,955  $13,393   $17,568  $19,681 
Purchase of additions in real estate properties included in accounts payable
  $4,233  $6,487   $4,804  $9,778 
Purchase of deferred leasing costs included in accounts payable
  $2,164  $550   $1,351  $797 
The accompanying notes are an integral part of these condensed consolidated financial statements
.
 
5
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. 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, eli
m
inatingeliminating 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 stateme
n
tsstatements have been prepared by the Company in accordance with Securities and Exchange Commission (“SEC”) 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
Form 10-K
for the year ended December 31, 2020.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (the “FASB”) 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”).
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. Further, in January 2021, the FASB issued ASU
No. 2021-01
(“ASU
2021-01”),
Topic 848, Reference Rate Reform (“Topic 848”). ASU
2021-01
clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848.
ASU
2020-04
and ASU
2021-01
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 has not yet adopted the standard and continues to evaluate the impact of ASU
2020-04
and ASU
2021-01
on its condensed consolidated financial statements and may elect optional expedients in future periods as reference rate reform activities occur.
 
6
Table of Contents
In July 2021, the FASB issued ASU
No. 2021-05
(“ASU
2021-05”),
Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. ASU
2021-05
requires lessors to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease if the lease would have been classified as a sales-type lease or a direct financing lease under the
pre-ASU
classification criteria, and sales-type or direct financing classification would result in a Day 1 loss. The ASU is effective for fiscal years beginning after December 15, 2021. The ASU may be early adopted and can be applied either retrospectively to leases that commenced or were modified on or after the adoption of Update
2016-02
or prospectively to leases that commence or are modified on or after the date that an entity first applies the amendments. The Company has not yet adopted the standard and continues to evaluate the impact of ASU
2021-05
on its condensed consolidated financial statements and may elect to adopt the standard in future periods as the Company enters into or modifies leases that meet the criteria under the standard.
3. Real Estate Investments
Acquisitions
During the sixnine months ended JuneSeptember 30, 2021 and 2020 the Company acquired the following properties:
 
Property
  
Date Acquired
   
Percentage Owned
 
5910 Pacific Center and 9985 Pacific Heights
(1)
   May 2021    100% 
 
 (1)
5910 Pacific Center and 9985 Pacific Heights have been added to the existing Sorrento Mesa portfolio of properties (collectively “Sorrento Mesa”).
The
T
he foregoing acquisition was accounted for as an asset acquisition.
The following table summarizes the Company’s allocation of the purchase price of assets acquired and liabilities assumed during the sixnine months ended JuneSeptember 30, 2021 (in thousands):
 
  
5910 Pacific
Center and 9985
Pacific Heights
   
5910 Pacific
Center and
9985 Pacific
Heights
 
Land
  $37,294   $37,294 
Building and improvement
   2,979    2,979 
Tenant improvement
   917    917 
Lease intangible assets
   2,469    2,469 
Other assets
   19    19 
Accounts payable and other liabilities
   (319)    (319) 
Lease intangible liabilities
   (103)    (103) 
  
 
   
 
 
Net assets acquired
  $43,256   $43,256 
  
 
   
 
 
Sale of Real Estate Property
On February 10, 2021, the Company sold the Cherry Creek property in Denver, Colorado for a gross sales price of
$95.0 million, resulting in an aggregate gain of $47.4 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 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.
7
Table of Contents
Assets Held for Sale
On August 19, 2021, the Company entered into a purchase and sale agreement to sell the Sorrento Mesa buildings consisting of 10390 Pacific Center Court, 10394 Pacific Center Court, 10398 Pacific Center Court, 10421 Pacific Center Court, 10445 Pacific Center Court and 5910 Pacific Center Boulevard (the “North Disposition”). The gross sales price of the North Disposition is
$395.1 
million. The sale is scheduled to close in the fourth quarter of 2021, subject to customary closing conditions. As of September 30, 2021, the Company received a deposit of
$19.8 
million, which was recorded in restricted cash along with a corresponding liability in other liabilities on the Company’s condensed consolidated balance sheet.
Also on August 19, 2021, the Company entered into a purchase and sale agreement to sell the Sorrento Mesa buildings consisting of 5975 Pacific Mesa Court and 9985 Pacific Heights Boulevard (the “South Disposition”). The gross sales price of the South Disposition is $180.9 
million. The sale was initially scheduled to close in the first quarter of 2023, subject to customary closing conditions. The Company had the ability to accelerate the closing date with forty-five (45) days prior written notice thereof and subsequent to quarter end the Company exercised its option to accelerate the closing date to December 2021. As of September 30, 2021, the Company received a deposit of
$9.0 million, which was recorded in restricted cash along with a corresponding liability in other liabilities on the Company’s condensed consolidated balance sheet
.
The company determined that both the North Disposition and South Disposition met the criteria for classification as an asset held for sale as of September 30, 2021 (in thousands):
Sorrento Mesa
  
North
Disposition
   
South
Disposition
   
Total
 
Real estate properties, net
 
$
77,870
  
$
30,717
   $108,587 
Deferred leasing costs, net
  
3,308
   
—
 
 
    3,308 
Acquired lease intangible assets, net
  
2,225
   
1,268
    3,493 
Rents receivable, prepaid expenses and other assets
  
2,977
   
17
    2,994 
  
 
 
   
 
 
   
 
 
 
Assets held for sale
 
$
86,380
  
$
32,002
   $
 
118,382 
  
 
 
   
 
 
   
 
 
 
Acquired lease intangible liabilities, net
 
$
(1,005
)
 
 
$
—
 
 
   $(1,005) 
Accounts payable, accrued expenses, deferred rent and tenant rent deposits
  
(1,502
)
 
  
(366
)
 
   (1,868) 
  
 
 
   
 
 
   
 
 
 
Liabilities related to assets held for sale
 
$
(2,507
)
 
 
$
(366
)
 
  $(2,873) 
  
 
 
   
 
 
   
 
 
 
On November 18, 2020, the Company entered into a purchase and sale
agreement
to sell the Cherry Creek property for a gross sales price of
$95.0 million. The Company determined that theth
e
 property met theth
e
 criteria for classification as held for sale as of December 31, 2020. On February 10, 2021, the Company completed the sale of the Cherry Creek property.
7
Table of Contents
The property was classified as held for sale as of December 31, 2020 (in thousands):
 
Cherry Creek
  
December 31,
2020
   
December 31,
2020
 
Real estate properties, net
  $40,849   $40,849 
Deferred leasing costs, net
   150    150 
Acquired lease intangible assets, net
   2,256    2,256 
Rents receivable, prepaid expenses and other assets
   2,799    2,799 
  
 
   
 
 
Assets held for sale
  $46,054   $46,054 
  
 
   
 
 
Accounts payable, accrued expenses, deferred rent and tenant rent deposits
  $(531)   $(531)
  
 
   
 
 
Liabilities related to assets held for sale
  $(531)   $(531) 
  
 
   
 
 
8
Table of Contents
4. Lease Intangibles
Lease intangibles and theth
e
 value of assumed lease obligation
s
obligations as of JuneSeptember 30, 2021 and December 31, 2020 were comprised of the following (in thousands):
   
Lease Intangible Assets
  
Lease Intangible Liabilities
 
September 30, 2021
  
Above

Market
Leases
  
In Place

Leases
  
Leasing
Commissions
  
Total
  
Below
Market
Leases
  
Below
Market
Ground
Lease
  
Total
 
Cost
  $
 
14,135  $71,416  $27,847  $
 
113,398  $  (9,641)  $(138)  $  (9,779) 
Accumulated amortization
   (9,240)   (55,820)   (18,155)   (83,215)   5,864   47   5,911 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
   $4,895  $15,596  $9,692  $30,183  $(3,777)  $(91)  $(3,868) 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
Lease Intangible Assets
  
Lease Intangible Liabilities
 
December 31, 2020
  
Above

Market
Leases
  
In Place

Leases
  
Leasing
Commissions
  
Total
  
Below
Market
Leases
  
Below
Market
Ground
Lease
  
Total
 
Cost
  $14,894  $80,259  $30,284  $
 
125,437  $
 
(13,093)  $(138)  $
 
(13,231) 
Accumulated amortization
   (8,497)   (55,636)   (17,161)   (81,294)   7,152   44   7,196 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
   $6,397  $24,623  $13,123  $44,143  $(5,941)  $(94)  $(6,035) 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
   
Lease Intangible Assets
  
Lease Intangible Liabilities
 
June 30, 2021
  
Above

Market
Leases
  
In Place

Leases
  
Leasing
Commissions
  
Total
  
Below
Market
Leases
  
Below
Market
Ground
Lease
  
Total
 
Cost
  $14,489  $79,885  $30,097  $124,471  $(13,184)  $(138)  $(13,322) 
Accumulated amortization
   (8,930)   (59,541)   (18,637)   (87,108)   7,924   46   7,970 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
   $5,559  $20,344  $11,460  $37,363  $(5,260)  $(92)  $(5,352) 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
   
Lease Intangible Assets
  
Lease Intangible Liabilities
 
December 31, 2020
  
Above

Market
Leases
  
In Place

Leases
  
Leasing
Commissions
  
Total
  
Below
Market
Leases
  
Below
Market
Ground
Lease
  
Total
 
Cost
  $14,894  $80,259  $30,284  $125,437  $(13,093)  $(138)  $(13,231) 
Accumulated amortization
   (8,497)   (55,636)   (17,161)   (81,294)   7,152   44   7,196 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
   $6,397  $24,623  $13,123  $44,143  $(5,941)  $(94)  $(6,035) 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
The estimated aggregate amortization expense for lease intangibles for the next five years and in the aggregate are as follows (in thousands):
 
2021
  $6,112 
2022
   8,941 
2023
   5,914 
2024
   3,118 
2025
   2,720 
Thereafter
   5,206 
   
 
 
 
   $32,011 
   
 
 
 
2021
  $2,381 
2022
   7,699 
2023
   5,281 
2024
   2,994 
2025
   2,751 
Thereafter
   5,209 
   
 
 
 
   $26,315 
   
 
 
 
8
9
Table of Contents
5. Debt
The following table summarizes theth
e
 indebtedness asa
s
 of JuneSeptember 30, 2021 and December 31, 2020 (dollars in thousands):
 
                                                                                                                            
Property
  
June 30,

2021
   
December 31,
2020
   
Interest Rate as
of June 30,

2021
(1)
 
Maturity
   
September 30,

2021
   
December 31,
2020
   
Interest Rate as
of September 30,

2021
(1)
 
Maturity
 
Unsecured Credit Facility
(2)(3)
  $96,000   $75,000    LIBOR +1.40%
(4)
 		  March 2022   $88,000   $75,000    LIBOR +1.40%
(4)
 		 March 2022 
Term Loan
(3)
   50,000    50,000    LIBOR +1.25%
(4)
 		  September 2024    50,000    50,000    LIBOR +1.25%
(4)
 		 September 2024 
Mission City
   47,000    47,000    3.78%   November 2027    47,000    47,000    3.78%  November 2027 
Canyon Park
(5)
   40,782    40,950    4.30%   March 2027    40,612    40,950    4.30%  March 2027 
190 Office Center
   39,910    40,236    4.79%   October 2025    39,749    40,236    4.79%  October 2025 
Circle Point
   39,650    39,650    4.49%   September 2028    39,650    39,650    4.49%  September 2028 
SanTan
   33,129    33,444    4.56%   March 2027    33,022    33,444    4.56%  March 2027 
Intellicenter
   32,164    32,442    4.65%   October 2025    32,026    32,442    4.65%  October 2025 
The Quad
   30,600    30,600    4.20%   September 2028    30,600    30,600    4.20%  September 2028 
FRP Collection
   27,901    28,263    3.10%   September 2023    27,719    28,263    3.10%  September 2023 
2525 McKinnon
   27,000    27,000    4.24%   April 2027    27,000    27,000    4.24%  April 2027 
Greenwood Blvd
   22,175    22,425    3.15%   December 2025    22,048    22,425    3.15%  December 2025 
Cascade Station
   21,767    21,952    4.55%   May 2024    21,676    21,952    4.55%  May 2024 
5090 N. 40th St
   21,439    21,640    3.92%   January 2027    21,337    21,640    3.92%  January 2027 
AmberGlen
   20,000    20,000    3.69%   May 2027    20,000    20,000    3.69%  May 2027 
Lake Vista Pointe
   17,198    17,375    4.28%   August 2024    17,108    17,375    4.28%  August 2024 
Central Fairwinds
   16,918    17,127    3.15%   June 2024    16,813    17,127    3.15%  June 2024 
FRP Ingenuity Drive
   16,597    16,736    4.44%   December 2024    16,528    16,736    4.44%  December 2024 
Carillon Point
   15,387    15,585    3.10%   October 2023    15,286    15,585    3.10%  October 2023 
Midland Life Insurance
(6)
   —      83,537    —     —      —      83,537    —     —   
  
 
   
 
          
 
   
 
      
Total Principal
   615,617    680,962           606,174    680,962      
Deferred financing costs, net
   (3,511)    (4,195)           (3,209)    (4,195)      
Unamortized fair value adjustments
   404    475           369    475      
  
 
   
 
          
 
   
 
      
Total
  $612,510   $677,242          $603,334   $677,242      
  
 
   
 
          
 
   
 
      
 
(1)
All interest rates are fixed interest rates with the exception of the Unsecured Credit Facility (the “Unsecured Credit Facility”) and the Term Loan (the “Term Loan”), as explained in footnotes 2 and 3 below.
(2)
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 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. As of JuneSeptember 30, 2021, the Unsecured Credit Facility had $96.0$88.0 million drawn and $4.8
a
$4.2 million of lettersletter 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.
(3)
In September 2019, the Company entered into a five-year $50 million 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.
(4)
As of JuneSeptember 30, 2021, the
one-month
LIBOR rate was 0.10%0.08%.
(5)
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.
(6)
The mortgage loan was cross-collateralized by Cherry Creek, City Center and 7595 Tech (formerly “DTC Crossroads”). In February 2021, the loan balance of $83.5 million was repaid in full.
The scheduled principal repayments o
f
 debt a
s
of debt as of JuneSeptember 30, 2021 are as follows (in thousands)
:
 
2021
  $2,967   $1,524 
2022
   102,539    94,539 
2023
   48,539    48,539 
2024
   124,736    124,736 
2025
   91,997    91,997 
Thereafter
   244,839    244,839 
  
 
   
 
 
  $615,617   $606,174 
  
 
   
 
 
 
9
10
Table of Contents
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
In September 2019, the Company entered into the Interest Rate Swap for a notional amount of $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/(loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.
As of JuneSeptember 30, 2021, the Interest Rate Swap was reported as a liabili
t
yliability at its fair value of approximately $1.2$1.1 million, which is included in other liabilities on the Company’s condensed consolidated balance sheet. For the sixnine months ended JuneSeptember 30, 2021,
,
approximately $0.3$0.4 million of realized losses were reclassified to interest expense due to payments made to the swap counterparty. For the sixnine months ended JuneSeptember 30, 2020,
,
the amount approximately $0.2 million of realized losses were reclassified to interest expense due to payments received bymade to the swap counterparty were nominal.counterparty.
As of December 31, 2020, the Interest Rate Swap was reported as a liability at its fair value of approximately $2.0 million, which is included in other liabilities 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.
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 $476.4$474.0 million and $573.6 million (compared to a carrying value of $469.6$468.2 million and $556.0 million) as of JuneSeptember 30, 2021 and December 31, 2020, respectively. Accordingly, the fair value of mortgage loans payable have been classified as Level 3 fair value measurements
.
measurements.
7. Related Party Transactions
Administrative Services Agreement
For the sixnine months ended JuneSeptember 30, 2021 and 2020, the Company earned $0.3$0.5 million and $0.3 $0.5 
million, respectively, in administrative services performed for Second City Real Estate II Corporation, (“Second City”), Clarity Real Estate Ventures GP, Limited Partnership (“Clarity”) and their affiliates.
10
Table of Contents
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.
11
Table of Contents
The Company recognized fixed and variable lease payments for the three and sixnine months ended JuneSeptember 30, 2021 and the three and sixnine months ended JuneSeptember 30, 2020 as follows (in thousands):
 
   
Three Months Ended

June 30,
   
Six Months Ended

June 30,
 
   
2021
   
2020
   
2021
   
2020
 
Fixed payments
  $34,311   $33,907   $67,862   $67,999 
Variable payments
   5,629    5,697    11,536    11,713 
  
 
 
   
 
 
   
 
 
   
 
 
 
  $39,940   $39,604   $79,398   $79,712 
  
 
 
   
 
 
   
 
 
   
 
 
 
   
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
   
2021
   
2020
   
2021
   
2020
 
Fixed payments
  $38,963   $
 
35,071   $
 
106,825   $
 
103,070 
Variable payments
   5,868    6,151    17,404    17,864 
   
 
 
   
 
 
   
 
 
   
 
 
 
   $ 44,831   $41,222   $124,229   $120,934 
   
 
 
   
 
 
   
 
 
   
 
 
 
Future minimum lease payments tot
o
 be received by the Company as of JuneSeptember 30, 2021 under
non-cancellable
operating leases for the next five years and thereafter are as follows (in thousands):
 
2021
  $61,009   $29,967 
2022
   108,545    111,708 
2023
   88,167    92,205 
2024
   68,482    72,917 
2025
   55,089    59,773 
Thereafter
   160,172    182,296 
  
 
   
 
 
  $541,464   $548,866 
  
 
   
 
 
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
s
increases rather than variable payments based on an index or unknown rate.
Lessee Accounting
As a lessee, the Company has ground and office leases which are classified as operating and financing leases. As of JuneSeptember 30, 2021, these leases had remaining terms of 1under one year to 67 years andan
d
 a weighted average remaining lease term of 4950 years.
Right-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):
 
  
June 30, 2021
   
December 31, 2020
   
September 30, 2021
   
December 31, 2020
 
Right-of-use
asset – operating leases
  $14,362   $12,739   $14,238   $12,739 
Lease liability – operating leases
  $9,447   $7,719   $9,374   $7,719 
Right-of-use
asset – financing leases
  $43   $55   $37   $55 
Lease liability – financing leases
  $43   $55   $37   $55 
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 6.2% 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.adjustments
.
 
11
12
Table of Contents
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 expenses for the three and sixnine months ended JuneSeptember 30, 2021 were $0.3$0.2 million and $0.5$0.7 million,
,
respectively. Operating lease expenses for the three and sixnine months ended JuneSeptember 30, 2020 were $0.2 million and $0.4$0.6 million,
,
respectively. Financing lease expenses for the three and sixnine months ended JuneSeptember 30, 2021 and 2020 were
nominal.
Future minimum lease payments to be paid by the Company as a lessee for operating and financing leases as of JuneSeptember 30, 2021 for the next five years and thereafter are as follows (in thousands):
 
  
Operating
Leases
   
Financing
Leases
   
Operating
Leases
   
Financing

Leases
 
2021
  $301   $14   $89   $7 
2022
   971    27    971    27 
2023
   836    4    836    4 
2024
   770    0      770    —   
2025
   770    0      770    —   
Thereafter
   27,875    0      27,875    —   
  
 
   
 
   
 
   
 
 
Total future minimum lease payments
   31,523    45    31,311    38 
Discount
   (22,076)    (2)    (21,937)    (1) 
  
 
   
 
   
 
   
 
 
Total
  $9,447   $43   $9,374   $37 
  
 
   
 
   
 
   
 
 
9. Commitments and Contingencies
The Company is obligated under certain tenant leases tot
o
 fund tenant improvements and the expansi
o
nexpansion 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 JuneSeptember 30, 2021, 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.
12
Table of Contents
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 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 SEC and other applicable legal
requirements.
13
Table of Contents
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.
There were 0 shares repurchased during the sixnine months ended JuneSeptember 30, 2021. During the sixnine months ended JuneSeptember 30, 2020, the Company completed the repurchase of 10,249,65511,363,851 shares of its common stock for approximately $89.3 million
$100.0 million.
Common Stock and Common Unit Distributions
On June 15,September 16, 2021, the Company’s Board of Directors approved and the Company declared a cash dividend distribution of $0.15 per common share for the quarterly period ended JuneSeptember 30, 2021. The dividend was paid subsequent to quarter end on July 23,October 22, 2021 to common stockholders and common unitholders of record as of the close of business on July 9,October 8, 2021, resulting in an aggregate payment of $6.5 million.
Preferred Stock Distributions
On June 15,September 16, 2021, the Company’s Board of Directors approved and the Company declared a cash dividend distribution 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 JuneSeptember 30, 2021. The dividend was paid subsequent to quarter end on July 23,October 22, 2021 to the holders of record of Series A Preferred Stock as of the close of business on July 9,October 8, 2021.
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 (the “Plan Administrator”). 2,263,580 shares of common stock may be issued under the Equity Incentive Plan.
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-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 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.earned
.
 
13
14
Table of Contents
During the sixnine months ended JuneSeptember 30, 2021, 169,500 restricted stock units (“RSUs”) were granted to executive officers, directors and certain
non-executive
employees with a fair value of $1.6 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 sixnine months ended JuneSeptember 30, 2021, the Company recognized net compensation expense of $0.5 million and $0.9$1.4 million, respectively, related to the RSUs. For the three and sixnine months ended JuneSeptember 30, 2020, the Company recognized net compensation expense of $0.5
million and
$1.0 $1.4 million, respectively, related to the
RSUs.
During the sixnine months ended JuneSeptember 30, 2021, 120,000 Performance RSU Awards were granted to executive officers with a fair value of $1.2 million. The Performance RSU Awards will vest on the last day of the three-year measurement period of January 1, 2021 through December 31, 2023. For the three and sixnine months ended JuneSeptember 30, 2021, the Company recognized net compensation expense of $0.2
million and
$0.4 $0.6 million, respectively, related to the Performance RSU Awards. For the three and sixnine months ended JuneSeptember 30, 2020, the Company recognized net compensation expense of $0.1 million and $0.2$0.3 million, respectively, related to the Performance RSU Awards.
 
1415
Table of Contents
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 Report, 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 ongoing coronavirus disease 2019
(“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, including as a result of near-term market fluctuations or long-term trends that result in an overall decrease in the demand for office space;
 
defaults on or
non-renewal
of leases by 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, including as a result of 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;
 
1516
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;
 
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
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 SEC, including but not limited to those described in our Annual Report on Form
10-K
for the year ended December 31, 2020 under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” 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, 2020 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 JuneSeptember 30, 2021, we owned 24 properties comprised of 64 office buildings with a total of approximately 5.6 million square feet of net rentable area (“NRA”). As of JuneSeptember 30, 2021, our properties were approximately 89.7%88.7% leased.
 
1617
Table of Contents
Office Leases
Historically, most leases for our properties have been 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 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 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. All tenants in the Lake Vista Pointe, Superior Pointe, 2525 McKinnon and Canyon Park properties have triple net leases. Certain tenants at AmberGlen, Florida Research Park, Circle Point, The Quad, Cascade Station, Denver Tech and Sorrento Mesa have leases on a triple net basis. We are also a lessor for a fee simple ground lease at the AmberGlen property. All of ourOur remaining leases are predominately 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 have been or are subject to some form of 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.
All of our buildings are open and continue to operate. We 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 the secondthird quarter 2021 was significantly lower than normal. Usage of our assets in the near future depends on the duration of the pandemic, the continued implementation and effectiveness of
COVID-19
vaccines and other therapeutics and corporate and individual decisions regarding return to usage of office space, 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 three months ended JuneSeptember 30, 2021, as a result of
COVID-19
or governmental or tenant actions in response thereto, the Company granted rent relief to twofour tenants comprising approximately 0.1% of the Company’s occupied NRA, most often in the form of a rent deferral or rent abatement. 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 uncertain and impossible to estimate, and will depend on the scope, severity and duration of the pandemic.
We have collected over 99% of contractually required base rents from our tenants for the three months ended JuneSeptember 30, 2021 and granted rent relief for another approximately 0.1% of contractually required base rents from our tenants for the three months ended JuneSeptember 30, 2021. We may incur 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 impossible to predict given the fluidity of the pandemic and its uncertain impact on economic activity.
Leasing activity has generally been slow, with the exception of the life science sector, and we believe leasing activity will continue to be impacted by the
COVID-19.COVID-19
pandemic. We have experienced and we expect that we will continue to experience slower new leasing and there remains uncertainty over existing tenants’ long-term space requirements. Overall, this could reduce our anticipated rental revenues. In addition, certain tenants in our markets have and 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,” could 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.
 
1718
Table of Contents
We believe economic conditions, leasing activity and acquisition prospects have improved substantially since the initial phase of the
COVID-19
pandemic and we will continue to actively evaluate business operations and strategies to optimally position ourselves. 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 the
COVID-19
pandemic and additional variants that may spread remains fluid and as certain restrictions are lifted in various geographical locations throughout the U.S., 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 growing populations with above-average employment growth forecasts, a large number of government offices, large international, national and regional employers across diversified industries, generally
low-cost
centers for business operations and a high quality of life. 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. The long-term impact of the
COVID-19
pandemic on these markets is uncertain and impossible to estimate, and will depend on the scope, severity and duration of the
COVID-19
pandemic.
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.
 
1819
Table of Contents
Our Properties
As of JuneSeptember 30, 2021, we owned 24 properties comprised of 64 office buildings with a total of approximately 5.6 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 JuneSeptember 30, 2021.
 
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)
   
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

(21.8% of NRA)
  Pima Center   100.0%    272    67.9%   $27.87   $27.87   $5,145   Pima Center   100.0%    272    67.9%   $28.21   $28.21   $5,208 
  
SanTan
   100.0%    267    97.5%   $29.68   $29.68   $7,713   
SanTan
   100.0%    267    97.5%   $29.70   $29.70   $7,718 
  
5090 N 40
th
St
   100.0%    175    90.5%   $30.27   $30.27   $4,799   
5090 N 40
th
St
   100.0%    175    91.1%   $30.33   $30.33   $4,842 
  
Camelback Square
   100.0%    174    77.3%   $32.19   $32.19   $4,332   
Camelback Square
   100.0%    172    78.4%   $32.19   $32.19   $4,332 
  
The Quad
   100.0%    163    100.0%   $30.37   $30.68   $4,950   
The Quad
   100.0%    163    100.0%   $30.61   $30.93   $4,990 
  
Papago Tech
   100.0%    163    96.3%   $23.29   $23.29   $3,650   
Papago Tech
   100.0%    163    96.3%   $23.45   $23.45   $3,675 
Tampa, FL
(18.7%)
  Park Tower   94.8%    470    87.4%   $27.16   $27.16   $11,155   Park Tower   94.8%    472    74.5%   $26.42   $26.42   $9,295 
  
City Center
   95.0%    243    93.0%   $27.03   $27.03   $6,102   
City Center
   95.0%    243��   89.3%   $27.18   $27.18   $5,892 
  
Intellicenter
   100.0%    204    100.0%   $25.09   $25.09   $5,105   
Intellicenter
   100.0%    204    100.0%   $25.09   $25.09   $5,105 
  
Carillon Point
   100.0%    124    100.0%   $29.39   $29.39   $3,650   
Carillon Point
   100.0%    124    88.0%   $29.29   $29.29   $3,203 
Denver, CO
(14.5%)
  Denver Tech
(3)
   100.0%    383    93.8%   $23.41   $27.52   $8,349   Denver Tech
(3)
   100.0%    383    93.8%   $23.52   $27.64   $8,388 
  
Circle Point
   100.0%    272    81.6%   $18.75   $32.62   $4,162   
Circle Point
   100.0%    272    83.6%   $18.77   $32.64   $4,266 
  
Superior Pointe
   100.0%    152    94.0%   $18.18   $31.18   $2,592   
Superior Pointe
   100.0%    152    94.0%   $18.18   $31.18   $2,592 
Orlando, FL
(12.9%)
  Florida Research Park
(4)
   96.6%    397    95.2%   $23.96   $27.45   $9,026   Florida Research Park
(4)
   96.6%    397    91.5%   $24.00   $27.57   $8,679 
  
Central Fairwinds
   97.0%    168    90.5%   $26.36   $26.36   $4,012   
Central Fairwinds
   97.0%    168    88.7%   $25.72   $25.72   $3,838 
  
Greenwood Blvd
   100.0%    155    100.0%   $23.75   $23.75   $3,682   
Greenwood Blvd
   100.0%    155    100.0%   $23.75   $23.75   $3,682 
San Diego, CA
(12.2%)
  Sorrento Mesa
(5)
   100.0%    400    83.5%   $33.30   $38.60   $11,112 
  
Mission City
   100.0%    281    75.8%   $37.28   $37.28   $7,951 
Dallas, TX
(10.3%)
  190 Office Center   100.0%    303    76.1%   $26.63   $26.63   $6,146   190 Office Center   100.0%    303    76.1%   $26.63   $26.63   $6,146 
  
Lake Vista Pointe
   100.0%    163    100.0%   $17.00   $26.00   $2,777   
Lake Vista Pointe
   100.0%    163    100.0%   $17.00   $26.00   $2,777 
  
2525 McKinnon
   100.0%    111    91.6%   $29.28   $48.28   $2,987   
2525 McKinnon
   100.0%    111    91.6%   $29.32   $48.32   $2,992 
Portland, OR
(5.9%)
  AmberGlen   76.0%    203    98.4%   $22.66   $25.20   $4,517   AmberGlen   76.0%    203    98.4%   $22.66   $25.20   $4,517 
  
Cascade Station
   100.0%    128    95.5%   $27.80   $29.81   $3,385   
Cascade Station
   100.0%    128    95.5%   $27.85   $29.86   $3,391 
San Diego, CA

(5.0%)
  Mission City   100.0%    281    88.1%   $37.46   $37.46   $9,284 
Seattle, WA
(3.7%)
  Canyon Park   100.0%    207    100.0%   $22.49   $27.49   $4,650   Canyon Park   100.0%    207    100.0%   $22.49   $27.49   $4,650 
        
 
   
 
   
 
   
 
   
 
       
 
   
 
   
 
   
 
   
 
 
Total / Weighted Average – June 30, 2021
(6)
 
  
 
5,578
 
  
 
89.7
% 
  
$
26.40
 
  
$
29.35
 
  
$
131,949
 
Total / Weighted Average – Excluding Assets Held For Sale
(5)
Total / Weighted Average – Excluding Assets Held For Sale
(5)
 
  
 
5,178
 
  
 
89.0
% 
  
$
25.94
 
  
$
28.77
 
  
$
119,462
 
        
 
            
 
       
 
         
 
 
San Diego, CA

(7.2%)
  Sorrento Mesa
(6)
   100.0%    400    84.7%   $31.50   $36.74   $10,678 
      
 
   
 
   
 
   
 
   
 
 
Total / Weighted Average – September 30, 2021
(5)
Total / Weighted Average – September 30, 2021
(5)
 
  
 
5,578
 
  
 
88.7
% 
  
$
26.32
 
  
$
29.31
 
  
$
130,140
 
      
 
         
 
 
 
(1)
Annualized gross rent per square foot includes adjustment for estimated expense reimbursements of triple net leases.
(2)
Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month ended JuneSeptember 30, 2021 by (ii) 12.
(3)
Denver Tech is comprised of 7601 Tech 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.
(6)
Sorrento Mesa includes 5910 Pacific Center and 9985 Pacific Heights, which were acquired during the second quarter of 2021.
(6)
Averages weighted based on the property’s NRA, adjusted The Sorrento Mesa property was under contract for occupancy.sale as at September 30, 2021.
 
1920
Table of Contents
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 is not reasonably estimable at this time.
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, 2020 included in our Annual Report on Form
10-K
for the year ended December 31, 2020.
Results of Operations
Comparison of Three Months Ended JuneSeptember 30, 2021 to Three Months Ended JuneSeptember 30, 2020
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 $0.4$3.6 million, or 1%9%, to $40.0$44.9 million for the three months ended JuneSeptember 30, 2021 compared to $39.6$41.3 million for the three months ended JuneSeptember 30, 2020. Of thisThe increase $0.4can be attributed to our Park Tower and SanTan properties, which recorded significant termination fee income during the third quarter which increased revenue by $5.2 million and $0.6 million, respectively. A further increase of $0.7 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. Revenue increased by $0.5 million at our 7595 Tech property within the Denver Tech portfolio and by $0.6 million at our existing Sorrento Mesa property due to significant leasing transactions during the prior year, which lifted occupancy and rental income. Revenue also increased due to significant termination fee income at our SanTan and Park Tower properties which increased revenue by $0.6 million and $0.3 million, respectively. Offsetting these increases was the disposition of Cherry Creek in February 2021, which resulted in a $2.1$2.4 million decrease in revenue. The remaining properties’ rental and other revenues were relatively unchanged in comparison to the prior period.
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 $0.3$5.1 million, or 1%16%, to $32.2$37.7 million for the three months ended JuneSeptember 30, 2021, from $31.9$32.6 million for the three months ended JuneSeptember 30, 2020. Of thisGeneral and administrative expenses increased by $5.4 million over the prior year primarily due to a
one-time
$5.0 million bonus accrual incurred as a result of the Sorrento Mesa sale transaction announced during the third quarter of 2021. Further increase $0.4of $0.7 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. Higher operating expenses at Mission City also contributed to a $0.6 million increase. General and administrative expenses also increased $0.4 million due to higher professional fees. TheOffsetting these increases, the disposition of Cherry Creek resulted in a $1.3 million decrease in total operating expenses. The remaining expenses were marginally higher in comparison to the prior period.
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 $0.1$0.3 million, or 1%2%, to $14.2$15.2 million for the three months ended JuneSeptember 30, 2021, from $14.1$14.9 million in the same period in the prior year. Of this increase, $0.1$0.3 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. Higher operating expenses at Mission City also contributed to a $0.3 million increase. Offsetting these increasesthis increase was the disposition of Cherry Creek which resulted in a $0.7 million decrease in property operating expenses. The majority of the remaining properties’ expenses were marginally higher in comparison to the prior period.period resulting in a total increase of $0.7 million.
 
2021
Table of Contents
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 $0.4$5.4 million, or 14%210%, to $3.1$7.9 million for the three months ended JuneSeptember 30, 2021, from $2.7$2.5 million reported for the same period in 2020. General and administrative expenses increased due to a
one-time
$5.0 million bonus accrual incurred as a result of the Sorrento Mesa sale transaction announced during the third quarter of 2021. The remaining increase is due to higher professional fees in the quarter.fees.
Depreciation and Amortization.Amortization
. Depreciation and amortization decreased $0.1$0.6 million, or 1%4%, to $15.0$14.6 million for the three months ended JuneSeptember 30, 2021, from $15.1$15.2 million reported for the same period in the prior year. The decrease was primarily attributable to the disposition of Cherry Creek which resulted in a $0.6 million decrease to depreciation and amortization which was offset by a $0.3 million increase attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio during the quarter.amortization. The remaining properties were relatively unchanged.
Other Expense (Income)
Interest Expense.
Interest expense decreased $1.2$1.0 million, or 17%15%, to $5.9 million for the three months ended JuneSeptember 30, 2021, from $7.1$6.9 million for the three months ended JuneSeptember 30, 2020. The decrease was primarily attributable to the sale of Cherry Creek during the period as the proceeds of the sale were used to repay debt.
Comparison of SixNine Months Ended JuneSeptember 30, 2021 to SixNine Months Ended JuneSeptember 30, 2020
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 decreased $0.2increased $3.4 million, or 0%3%, to $79.5$124.4 million for the sixnine months ended JuneSeptember 30, 2021 compared to $79.7$121.0 million for the sixnine months ended JuneSeptember 30, 2020. The disposition of Cherry Creek in February 2021 contributed $3.2increase can be attributed to our Park Tower and SanTan properties, which recorded significant termination fee income during the third quarter which increased revenue by $5.3 million to the decrease in revenue.and $1.4 million, respectively. Revenue also decreased at 190 Office Center and Pima Center by $0.5 million and $0.6 million, respectively, due to a decrease in occupancy year over year. Offsetting these decreases, an increase of $0.4 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. Revenue increased by $0.9$0.8 million at our 7595 Tech property within the Denver Tech portfolio, $1.2 million at our existing Sorrento Mesa property and $0.3 million at City Center due to significant leasing transactions which lifted occupancy and rental income. A further increase of $1.1 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. Offsetting this increase, the disposition of Cherry Creek in February 2021 contributed $5.6 million to the decrease in revenue. Revenue also increaseddecreased at 190 Office Center and Pima Center by $0.6 million and $0.8 million, respectively, due to significant rent termination income at our SanTan and Park Tower properties which increased rental income by $0.8 million and $0.1 million, respectively.a decrease in occupancy year over year. The remaining properties’ rental and other revenues were relatively unchanged in comparison to the prior period.
Operating Expenses
Total Operating Expenses.
Total operating expenses consist of property operating expenses, general and administrative expenses and depreciation and amortization. Total operating expenses decreased by $0.8$4.4 million, or 1%4%, to $63.5$101.3 million for the sixnine months ended JuneSeptember 30, 2021, from $64.3$96.9 million for the sixnine months ended JuneSeptember 30, 2020. The dispositionGeneral and administrative expenses increased by $5.8 million over the prior year primarily due to a
one-time
$5.0 million bonus accrual incurred as a result of Cherry Creek resulted in a $2.1 million decrease in expenses. Offsetting this decrease, anthe Sorrento Mesa sale transaction announced during the third quarter of 2021. Further increase of $0.4$1.2 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021 and an increase of $0.4$0.7 million was attributable to the Denver Tech portfolio due to a combination of higher property operating expenses and depreciation and amortization. General and administrative expenses also increased $0.4Offsetting these increases, the disposition of Cherry Creek resulted in a $3.4 million due to higher professional fees.decrease in total operating expenses. The remaining expenses were marginally higher in comparison to the prior period.
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 decreased by $0.5$0.2 million, or 2%0%, to $28.3$43.5 million for the sixnine months ended JuneSeptember 30, 2021, compared to $28.8$43.7 million for the sixnine months ended JuneSeptember 30, 2020. The disposition of Cherry Creek resulted in a $1.0$1.7 million decrease in expenses. Offsetting these decreases, an increase of $0.1$0.4 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. The majority of the remaining properties’ expenses were marginally higher in comparison to the prior period.period resulting in a total increase of $1.1 million.
 
2122
Table of Contents
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 $0.4$5.8 million, or 7%72%, to $5.9$13.8 million for the sixnine months ended JuneSeptember 30, 2021, from $5.5$8.0 million reported for the same period in 2020. General and administrative expenses increased due to a
one-time
$5.0 million bonus accrual incurred as a result of the Sorrento Mesa sale transaction announced during the third quarter of 2021. The remaining increase is due to higher professional fees in the quarter.fees.
Depreciation and Amortization.
Depreciation and amortization decreased $0.6$1.2 million, or 2%3%, to $29.4$44.0 million for the sixnine months ended JuneSeptember 30, 2021, from $30.0$45.2 million reported for the same period in 2020. The disposition of Cherry Creek resulted in a $1.1$1.8 million decrease to depreciation and amortization which was offset by the depreciation related to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio during the quarter.in May 2021. The remaining properties were relatively unchanged.
Other Expense (Income)
Interest Expense.
Interest expense decreased $1.3$2.4 million, or 10%11%, to $12.5$18.4 million for the sixnine months ended JuneSeptember 30, 2021, from $13.8$20.8 million for the sixnine months ended JuneSeptember 30, 2020. The decrease was primarily attributable to the sale of Cherry Creek during the periodin February 2021 as the proceeds of the sale were used to repay debt.
Net Gain on the Sale of Real Estate Property.
 We recorded a net gain on the sale of real estate property of $47.4 million for the sixnine months ended JuneSeptember 30, 2021 related to the sale of our Cherry Creek property in February 2021.
Cash Flows
Comparison of SixNine Months Ended JuneSeptember 30, 2021 to SixNine Months Ended JuneSeptember 30, 2020
Cash, cash equivalents and restricted cash were $36.3$70.2 million and $83.1$56.4 million as of JuneSeptember 30, 2021 and JuneSeptember 30, 2020, respectively.
Cash flow from operating activities.
Net cash provided by operating activities increased by $4.4$18.1 million to $35.7$65.7 million for the sixnine months ended JuneSeptember 30, 2021 compared to $31.3$47.6 million for the same period in 2020. The increase in cash provided by operating activities was primarily attributable to changes in working capital.
Cash flow from investing activities.
Net cash provided by investing activities increased by $55.6$74.8 million to $37.4$59.6 million for the sixnine months ended JuneSeptember 30, 2021 compared to $18.2$15.2 million used in investing activities for the same period in 2020. The increase in cash provided by investing activities was primarily due to the proceeds from the sale of the Cherry Creek property in February 2021 and deposits received for the anticipated sale of the Sorrento Mesa portfolio in the third quarter of 2021, which were recorded in restricted cash, partially offset by the acquisition of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021.
Cash flow to financing activities.
Net cash used in financing activities increased by $65.2$37.6 million to $82.7$101.1 million for the sixnine months ended JuneSeptember 30, 2021 compared to $17.5$63.5 million for the same period in 2020. The increase in cash used in financing activities was primarily due to higher repayment of borrowings, including the Midland Life Insurance loan, and lower net proceeds from borrowing for the sixnine months ended JuneSeptember 30, 2021.
23
Table of Contents
Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources
We had approximately $13.4$17.7 million of cash and cash equivalents and $22.9$52.5 million of restricted cash as of JuneSeptember 30, 2021.
22
Table of Contents
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 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. As of JuneSeptember 30, 2021, we had approximately $96.0$88.0 million outstanding under our Unsecured Credit Facility and a $4.8$4.2 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 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 of common stock and up to 1,000,000 Series A Preferred Stock through the Sales Agents, acting as agents or principals (the “ATM Program”). On May 7, 2021, the Company delivered to D.A. Davidson & Co. notice of termination of the Agreements with D.A. Davidson & Co., which termination became effective on May 7, 2021. The Company did not issue any shares of common stock or Series A Preferred Stock under the ATM Program during the sixnine months ended JuneSeptember 30, 2021.
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.
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.
24
Table of Contents
Contractual Obligations and Other Long-Term Liabilities
The following table provides information with respect to our commitments as of JuneSeptember 30, 2021, including any guaranteed or minimum commitments under contractual obligations. The table does not reflect available debt extension options.
 
23
Table of Contents
  
Payments Due by Period (in thousands)
   
Payments Due by Period
(in thousands)		 
Contractual Obligations
  
Total
   
2021
   
2022-2023
   
2024-2025
   
More than

5 years
   
Total
   
2021
   
2022-2023
   
2024-2025
   
More than
5 years
 
Principal payments on mortgage loans
  $615,617   $2,967   $151,078   $216,733   $244,839   $606,174   $1,524   $143,078   $216,733   $244,839 
Interest payments
(1)
   100,122    11,011    40,538    30,751    17,822    94,531    5,455    40,503    30,751    17,822 
Tenant-related commitments
   20,196    19,984    212    —      —      24,147    19,930    4,217    —      —   
Lease obligations
   31,568    315    1,838    1,540    27,875    31,349    96    1,838    1,540    27,875 
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Total
  $767,503   $34,277   $193,666   $249,024   $290,536   $756,201   $27,005   $189,636   $249,024   $290,536 
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
 
(1)
Contracted interest on the floating rate borrowings under our Unsecured Credit Facility was calculated based on the balance and interest rate at JuneSeptember 30, 2021. 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 JuneSeptember 30, 2021, we had a $4.8$4.2 million letter of credit outstanding under our Unsecured Credit Facility to satisfy escrow requirements for a mortgage lender.
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.
 
2425
Table of Contents
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 condensed 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 JuneSeptember 30, 2021, approximately $469.6$468.2 million, or 76.3%77.2%, of our debt had fixed interest rates and approximately $146.0$138.0 million, or 23.7%22.8%, had variable interest rates. Of the $146.0$138.0 million variable rate debt, $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 84.4%85.5% of our debt was fixed rate debt and 15.6%14.5% was variable rate debt as of JuneSeptember 30, 2021. A 10% increase in LIBOR would result in a nominal increase to our annual interest costs on debt outstanding as of JuneSeptember 30, 2021, 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 on debt outstanding as of JuneSeptember 30, 2021 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
COVID-19
pandemic introduced significant volatility in global financial markets and economies during and subsequent to the sixnine months ended JuneSeptember 30, 2021. The long-term impacts of such volatility on the Company 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 JuneSeptember 30, 2021.
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.
 
2526
Table of Contents
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 JuneSeptember 30, 2021, 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
None.
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 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.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On August 4, 2021, City Office REIT, Inc. (the “Company”), through a wholly-owned subsidiary, entered into Amendment No. 2 to the Company’s employment agreements (collectively, the “Employment Agreement Amendments”) with each of James Farrar, the Company’s Chief Executive Officer, Greg Tylee, the Company’s President and Chief Operating Officer, and Anthony Maretic, the Company’s Chief Financial Officer, Secretary and Treasurer. The Employment Agreement Amendments clarify certain provisions pertaining to the vesting of equity awards of upon the death or disability of the Company’s executive officers.
The Compensation Committee of the Company’s Board of Directors approved the Company’s entry into the Employment Agreement Amendments. The foregoing descriptions of the Employment Agreement Amendments are not complete. Reference is made to the full text of each of the Employment Agreement Amendments filed as Exhibit 10.1, 10.2 and 10.3 to this Quarterly Report on Form 10-Q.None.
 
2627
Table of Contents
Item 6. Exhibits
 
Exhibit
Number
  
Description
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 with the SEC on March 1, 2018).
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 with the SEC on March 14, 2017).
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 CommissionSEC on February 18, 2014).
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 CommissionSEC on September 30, 2016).
10.1  Amendment No. 2 to Executive Employment Agreement of Purchase and Sale and Joint Escrow Instructions, dated as of August 4,19, 2021, by and between City Office Management ULCamong CIO Sorrento Mesa Holdings, LLC, CIO 5910 Pacific Center, LLC and James Farrar. †**North Buyer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 20, 2021).
10.2  Amendment No. 2 to Executive Employment Agreement of Purchase and Sale and Joint Escrow Instructions, dated as of August 4,19, 2021, by and between City Office Management ULCamong CIO SM Land Holdings, LLC, CIO 9985 Pacific Heights, LLC and Gregory Tylee. †**South Buyer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 20, 2021).
10.3Amendment No. 2 to Executive Employment Agreement, dated as of August 4, 2021, by and between City Office Management ULC and Anthony Maretic. †**
31.1  Certification by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †
31.2  Certification by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †
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  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.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.
*  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.
 
2728
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: August 5,November 3, 2021
 
By: 
/s/ James Farrar
 James Farrar
 
Chief Executive Officer and Director

(Principal Executive Officer)
Date: August 5, 2021
Date: November 3, 2021
By: 
/s/ Anthony Maretic
 Anthony Maretic
 
Chief Financial Officer, Secretary and Treasurer

(Principal Financial Officer and Principal Accounting Officer)
 
2829