City Office REIT (CIO) 7 Nov 222022 Q3 Earnings call transcript

Good morning. And welcome to the Office REIT, Inc.

Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. reminder, call a being As Instructions] this is conference recorded. [Operator Corporate pleasure It Chief you and is Instructions] to Financial now Treasurer company’s [Operator the my introduce Maretic, to Officer, Secretary. Tony you, Thank Mr. Maretic.

may You begin.

Good morning.

like would where comparable of package release GAAP or both and cioreit.com, view and I begin, information discussed can measures. measures we to are today the most directly the to securities discuss you that may beliefs be The website made you meaning statements company’s earnings to not fact quarter federal that within third reconciliation laws. expectations financial supplemental package. today include non-GAAP forward-looking historical their Certain direct that will statements our constitute supplemental of based a at our the press release Before on or earnings

forward-looking undertakes to believes statements forward-looking any and our made after of the no achieved. filings company could the disclaimer forward-looking in quarter’s Jamie the we are no with turn call statements Executive the these statements discusses based The that results. cause Please expectations that these Chief for reflected update Officer, I be give press reasonable statements SEC operational between release will of quarter be some earnings differences assumptions, the assurance now expectations in such the material that our obligation factors may this company’s over Although see third course upon in financial will results actual forward-looking the highlights. call. and review company to will Jamie. Farrar, I our

for sector faced periods a specific joining of thanks macro In today. morning as we and our several public headwinds. uncertainty company, Good time and

conservative create REIT total across value. company intend to leading the and producing our to to strategy returns and past, a sector. in develop growth the and That long-term office is As in strategic opportunities patient aided in operate manner, we earnings

would I office operational we specifics we trends as discuss them. our like see market the to Before approach, of summarize

the trend markets X.X industry. and is continued first across nine on occupancy levels absorption we leasing in subleasing million will net downsizing cities metrics to pressure vacancy edge negative continue we our Year-to-date, The square to general. elevated feet, of expect has across rates general our pressure across higher and put on is

higher While face to costs expensive rental tenanting to are effective are shorter that rates due leases continued trending net trend lower rents overall, signed. and being more

the amenities outperforming highest best As in quality desirable clearly with I locations, are shortly, country. the will discuss the properties across

a in highest is continue the utilization office and the X.X% to The increased office to a a West. Day. national movement rates indicating JLL, gradual to post according The return Labor office. August significant and scale, second late rate September late utilization be trend the between South On

to in a days. showed where current mid-XXs outperformance translates properties, similar tracking sick in Belt and factor about at utilization travel to workstation were you internal back to the continues Our that our our own our vacation, third be now the two-thirds utilization With the increase. A when way Sun estimate trend of pre-COVID markets. we of being is

volume, leasing want population estate growth, markets both people where Belt corporate of terms In be. our and fundamentals, relocation, growth Sun and to real are employment companies

options heightened lounges, desirable space food in Likewise, and labor retention fitness a employee with increase ready-to-lease will updated trend next us and our tight demand highly spaces, the over of we these infrastructure, across give We To have advantage. accelerate believe connections inception competitive and have that employers finishes. been quarters be outdoor looking office the and are and market, office there’s buildings to for a is investing markets the driver one a our buildings. and last beverage amenitized our return a knowledge long-term. that since several for The industry centers,

minimal new common Our opportunities and property Quad fitness the restaurant. achieve broader we risk. a trends high center, the Phoenix and are areas watermark end market high tenant formed excellent leased while today to in The amenities, and and has case how lease continuing These rates is outperform create study event XXX% list property, with outdoor waiting and we improvements. tenant our on-site managing including of a basis property have are the a The with great of state value office is in The space, approaching in strategy an this. conference and to

in positioned our a Fortunately, of that and these assembled have well is are of invested properties very value trends. the company for we quality portfolio percentage a high

small we Now lower in amenitized value relatively of seeking segment been resides buildings, cost the much market This than targeting rent. overall asset our of less leasing tenants do percentage slower recognize that the has a in past.

when of best continue evaluate maintaining We or dispositions for includes to which properties, the forward market these improve. enhancements conditions market path position, selective elevating types through capital current their

of has upgrades. the is to property are use new and on fitness continuing prudent for looks the at activity a facility in our conference property The leasing we highest suites. Center modernize believe recent modest the and budget to Dallas. just property million. a transformed funds, why we other report renovation of As believe pleased mentioned renovation outdoor fantastic what calls, and of we we advance that prior common Earlier this a support over areas, impact we XXX spec enhancements $X are in Office In included completed are of center, addition year, the a

event property. feedback we after before Included a We During in Investor our leasing the third square a a two community this leasing was that received and slide total is recently we positioning leases and presentation for held the the the quarter, of the signed feet. property broker reintroduce extremely positive. shows to XX,XXX of and

suites spec our square XX,XXX program, feet. spec to year-to-date, our XX leased have of Moving suite we totaling

We have conditioning. completed XX,XXX leased feet, have we also square totaling five space spaces where substantial

the square and XXXX spec XXXX. feet of for feet XX,XXX suites, of balance with construction of square inventory XXX,XXX remaining a have approximately We in planned

Our glass incredible an a have spec design higher suites feel. fixtures, floors is upfront high office The ceilings, a functional initial end these conveys with and open finishes building. that suites typical and cost somewhat than of polished concrete spec traditional ample

additional benefits to asset discount the equivalent to at we internal of buying will the select foot. the these liquidity. the outweigh cap and at offers The significantly our are pursuing our million to be there’s own found touch we our in projects overall long-term These incremental per X% life even is science modest, significant ample average driving cost The that reduced was $XX operate have to to perspective, an last our are where we as continue portfolio levels financial future Further, additional but on a $XXX in for uses value challenging incremental repurchase square and potential rate portfolio site net over multifamily spaces leverage cost, lead better of release return. exploring climate. our From approximately longer time, in a property. on topic better believe value this conservatively. the We creative XXXX we far and operate create prudently types time, higher with includes that such the However, properties, completion a to I repurchase use generated. value and estimation we substantial sale share and a continue price The redevelopment opportunities us can this value. great long-term This of program. believe long-term a

believe mindful we additional however, further is this are, repurchases summary, for caution and market time equity We have currently of planned. our and both In position. any reducing cap do strategic not a

market of we select look will initiatives also Maretic deploying I Tony updates discuss to hand mindful capital into We team our general on will financial forward actively conditions, the impactful call and highly our to remain further while results. providing investments projects. these to over and

Thanks, Jaime.

$XXX,XXX third net million, income decrease a second during than of the amount was quarter Lake result in the This Our reported the is second quarter. in Pointe operating quarter. primarily the sale lower is $XX.X Vista the of which

in were have muted per mostly as reported impact. of on drivers has Vista decrease along of operating rates than sale Lake Pointe on was operating as quarter. the this recoveries which a net of net $X.X income our increased that offset second income interest from higher The been million core result the with categories, lower $X.XX or the lower million While expenses operating primarily impact $XX.X inflation share, facility. FFO floating various of We credit rate

$X.X expenses shares at and related Park third million to per repurchase of will of QX. Including average share was program property we $X.XX of a results. Our single AFFO price our repurchased On tenant common quarter foot XX,XXX million our to impact our Research whose improvement at largest per tenant The lease new the was square basis, share. was commence share share. AFFO $XX quarter a third item quarter, in second Florida $XX.XX to or $XXX,XXX an accretive per

we As third million. a building also suites was spec which part vacancy vacancy to conditioning, key and XXXX is in implementing Jaime mentioned, investment quarter business in ready-to-lease in our out The spec of and invest continue total plan. conditioning the suites $X.X

negative line some Moving our of at quarter quarter XXXX. the to X.X% third expectations same-store or lower cash on change was NOI third $XXX,XXX to compared operational as of with in our metrics, our

paying on same-store third commenced BB&T significant space Park free and to value is QX by new our will rent periods Third at tenant’s February rent The XXXX, XXXX. increase downtime property, May negative tenant. their new of XXXX quarter quarter eight-year begin lease $XXX,XXX the the cash foot and associated Tower Contributing was impacted but lease but with same-store X, cash lower free not the to XX,XXX That until year-over-year contributor leases. of to occupancy the decrease, the tenant’s accommodate new during rent results. NOI period new that vacated square a

debt Our $XXX was September at XXth million. total

including Our was EBITDA cash times. restricted net debt, X.X to

maturities of debt fall in small in and We two have the no maturities XXXX XXXX.

primarily is debt fixed Our rate.

had As of September on facility. as liquidity, million as XXth, availability undrawn of we $XXX credit our far

as cash had our our of will fourth source quarter unencumbered expectations restricted up Last, for have remarks the liquidity. questions. and end, line our quarter, of additional on $XX and also financeable the with and based concludes Operator? We an XXXX prepared reiterated of our open for to-date guidance. prior we properties we million cash along That results as

question Instructions] Thank from first today your now for Rob, is line Janney. open. Stevenson you. comes of Our [Operator Rob

commencements? of the there space should of of be expirations lease we you page looking that getting terms you thinking up you what versus When the matching back and of XX and guys. that’s does of sort a the at tenant starting in known out the the netting to in morning, currently like rent. quarters of expirations over and going the supplemental, versus sort next have those look unleased of are signed, are four stuff terms that Good How versus stuff wind net that’s space pay flow without lease to expirations signings the move-outs

Good in Rob. maybe question. Tony is about answer Fair way It’s two components. here. Best Sure. morning, to it talk

deals leases X that will that to be QX beginning over of to talk that have taking First of about we period feet XXX,XXX new that about moving through time. square of is in signed That up occupancy that in time. adds period I start will

to positive. known are the so Offsetting move-outs those. go through that’s those So happy and I am

most is That’s that we think property one XX, big vacating about our talked go XXXX. square that foot only just a of these period. to I have we the December already, in tenant through but at XX,XXX them, at really have XXXX

square in at tenant quarter. in next Denver a foot further QX of we year, we XX,XXX XX,XXX square the have XXX,XXX that tenant year And And tenant foot one, company in next at have then foot vacating that the in That’s be property. foot to XXX in be quarter XXX. downsizing. a Moving vacating then QX Papago our XX,XXX healthcare that next have of QX, lastly, and Center square we along a a will square largest will

So it’s of in a net-net slight move-outs, occupancy. a number decrease

that? what the over of And sort quarter Okay. I the, ready it’s down in talked that third earmark suite of and the little versus the you next How cash paying about $X then spec some else space spending you guys needs over can of vacant the much for few it getting are cash line. $XX How out about the a million talk development. has about million million an You are thinking on $XXX believe quarters?

question. Fair

that program. forward looking next the but given committed kind that think say year, we are leased. haven’t lot currently the success program. We guidance yet, feet a got just mean, to will inventory I been of we suite I spec really we left only of from hasn’t this have doing square So, XX,XXX into We have

that foot currently square under for to is about plan have XXX,XXX square up construction another We XX,XXX and XXXX. potentially foot

up be But as I kind a a costs $X committing talked suites million and with that I we that full mean, that. another leasing that’s reminder, will are of similar XXX,XXX to associated TI of if have spec CapEx of foot just successful that we and NOI. So just in square about, potentially

So trend these that you to of will see invest a spec continuation in suites.

on what the building you of out terms is terms running you? in what foot per number are a square And of currently the in spec price rough that costing suites,

Good question.

foot So varies they it are properties per but high to foot for could it by per as $XX go property. $XX. certain Typically, as range, where really in square this are adding square we $XX furniture,

guys want you buying of to outstanding, you given back discount type it is Jamie, do thinking you Okay. the buy I impact terms to it common for the know you too wouldn’t liquidity fact of for start preferred, helpful to you? keep that or How it you about in and the expensive be any that the is that about that here. issues need back the looking That’s in that helpful. one debt metrics are of some marketplace credit cautious more just And said then me. last

Yeah. It’s a good question, Rob.

look at kind we It’s also perpetual equity of it’s hybrid, So a it’s commitment. a preferred. both it because as fixed

move use today. of small and And really focused not pretty so at look something it’s illiquid, price. it on trades, we we movements when whatnot, where So it’s capital are the do

not on. that’s are focused So we something

Appreciate guys. time. the Thanks, Okay.

Thanks, Rob.

pleasure. My

you. Thank

Barry Barry, your Colliers. Oxford is from of line Our comes open. next now question

mentioned few guys. Hi, have Jamie are you a Tony, are move-ins. that going or than when you Great. thinking move-outs to we more

third to it a at the also quarter loss As we saw look we occupancy, in moved second down margins. quarter, in the

As those to to we are in we necessarily? look see slow continue kind deterioration numbers out of or not into going two XXXX,

here. Barry. Tony Hey, Good morning. It’s

Yeah. Yeah.

Yeah.

the here, net-net negative. a of as the I terms occupancy, -- next three mentioned In is there over quarters,

tick to we are expecting So occupancy downwards.

You if mentioned spread sure referencing negative. are was not the leasing margins. you I am which

NOI? at No. to looking was I just expenses and revenues

Yeah. Yeah.

of occupancy I committed which middle in in just because why in spec we that’s in talked mean program, next a I mean we the back space So next we we the I have up success got so year. that that that’s to to are expecting catalyst about year partly the downward much hopeful are occupancy leasing that, tick suites and of manner, increase for through are half

Okay.

last that when how dividend this you question, look you the Great. then the and Okay. And at juncture? at dividend are safety, guys about feeling particular

long-term our our view, So so… we a policy also balancing will Barry, both and and dividend reinvestment take on portfolio

Okay.

have and this we of there. comfortable we covering it, going kind to close been year are fairly so through …

and something our forward heavily cognizant and dividend to and to move we are standing looking real with that are to are at. are are rates we make that’s we we there’s the today mindful We next sure as year here watch fine But really where on impact comfortable. continue if and a going cash that flow, feeling we interest have we of are be so

for Okay. commentary the Perfect. Thanks guys.

Thanks, Barry.

you. Thank

comes open. Our Michael RBC. Michael, next from your line now Carroll of question is

Thanks.

to opportunities? program, across Just the mean, see is do sites where think, are I going the specific build suite buildings, where I you back those just you typically markets there out, it portfolio or spec

are plans, opportunity, leased mean, amenitized best seeing will finished. top what and XX list. Yeah. construction back if over the it’s the the ones as And they often that are and of near kind those are are we it properties the we We would as last tenants Michael, of prioritize, far so see as like we what be under often start does love generally most touring, risk, even and lowest before the construction look the we when -- those months, they the our

leasable we so And most assets focusing really are there. our looking and at

is different it across markets many and our Now spread of many buildings.

are options. we So be of a variety thoughtful in trying to having

you next hear could and had I numbers already feet it did spec the what you that square correctly year? was of Is that XXX,XXX build out out were? feet built this then And suites XX,XXX square

square square shortly feet, under should current XX,XXX construction and of delivering that another we plus have about in XX,XXX be we as plans speak, XXXX. inventory, XX,XXX for Yeah. XXX,XXX feet

of level right under now in construction and the terms interest? stuff activity the what’s that’s of leasing And on XX the

I these we as building So, out, this are while are and said earlier, we most desirable have spaces the had. most activity the

have XX,XXX are So is in it of of number dialogue kind those we varies on inventory that’s square a on under that construction, across of we There as the of Board. some the having well. stuff discussions and feet

I that am there’s in how environment. I portfolio your the Okay. your you Can your that of putting as don’t in amenitized that on earlier buildings some remarks that, qualify percentage prepared you color highly suited And then, bucket? put said is and kind kind in you macro you know of if of provide quality this well buildings didn’t a that that into Jamie, words mouth many would think,

question. fair Yeah. That’s a

So are to are fully going those. tenant in them walkable to the elevate as quantum lease well are of that when interest are of that are that suburban feel activity the have and as as bit to our dated we are that able buildings you they with a of walk very that and is can and have are move located far what at bones toughest, in nothing evaluating that you really little number across amenities to own seeing leasing locations the is new so are a portfolio, great modern. activity The walk are we right? assets that up the so we And we buildings far and be vibrant feel little look those capital today and industry, most ones as that good in that a the so in going got we need bit really have to maybe concentrated when

step ones may real a of are portfolio, of say our as a Typically, assets. specifics, have be that well. There’s in were it and suburban. were getting without say, the little you to a probably properties our percentage If if back into number of and they to lower as occupancy would bit more today you XX%

It in look of is debt, property look it’s a there’s properties it, specific think versus debt. company’s kind lot sub-X% at those particular when be those have assets. we at we when property the we invested of Now what and not worth a number of so level equity would the

So majority that the some buildings value are way to we the really our our equity are of our around are we in value. positioned. vast that that are think and We do get assets enhance trying to well challenges best arms have

in what’s then And or is we do? something near Is resolving line nature something term deciding to take what the to And could like? what on multiple or you that? want of how that’s years, transactions that those time going think about should that look

So think And say in medium-term that’s fair. more many cases. I I it’s would

them of best are not they assets positioned are today. but be leased that some well the long-term, might Now

bit if or the road. make markets we may but either leasing fair. them capital it I monetizing and at into to think, put the capital recycling -- ones think sales selling when the that’s a potentially In investment medium-term, some bit, near-term, so And cases, those to potentially market we do and not that look then, that’s them start of we and for elevate down position potentially are sense improve, these, a

mean, have And hand would to debt. are I debt debtor? those or it mortgage back then the something you buildings secured some there you said of that that is like

an case specific when that’s in had always property compartmentalize a table have buy benefit and of where risk a you in the scenario, the part asset, of mean, the loan. you structuring that’s I worst on we

that’s always option. So an

You back something can the an not want do. debt. keys and we always the eliminate to that obviously hand is It’s that But option.

Jamie. Thanks, Great. Okay.

You are welcome.

you. Thank

from line of Riley. is open. now question next Our your Kucera comes B. Craig, Craig

XXXX? here morning, Good what walk know the you in maybe far in Yeah. and expectations Tony, termination can you as guys. fourth your lease me recognition Thanks. through quarter as

Sure.

for the one only really of tenant. have balance lease for this terms in we your the if role year, QX, question So is large

XX,XXX foot have They are We our at square a XX, XXXX XXXX. tenant property. at vacating December

I the only I end month. will the it large can a rent those paying the again. So That’s tenant described others. few of be in go QX. until through

XX,XXX And a the XX,XXX XXXX, we have foot large February be foot tenant of XXX,XXX a have and and all July XXX beyond end company end have depart at next are QX. a Denver vacating quarters. we then known Center, XXX will a We at that that, to property the so feet in square was of at that XX,XXX four over at Phoenix square tenant Center expected our we two the that’s tenant those healthcare square of Tech and March foot by have end at at June the square Papago of Tech that’s of downsizing vacates in the the for XXXX

-- apologize I I looking in Got clear. I quarter, had which is, amortizing… I were I it. guess you third for was if think the what Toyota, wasn’t here

Oh!

… termination quarters? going and to look what you trying next quarters, think a the figure to the for some that I forward next few several income out I be had to were because was you amortizing several for just lease

Craig. Apologies. for Thanks clarifying,

of was last we end in we so August. income recorded obviously income half termination of that is be other recording will it that the the yes, at from they departed the quarter, the quarter fee as So, that This Toyota.

XX,XXX of The XXX. second square a tenant tenant at foot approximately March. are largest item that $XXX,XXX vacating that was quarter during from a we we end the That’s had at the

will that half by off of termination see through decrease fee part year. roughly burn effectively you and number next So the early income for

rates. retention Jamie, Great. to about your talk I’d Okay. And lease like

have concerns to view about recession? as range, historically, but outlier XX% the here off you dropped been about the they Do an of I more think XX%. or quarter more in heightened in this XX% think quarter perhaps, an to trend, really maybe there I third industry-wide

been this retention they have So historically. rates is think you are don’t really I quarter going think decrease I from to representative. where see do

two were large plus had XXXX. bulk we year really and out tenants that it that into knew we of moving ago that drove a the lowering So

just back is are you -- closer XX% going renewal to And larger some under to be plus if lower going where you periods to et that. the But going cetera. is was a downsize, XX%. there So those tenants it to that out, be little historical I was than think it have

Okay. Appreciated Thanks. guys.

Craig. Thanks,

My pleasure, Craig. Thanks.

[Operator Instructions] Our from Bill is open. next Bill, Raymond Crow your comes of question James. line now

you. Yeah. be discovery there what tenants Do guys. to Thank process Good going with longer broadly is coming their morning, are grips on? finally think speaking, this you will term space or requirements still

the Yeah. I we personally in process. think, Bill, still are discovery

We have think on that of in map number discovery seen there’s of But far the the and same people staggering, companies inconsistent utilization a I over strategies hearing all and the improve. as how they as days are it’s whether all are days are are are we right on lot back, so now. using going

Yeah.

an you You or on a sheet that to an multifamily. something converter? would that do balance to that mentioned sell of to converting an possibility Is tower is office asset opportunity the

So it’s existing much multifamily. how a portfolio really know little different. is to our of converting buildings the into conducive I don’t

site. where consider demolishing that there’s some perhaps buildings multifamily a land freeing of or more using multiple and I land then you have and think up where is opportunity areas as a bunch had if one, excess you we

a condos in create There’s estate a to more there that’s of was -- as great of potential is an properties, I some real So In example our condo is and tower challenges there’s there high at. location other some that. with value the looking within site. our what very potential

there’s but project, would could backfill and to medium term, focusing the the be term, going to something and there’s in there, that’s respect parking to a somebody whatnot. land value JV, substantial again, let do and imminently we longer excess But that on. land more have be we to We some there where potential. probably the with that’s else That’s determined. of are up actual happen to And trying there’s end nothing monetize and

-- do you I one today, you I’d have and rates everything rates more Mesa buckets? apologize to the what Sorrento we cap were How I changed beforehand. we your think up the offer those they interested-- have you can that of two pin the If do acquired interesting. like think you are, you It’s two have year won’t at since ask. but is portfolio those down buckets, how that think you sale post take portfolio beginning No. those then cap look in in I two on bucket

it’s a Well, good question.

So if at the rates quality, look the assets, cap where you higher located highest than the previously. certainly best were they are

portfolio. more cap If back And XXX substantially are XXX you CapEx than add, rates had points the those take the -- those cap core the Bill, plus it’s higher right? you value points, on so higher, of probably rate of on to and there, kind basis first bucket higher basis that the balance

of on that the going commitment says you final in your is covering and this That’s But sort I be understand the model a a XXXX us that dividend, give that event? given the dividend hear should didn’t sustainably or trends year firm I when helpful on. Yeah. question. One a could next actually. the is AFFO timeframe

fair call, of discussed and to here, be the have period are we time where rates a going occupancy are this decrease the the considering back -- based beyond A of and beyond that variables we last similar it will we Fed will this quarters interest to and earlier it’s in on XXXX dividend significant and on next here pretty Bill. will meeting be that Obviously, assumption with coverage our rate being and rise potentially there’s where ourselves it It question, three continue that one. to interest to see kind XXXX really shortfall. a

for all you Perfect. Thank your today. time

Thanks, Bill.

Thanks, Bill.

Thank you.

further questions We for have no today.

Jamie I Farrar any for further So back remarks. will to hand

for We next quarter. look our joining updating on Thanks progress you today. Good-bye. to forward us

you for call. Thank today’s joining

You may disconnect. now