CIO 10-Q Quarter ended March 31, 2014

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2014

OR

For the transition period from to

Commission file no: 001-36409

CITY OFFICE REIT, INC.

1075 West Georgia Street

Suite 2600

Vancouver, BC

V6E 3C9

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (604) 806-3366

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at May 21, 2014 was 6,582,150.

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CITY OFFICE REIT, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2014

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City Office REIT, Inc.

See accompanying notes to condensed balance sheet.

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CITY OFFICE REIT, Inc.

Notes to Condensed Balance Sheet

(Unaudited)

1. Organization

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 in our Operating Partnership. Both the Company and the Operating Partnership commenced operations upon completion of the IPO and certain related formation transactions (the “Formation Transactions”).

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 partnership agreement to manage and conduct the Operating Partnership’s business, subject to limited approval and voting rights of the limited partners.

The Company intends to elect to be taxed and to operate in a manner that will allow it to qualify as a real estate investment trust (“REIT”) commencing with its taxable year ending December 31, 2014. Subject to qualification as a REIT, the Company will be permitted to deduct distributions paid to its stockholders, eliminating the U.S. federal taxation of income represented by such distributions at the Company level. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.

Pursuant to the Jumpstart Our Business Startups Act (the “JOBS Act”), the Company qualifies as an emerging growth company (“EGC”). An EGC may choose to take advantage of the extended private company transition period provided for complying with new or revised accounting standards that may be issued by the Financial Accounting Standards Board (“FASB”) or the Securities and Exchange Commission (the “SEC”). The Company has elected to opt out of such extended transition period. This election is irrevocable.

2. Initial Public Offering and Formation Transactions

The Company’s operations will be carried on primarily through the Operating Partnership and wholly owned subsidiaries of the Operating Partnership. Both the Company and the Operating Partnership commenced operations upon completion of the IPO and Formation Transactions.

On April 21, 2014, we closed the IPO, pursuant to which we sold 5,800,000 shares of our common stock to the public at a public offering price of $12.50 per share. We raised $72.5 million in gross proceeds, resulting in net proceeds to us of approximately $62.7 million after deducting approximately $5.1 million in underwriting discounts and approximately $4.7 million in other expenses relating to the IPO. On May 9, 2014, the underwriters of the IPO exercised their overallotment option to purchase an additional 782,150 shares of our common stock at the IPO price of $12.50 a share resulting in additional gross proceeds to us of approximately $9.8 million resulting in net proceeds to us of $9.1 million after deducting approximately $0.7 million in underwriting discounts. The Company’s common stock began trading on the New York Stock Exchange under the symbol “CIO” on April 15, 2014.

The Company contributed the net proceeds of the IPO to the Operating Partnership in exchange for common units in the Operating Partnership. The Operating Partnership utilized a portion of the net proceeds of the IPO to pay fees in connection with the assumption of the indebtedness, pay expenses incurred in connection with the IPO and Formation Transactions and repay loans that were made to several of the contributing entities by certain investors in such entities. The remaining funds are expected to be used for general working capital purposes and to fund potential future acquisitions.

Pursuant to the Formation Transactions and exercise of the underwriters’ overallotment option, the Operating Partnership acquired a 100% interest in each of the Washington Group Plaza, Cherry Creek and Corporate Parkway properties and an approximate 76% economic interest in the AmberGlen property, 90% interest in the Central Fairwinds property and 95% interest in the City Center property. These initial property interests were contributed in exchange for 3,251,903 common units, 1,610,765 common stock and $28.5 million of cash.

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In connection with the IPO and Formation Transactions, the Company, through its Operating Partnership, extinguished the loan on the Central Fairwinds property and completed a refinancing of three properties (Cherry Creek, City Center and Corporate Parkway) with a new $95 million non-recourse mortgage loan and proceeds from the IPO. The loan bears a fixed interest rate of 4.34% and matures on May 6, 2021.

The accompanying balance sheet of the Company does not reflect the IPO or the Formation Transactions completed on April 21, 2014.

3. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited balance sheet has been prepared by management in accordance with United States generally accepted accounting principles. In the opinion of management, this unaudited balance sheet reflects all adjustments, consisting solely of a normal recurring nature, necessary to present fairly, in all material respects, the Company’s financial position for the interim period presented. The Company did not have any operations from the date of formation to March 31, 2014.

Offering Costs

Costs related to the IPO and Formation Transactions paid by the Company’s predecessor were reimbursed from the proceeds of the IPO.

4. Subsequent Events

As discussed in Note 2, the Company completed the IPO and Formation Transactions on April 21, 2014 and repaid approximately $101.0 million of outstanding indebtedness on four properties upon closing.

On April 21, 2014, the Company, through its Operating Partnership, entered into a new $11.0 million senior secured revolving credit facility which remains undrawn. The revolving credit facility bears an interest rate of LIBOR plus 2.75%.

On April 29, 2014, the Company, through its Operating Partnership, completed a $25.4 million refinancing of the AmberGlen property. The loan bears an interest rate of 4.38% and matures on May 1, 2019.

On May 21, 2014, the Company, through its Operating Partnership agreed to acquire a property in Denver, Colorado for $25.1 million.

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City Office REIT, Inc. Predecessor

Condensed Combined Balance Sheets

See accompanying notes to the condensed combined financial statements.

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City Office REIT, Inc. Predecessor

(Unaudited)

See accompanying notes to the condensed combined financial statements.

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City Office REIT, Inc. Predecessor

Condensed Combined Statements of Changes in Equity

See accompanying notes to the condensed combined financial statements.

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City Office REIT, Inc. Predecessor

(Unaudited)

See accompanying notes to the combined financial statements.

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City Office REIT, Inc. Predecessor

Notes to Condensed Combined Financial Statements

(Unaudited)

1. Organization and Description of Business

City Office REIT, Inc. Predecessor (the “Predecessor”) represents the combination of the six properties outlined below (the “Properties”). The Predecessor does not represent a legal entity. The Predecessor and its related assets and liabilities are under common control and were contributed to a newly formed entity, City Office REIT Operating Partnership, L.P., (the “Operating Partnership”) in connection with the initial public offering (the “IPO”) of City Office REIT, Inc. (the “Company”) on April 21, 2014.

As at March 31, 2014, the Properties include:

City Center : The Predecessor holds a 90% interest in a property in St. Petersburg, Florida, acquired in December 2010.

Central Fairwinds : The Predecessor holds a 90% interest in a property in Orlando, Florida, acquired in May 2012.

AmberGlen : The Predecessor holds an 85% interest in a Limited Partnership that owns a property in Portland, Oregon, acquired in December 2009.

Washington Group Plaza : The Predecessor holds an 89.9% interest in a property in downtown Boise, Idaho, acquired in June 2013.

Corporate Parkway : The Predecessor holds a 100% interest in a property in Allentown, Pennsylvania, acquired in May 2013.

Cherry Creek : The Predecessor holds a 100% interest in a property in Denver, Colorado. The Predecessor originally acquired a 42.3% interest in July 2011 and acquired the remaining 57.7% interest in January 2014.

The Company is a Maryland corporation formed on November 26, 2013. The Company is the sole general partner of the Operating Partnership and conducted no operations prior to the IPO.

Initial Public Offering and Formation Transactions

The Company’s operations will be carried on primarily through the Operating Partnership and wholly owned subsidiaries of the Operating Partnership. Both the Company and the Operating Partnership commenced operations upon completion of the IPO and certain related formation transactions (the “Formation Transactions”).

On April 21, 2014, we closed the IPO, pursuant to which we sold 5,800,000 shares of our common stock to the public at a public offering price of $12.50 per share. We raised $72.5 million in gross proceeds, resulting in net proceeds to us of approximately $62.7 million after deducting approximately $5.1 million in underwriting discounts and approximately $4.7 million in other expenses relating to the IPO. On May 9, 2014, the underwriters of the IPO exercised their overallotment option to purchase an additional 782,150 shares of our common stock at the IPO price of $12.50 a share resulting in additional gross proceeds to us of approximately $9.8 million resulting in net proceeds to us of $9.1 million after deducting approximately $0.7 million in underwriting discounts. The Company’s common stock began trading on the New York Stock Exchange under the symbol “CIO” on April 15, 2014.

The Company contributed the net proceeds of the IPO to the Operating Partnership in exchange for common units in the Operating Partnership. The Operating Partnership utilized a portion of the net proceeds of the IPO to pay fees in connection with the assumption of the indebtedness, pay expenses incurred in connection with the IPO and Formation Transactions and repay loans that were made to several of the contributing entities by certain investors in such entities. The remaining funds are expected to be used for general working capital purposes and to fund potential future acquisitions.

Pursuant to the Formation Transactions and exercise of the underwriters’ overallotment option, the Operating Partnership acquired a 100% interest in each of the Washington Group Plaza, Cherry Creek and Corporate Parkway properties and acquired an approximate 76% economic interest in the AmberGlen property, 90% interest in the Central Fairwinds property and 95% interest in the City Center property. These initial property interests were contributed in exchange for 3,251,903 common units, 1,610,765 common stock and $28.5 million of cash.

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In connection with the IPO and Formation Transactions, the Company, through its Operating Partnership, extinguished the loan on the Central Fairwinds property and completed a refinancing of three properties (Cherry Creek, City Center and Corporate Parkway) with a new $95 million non-recourse mortgage loan and proceeds from the IPO. The loan bears a fixed interest rate of 4.34% and matures on May 6, 2021.

The Company intends to elect to be taxed and to operate in a manner that will allow it to qualify as a real estate investment trust (“REIT”) commencing with its taxable year ending December 31, 2014.

The accompanying condensed combined financial statements of the Predecessor do not reflect the IPO or the Formation Transactions completed on April 21, 2014.

2. Summary of Significant Accounting Policies

Basis of Preparation and Summary of Significant Accounting Policies

The Predecessor represents a combination of certain entities holding interests in real estate that are commonly controlled. Due to their common control, the financial statements of the separate entities which own the properties are presented on a combined basis. The accompanying condensed combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All significant intercompany balances and transactions have been eliminated in combination.

The accompanying condensed combined financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

The information furnished in the accompanying condensed combined financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned condensed combined financial statements for the interim periods. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. These interim financial statements should be read in conjunction with, and follow the same policies and procedures as outlined in the audited combined financial statements for the year ended December 31, 2013, included in the Company’s final prospectus dated April 14, 2014.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the combined financial statements and the reported amounts of revenues and expenses during the period. Such estimates are based on management’s best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from management’s estimates.

3. Real Estate Investments

Acquisitions

During the three months ended March 31, 2014, the Predecessor acquired the following property:

The above acquisition has been accounted for as a business combination.

On January 2, 2014, the Predecessor acquired the remaining 57.7% interest it did not already own in ROC-SCCP Cherry Creek I, LP (“Cherry Creek”) for approximately $12.0 million. The acquisition was financed through a new $50 million mortgage loan, the proceeds of which were used to repay $36 million of existing debt of Cherry Creek, fund the payment of $12.0 million to the seller, pay $1.2 million of deferred financing costs and $0.8 million in transactions costs.

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The following table summarizes the Company’s preliminary allocation of the purchase price of assets acquired and liabilities assumed during the three months ended March 31, 2014:

The Predecessor recognized expenses relating to acquisition of $806,344 for the three months ended March 31, 2014. A gain of $4.5 million was recognized from the fair value adjustment associated with the Company’s original ownership due to a change in control, calculated as follows:

The operating results of the acquired property since the date of acquisition have been included in the Predecessor’s combined financial statements. The following table represents the results of the property’s operations since the date of acquisition on a stand-alone basis.

The following table presents Cherry Creek’s revenues and income from continuing operations on a pro forma basis as if the Predecessor had completed the acquisition of the property as of January 1, 2013:

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4. Lease Intangibles

Lease intangibles and the value of assumed lease obligations as of March 31, 2014 and December 31, 2013 were comprised as follows:

The Company has adjusted acquired lease intangibles and accounts payable and accrued liabilities as of December 31, 2013 in the amount of $649,192 to conform with the current period presentation as of March 31, 2014. There was no impact to net income resulting from this adjustment.

The estimated aggregate amortization expense for lease intangibles for the five succeeding years and in the aggregate are as follows:

5. Mortgage Loans Payable

The following table summarizes the Predecessor’s secured indebtedness as of March 31, 2014 and December 31, 2013:

All interest rates are fixed interest rates with the exception of City Center as explained in footnote (2) below.

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The scheduled principal repayments of mortgage payable as of March 31, 2014 are as follows:

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

Financial assets whose fair values are measured on a recurring basis consist only of an interest rate swap. The fair value of the interest rate swap is calculated based on Level 2 inputs.

As of March 31, 2014, the Predecessor had not designated its interest rate swap as a hedge. This derivative was not speculative and was used to manage the Predecessor’s exposure to interest rate movements and other identified risks, but the Predecessor elected not to designate these instruments in hedging relationships based on the provisions in ASC 815-10. The changes in fair value of derivatives not designated in hedging relationships have been recognized in earnings. Summarized below is the interest rate derivative that was not designated as a cash flow hedge and the fair value of all derivative assets and liabilities as of March 31, 2014 and December 31, 2013:

With the exception of fixed rate mortgage loans payable, the carrying amounts of the Predecessor’s financial instruments approximate their fair value. The Predecessor 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 Predecessor has determined that the fair value of these instruments was $138,850,000 and $88,500,000 as of March 31, 2014 and December 31, 2013, respectively. Although the Predecessor has determined that the majority of the inputs used to value its fixed rate debt fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its fixed rate debt utilize Level 3 inputs, such as estimates of current credit spreads. Accordingly, mortgage loans payable have been classified as Level 3 fair value measurements.

7. Related Party Transactions

Property Management Fees

Five of the properties (City Center, Central Fairwinds, AmberGlen, Washington Group Plaza and Cherry Creek) engaged related parties to perform asset and property management services for a fee ranging from 1.75% to 3.5% of gross revenue.

In addition to the base property management fee of 1.75% of gross revenue or $10,000 per month paid to a related party for the property management of Washington Group Plaza, the property manager is also entitled to an additional incentive commission equal to the lesser of (a) 15% of net operating income in excess of $5 million in 2013, $5.45 million in 2014 and $5.6 million in 2015; or (b) 1% of all monthly gross revenue. The asset and management agreement has an initial term of three years and will automatically renew for successive two year periods. This agreement can be terminated by the Company or the property manager upon thirty days prior written notice to the other party.

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The costs of these services, aggregating $207,617 and $122,219 for the three months ended March 31, 2014 and 2013, respectively, were recorded as property management fees on the accompanying combined statements of operations.

Deferred Offering and Financing Costs

Deferred offering and financing costs directly associated with the IPO and Formation Transactions of $1,564,762 and $2,100,000, respectively, were recorded for the three months ended March 31, 2014. The Predecessor has recorded $1,006,708 as an owners’ contribution by an entity under common control and $2,658,054 as an accrued liability during the period.

8. Future Minimum Rent Schedule

Future minimum lease payments to be received as of March 31, 2014 under noncancellable operating leases for the next five years and thereafter are as follows:

The above minimum lease payments to be received do not include reimbursements from tenants for certain operating expenses and real estate taxes and do not include early termination payments provided for in certain leases.

Two state government tenants currently have the exercisable right to terminate its lease if the state does not appropriate rent in its annual budgets. The Predecessor has determined that the occurrence of the government tenant not appropriating the rent in its annual budget is a remote contingency and accordingly recognizes lease revenue on a straight-line basis over the respective lease term. These tenants represent approximately 51.5% of our total future minimum lease payments as of March 31, 2014.

9. Commitments and Contingencies

Property Management Fees

Washington Group Plaza engaged a related party to perform asset and management services for base and incentive fees as discussed in Note 7.

Fees under this agreement were $79,106 for the three months ended March 31, 2014 and are recorded as management fees on the accompanying condensed combined statements of operations.

Other

The Predecessor is obligated under certain tenant leases to fund tenant improvements and the expansion of the underlying leased properties.

Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. As such, the Predecessor may be potentially liable for costs associated with any potential environmental remediation at any of its formerly or currently owned properties.

The Predecessor 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 Predecessor’s financial position or results of operations. Management is unaware of any instances in which the Predecessor 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.

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The Predecessor is involved from time to time in lawsuits and other disputes which arise in the ordinary course of business. As of March 31, 2014 management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Predecessor’s financial position or results of operations.

10. Subsequent Events

As discussed in Note 1, the Company completed the IPO and Formation Transactions on April 21, 2014 and repaid approximately $101.0 million of outstanding indebtedness on four properties upon closing.

On April 21, 2014, the Company, through its Operating Partnership, entered into a new $11.0 million senior secured revolving credit facility which remains undrawn. The revolving credit facility bears an interest rate of LIBOR plus 2.75%.

On April 29, 2014, the Company, through its Operating Partnership, completed a $25.4 million refinancing of the AmberGlen property. The loan bears an interest rate of 4.38% and matures on May 1, 2019.

On May 21, 2014, the Company, through its Operating Partnership agreed to acquire a property in Denver, Colorado for $25.1 million.

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CITY OFFICE REIT, INC.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma consolidated financial statements of City Office REIT, Inc. (together with its combined entities, “City Office,” the “Company,” “we,” “our” or “us”) as of and for the period ended March 31, 2014 reflect the historical results of City Office REIT Predecessor (the “Predecessor”) adjusted to give effect to the transactions outlined below are presented as if the initial public offering had occurred on March 31, 2014 for the purposes of the unaudited pro forma consolidated balance sheet and on January 1, 2014 for the purposes of the unaudited pro forma consolidated statement of operations.

City Office is engaged in the business of developing, owning and managing high-quality office buildings in the United States. The Predecessor was not a legal entity, but rather a combination of entities under common control.

Concurrently with the Offering, we completed the Formation Transactions, pursuant to which we acquired, through a series of contribution transactions, ownership interests in the entities that own interests in our initial properties as further detailed below.

As a result of the Formation Transactions, we own interests in our initial properties as summarized in the table below.

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The parties retaining the noncontrolling interests in the AmberGlen, Central Fairwinds and City Center properties at the conclusion of the Formation Transactions did not receive any common units and common stock. The value of the consideration paid to each of the entities in the Second City Group in the Formation Transactions was determined according to the terms of the respective contribution agreements. Set forth in greater detail below is the consideration that the entities that controlled our Predecessor received in connection with the Formation Transactions:

For each of our initial properties, the table below shows the equity interests that we and our operating partnership will acquire and dispose of in connection with the Formation Transactions.

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On April 21, 2014, we closed the IPO, pursuant to which we sold 5,800,000 shares of our common stock to the public at a public offering price of $12.50 per share. We raised $72.5 million in gross proceeds, resulting in net proceeds to us of approximately $62.7 million after deducting approximately $5.1 million in underwriting discounts and approximately $4.7 million in other expenses relating to the IPO. On May 9, 2014, the underwriters of the IPO exercised their overallotment option to purchase an additional 782,150 shares of our common stock at the IPO price of $12.50 a share resulting in additional gross proceeds to us of approximately $9.8 million resulting in net proceeds to us of $9.1 million after deducting approximately $0.7 million in underwriting discounts. The net proceeds from the Offering were contributed to our Operating Partnership in exchange for 6,582,150 common units.

You should read the information below along with all other financial information and analysis presented in this Quarterly Report on Form 10-Q, including the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Predecessor combined financial statements and related notes included elsewhere in this document and included in the Company’s final prospectus dated April 14, 2014. The unaudited pro forma consolidated financial statements are not necessarily indicative of the actual financial position of City Office as of March 31, 2014 or the actual results of operations for the three month period ended March 31, 2014, nor are they indicative of the results of operations for future periods. The unaudited pro forma adjustments and eliminations are based on available information and upon assumptions management believes are reasonable.

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City Office REIT, Inc.

Pro Forma Consolidated Balance Sheet

As of March 31, 2014

(Unaudited)

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City Office REIT, Inc.

Pro Forma Consolidated Statement of Operations

For the three months ended March 31, 2014 (Unaudited)