CIO 10-Q Quarterly Report March 31, 2021 | Alphaminr
City Office REIT, Inc.
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CIO 10-Q Quarter ended March 31, 2021

Balance Sheet
Cash Flow
Income Statement
Debt
CITY OFFICE REIT, INC.
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2022-03-31 2023-03-31 false 2021 Q1 --12-31 City Office REIT, Inc. 0001593222 BC P3Y 0001593222 2021-01-01 2021-03-31 0001593222 2020-01-01 2020-12-31 0001593222 2020-01-01 2020-03-31 0001593222 2021-03-31 0001593222 2020-12-31 0001593222 2019-05-02 0001593222 2021-05-04 0001593222 2020-03-09 0001593222 2020-08-05 0001593222 2019-12-31 0001593222 2020-03-31 0001593222 cio:FrpIngenuityDriveMember us-gaap:SecuredDebtMember 2021-03-31 0001593222 cio:FRPCollectionMember us-gaap:SecuredDebtMember 2021-03-31 0001593222 cio:MckinnonMember us-gaap:SecuredDebtMember 2021-03-31 0001593222 cio:GreenwoodBlvdMember us-gaap:SecuredDebtMember 2021-03-31 0001593222 us-gaap:SecuredDebtMember cio:CascadeStationMember 2021-03-31 0001593222 cio:FiftyNinetyMember us-gaap:SecuredDebtMember 2021-03-31 0001593222 cio:AmberGlenMember us-gaap:SecuredDebtMember 2021-03-31 0001593222 cio:LakeVistaPointeMember us-gaap:SecuredDebtMember 2021-03-31 0001593222 cio:CentralFairwindsMember us-gaap:SecuredDebtMember 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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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. 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 May 4, 2021 was 43,397,117 .
Table of Contents
City Office REIT, Inc.
Quarterly Report on Form
10-Q
For the Quarter Ended March 31, 2021
Table of Contents
1
1
1
2
3
4
5
6
14
24
24
25
25
25
25
25
25
25
26
27
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)
March 31,

2021
December 31,
2020
Assets
Real estate properties
Land
$ 204,289 $ 204,289
Building and improvement
778,749 777,184
Tenant improvement
105,195 104,694
Furniture, fixtures and equipment
642 642
1,088,875 1,086,809
Accumulated depreciation
( 140,142 ) ( 131,220 )
948,733 955,589
Cash and cash equivalents
14,890 25,305
Restricted cash
18,295 20,646
Rents receivable, net
32,199 32,968
Deferred leasing costs, net
18,194 16,829
Acquired lease intangible assets, net
39,641 44,143
Other assets
16,199 15,758
Assets held for sale
— 46,054
Total Assets
$ 1,088,151 $ 1,157,292
Liabilities and Equity
Liabilities:
Debt
$ 572,776 $ 677,242
Accounts payable and accrued liabilities
20,847 25,414
Deferred rent
7,248 7,295
Tenant rent deposits
4,653 4,801
Acquired lease intangible liabilities, net
5,644 6,035
Other liabilities
17,370 18,099
Liabilities related to assets held for sale
— 531
Total Liabilities
628,538 739,417
Commitments and Contingencies (Note 9)
Equity:
6.625 % Series A Preferred stock, $ 0.01 par value per share, 5,600,000 s
hare
s authorized, 4,480,000 issued and outstanding as of March 31, 2021 and December 31, 2020
112,000 112,000
Common stock, $ 0.01 par value, 100,000,000 shares authorized, 43,397,117 shares issued and outstanding as of March 31, 2021 and December 31, 2020
433 433
Additional
paid-in
capital
480,106 479,411
Accumulated deficit
( 132,556 ) ( 172,958 )
Accumulated other comprehensive loss
( 1,291 ) ( 1,960 )
Total Stockholders’ Equity
458,692 416,926
Non-controlling
interests in properties
921 949
Total Equity
459,613 417,875
Total Liabilities and Equity
$ 1,088,151 $ 1,157,292
Subsequent Events (Note 11)
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
March 31,
2021
2020
Rental and other revenues
$ 39,516 $ 40,122
Operating expenses:
Property operating expenses
14,118 14,694
General and administrative
2,801 2,783
Depreciation and amortization
14,415 14,953
Total operating expenses
31,334 32,430
Operating income
8,182 7,692
Interest expense:
Contractual interest expense
( 6,243 ) ( 6,362 )
Amortization of deferred financing costs and debt fair value
( 330 ) ( 324 )
( 6,573 ) ( 6,686 )
Net gain on sale of real estate property
47,400 —
Net income
49,009 1,006
Less:
Net income attributable to
non-controlling
interests in properties
( 192 ) ( 182 )
Net income attributable to the Company
48,817 824
Preferred stock distributions
( 1,855 ) ( 1,855 )
Net income/(loss) attributable to common stockholders
$ 46,962 $ ( 1,031 )
Net income/(loss) per common share:
Basic
$ 1.08 $ ( 0.02 )
Diluted
$ 1.07 $ ( 0.02 )
Weighted average common shares outstanding:
Basic
43,397 54,458
Diluted
44,043 54,458
Dividend distributions declared per common share
$ 0.150 $ 0.150
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)
(Unaudited)
(In thousands)
Three Months Ended
March 31,
2021
2020
Net income
$ 49,009 $ 1,006
Other comprehensive income/(loss):
Unrealized cash flow hedge gain/(loss)
527 ( 2,690 )
Amounts reclassified to interest expens
e
142 ( 51 )
Other comprehensive income/(loss)
669 ( 2,741 )
Comprehensive income/(loss)
49,678 ( 1,735 )
Less:
Comprehensive income attributable to
non-controlling
interests in properties
( 192 ) ( 182 )
Comprehensive income/(loss) attributable to the Company
$ 49,486 $ ( 1,917 )
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
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
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)
Three Months Ended

March 31,
2021
2020
Cash Flows from Operating Activities:
Net income
$ 49,009 $ 1,006
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
14,415 14,953
Amortization of deferred financing costs and debt fair value
330 324
Amortization of above and below market leases
105 14
Straight-line rent/expense
( 61 ) ( 704 )
Non-cash
stock compensation
645 569
Net gain on sale of real estate property
( 47,400 ) —
Changes in
non-cash
working capital:
Rents receivable, net
1,014 ( 38 )
Other assets
( 531 ) 190
Accounts payable and accrued liabilities
( 1,807 ) ( 4,282 )
Deferred rent
( 47 ) ( 1,295 )
Tenant rent deposits
( 148 ) 2
Net Cash Provided By Operating Activities
15,524 10,739
Cash Flows from/(to) Investing Activities:
Additions to real estate properties
( 6,248 ) ( 3,137 )
Net proceeds from sale of real estate
93,303 —
Deferred leasing costs
( 1,934 ) ( 2,195 )
Net Cash Provided by/(Used In) Investing Activities
85,121 ( 5,332 )
Cash Flows (to)/from Financing Activities:
Proceeds from borrowings
45,000 100,000
Repayment of borrowings
( 149,826 ) ( 1,541 )
Distributions to
non-controlling
interests in properties
( 220 ) ( 200 )
Dividend distributions paid to stockholders
( 8,365 ) ( 14,684 )
Repurchases of common stock
— ( 11,622 )
Shares withheld for payment of taxes on restricted stock unit vesting
— ( 49 )
Contributions from
non-controlling
interests in
properties
— 3
Net Cash (Used In)/Provided By Financing Activities
( 113,411 ) 71,907
Net (Decrease)/Increase in Cash, Cash Equivalents and Restricted Cash
( 12,766 ) 77,314
Cash, Cash Equivalents and Restricted Cash, Beginning of Period
45,951 87,523
Cash, Cash Equivalents and Restricted Cash, End of Period
$ 33,185 $ 164,837
Reconciliation of Cash, Cash Equivalents and Restricted Cash:
Cash and Cash Equivalents, End of Period
14,890 146,509
Restricted Cash, End of Period
18,295 18,328
Cash, Cash Equivalents and Restricted Cash, End of Period
$ 33,185 $ 164,837
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest
$ 6,322 $ 6,111
Purchase of additions in real estate properties included in accounts payable
$ 4,145 $ 2,587
Purchase of deferred leasing costs included in accounts payable
$ 493 $ 284
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, eliminating the U.S. federal taxation of income represented by such distributions at the Company level. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and, for tax years beginning before 2018, any applicable alternative minimum tax.
2. Summary of Significant Accounting Policies
Basis of Preparation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with Securities and Exchange Commission (“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 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
6
Table of Contents
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.
3. Real Estate Investments
Sale of Real Estate Property
On February 10, 2021, the Company sold the Cherry Creek property in Denver, Colorado for $ 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.
Assets Held for Sale
On November 18, 2020, the Company entered into a purchase and sale agreement to sell the Cherry Creek property for $ 95.0 million. The Company determined that the property met the 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.
The property was classified as held for sale as of December 31, 2020 (in thousands):
Cherry Creek
December 31,
2020
Real estate properties, net
$ 40,849
Deferred leasing costs, net
150
Acquired lease intangible assets, net
2,256
Rents receivable, prepaid expenses and other assets
2,799
Assets held for sale
$ 46,054
Accounts payable, accrued expenses, deferred rent and tenant rent deposits
$ ( 531 )
Liabilities related to assets held for sale
$ ( 531 )
4. Lease Intangibles
Lease intangibles and the value of assumed lease obligations as of March 31, 2021 and December 31, 2020 were comprised of the following (in thousands):
Lease Intangible Assets
Lease Intangible Liabilities
March 31, 2021
Above

Market
Leases
In Place

Leases
Leasing
Commissions
Total
Below
Market
Leases
Below
Market
Ground
Lease
Total
Cost
$
14,830 $ 79,316 $ 30,189 $
124,335 $ ( 13,093 ) $ ( 138 ) $ ( 13,231 )
Accumulated amortization
( 8,930 ) ( 57,760 ) ( 18,004 ) ( 84,694 ) 7,542 45 7,587
$ 5,900 $ 21,556 $ 12,185 $ 39,641 $ ( 5,551 ) $ ( 93 ) $ ( 5,644 )
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 )
7
The estimated aggregate amortization expense for lease intangibles for the next five years and in the aggregate are as follows (in thousands):
2021
$ 9,446
2022
8,118
2023
5,424
2024
3,101
2025
2,703
Thereafter
5,205
●●
$ 33,997
5. Debt
The following table summarizes the indebtedness as of March 31, 2021 and December 31, 2020 (dollars in thousands):
Property
March 31,

2021
December 31,
2020
Interest Rate as
of March 31,

2021
(1)
Maturity
Unsecured Credit Facility
(2)(3)
$ 55,000 $ 75,000
LIBOR + 1.40 %
(4)
March 2022
Term Loan
(3)
50,000 50,000
LIBOR + 1.25 %
(4)
September 2024
Mission City
47,000 47,000
3.78 %
November 2027
Canyon Park
(5)
40,950 40,950
4.30 %
March 2027
190 Office Center
40,069 40,236
4.79 %
October 2025
Circle Point
39,650 39,650
4.49 %
September 2028
SanTan
33,287 33,444
4.56 %
March 2027
Intellicenter
32,300 32,442
4.65 %
October 2025
The Quad
30,600 30,600
4.20 %
September 2028
FRP Collection
28,083 28,263
3.10 %
September 2023
2525 McKinnon
27,000 27,000
4.24 %
April 2027
Greenwood Blvd
22,344 22,425
3.15 %
December 2025
Cascade Station
21,857 21,952
4.55 %
May 2024
5090 N. 40th St
21,540 21,640
3.92 %
January 2027
AmberGlen
20,000 20,000
3.69 %
May 2027
Lake Vista Pointe
17,287 17,375
4.28 %
August 2024
Central Fairwinds
17,023 17,127
3.15 %
June 2024
FRP Ingenuity Drive
16,665 16,736
4.44 %
December 2024
Carillon Point
15,486 15,585 3.10 % October 2023
Midland Life Insurance
(6)
— 83,537 — —
Total Principal
576,141 680,962
Deferred financing costs, net
( 3,804 ) ( 4,195 )
Unamortized fair value adjustments
439 475
Total
$ 572,776 $ 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 (as defined herein), 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 March 31, 2021, the Unsecured Credit Facility had $ 55.0 million drawn and $ 4.8 million of letters of credit to satisfy escrow requirements for mortgage lenders. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50 x.
(3)
In September 2019, the Company entered into a five-year $ 50 million Term Loan (the “Term Loan”) increasing its authorized borrowings under the Unsecured Credit Facility from $ 250 million to $ 300 million. Borrowings under the Term Loan bear interest at a rate equal to the LIBOR rate plus a margin between 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the Company also entered into a five-year interest rate swap for a notional amount of $ 50 million (the “Interest Rate Swap”). Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27 % of the notional amount annually, payable monthly, and receive floating rate
30-day
LIBOR payments.
8
(4)
As of March 31, 2021, the
one-month
LIBOR rate was 0.11 %.
(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 of debt as of March 31, 2021 are as follows (in thousands):
2021
$ 4,483
2022
61,529
2023
48,529
2024
124,725
2025
96,572
Thereafter
240,303
$
576,141
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 March 31, 2021, the Interest Rate Swap was reported as a liability at its fair value of approximately $ 1.3 million, which is included in other liabilities on the Company’s condensed consolidated balance sheet. For the three months ended March 31, 2021 approximately $ 0.1 million of realized losses were reclassified to interest expense due to payments made to the swap counterparty. For the three months ended March 31, 2020 the amount of realized losses reclassified to interest expense due to payments received by the swap counterparty were nominal.
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.
9
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 $ 474.1 million and $ 573.6 million (compared to a carrying value of $ 471.1 million and $ 556.0 million) as of March 31, 2021 and December 31, 2020, respectively. Accordingly, the fair value of mortgage loans payable have been classified as Level 3 fair value measurements.
7. Related Party Transactions
Administrative Services Agreement
For the three months ended March 31, 2021 and 2020, the Company earned $ 0.1 million and $ 0.1 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.
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.
The Company recognized fixed and variable lease payments for the three months ended March 31, 2021 and 2020 as follows (in thousands):
Three Months Ended

March 31,
2021
2020
Fixed payments
$ 33,551 $ 34,092
Variable payments
5,907 6,016
$ 39,458 $ 40,108
Future minimum lease payments to be received by the Company as of March 31, 2021 under
non-cancellable
operating leases for the next five years and thereafter are as follows (in thousands):
2021
$ 89,536
2022
105,566
2023
88,575
2024
68,921
2025
53,149
Thereafter
154,927
$
560,674
10
The Company’s leases may include various provisions such as scheduled rent increases, renewal options and termination options. The majority of the Company’s leases include defined rent increase rather than variable payments based on an index or unknown rate.
Lessee Accounting
As a lessee, the Company has ground and office leases which are classified as operating and financing leases. As of March 31, 2021, these leases had remaining terms of 1 to 67 years and a weighted average remaining lease term of 58 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):
March 31, 2021
December 31, 2020
Right-of-use
asset – operating leases
$ 12,633 $ 12,739
Lease liability – operating leases
$ 7,666 $ 7,719
Right-of-use
asset – financing leases
$ 49 $ 55
Lease liability – financing leases
$ 49 $ 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 6.3 % in determining its lease liabilities. The discount rates were derived from the Company’s assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments.
Right-of-use
assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.
Operating lease expense for each of the three months ended March 31, 2021 and March 31, 2020 was $ 0.2 million. Financing lease
expense for each of the three months ended March 31, 2021 and 2020 was nominal
.
Future minimum lease payments to be paid by the Company as a lessee for operating and financing leases as of March 31, 2021 for the next five years and thereafter are as follows (in thousands):
Operating

Leases
Financing

Leases
2021
$ 383 $ 20
2022
798 27
2023
663 4
2024
597 —
2025
596 —
Thereafter
26,084 —
Total future minimum lease payment
s
29,121 51
Discoun
t
( 21,455 ) ( 2 )
Total
$ 7,666 $ 49
11
9. Commitments and Contingencies
The Company is obligated under certain tenant leases to fund tenant improvements and the expansion of the underlying leased properties.
Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. As such, the Company may be potentially liable for costs associated with any potential environmental remediation at any of its formerly or currently owned properties.
The Company believes that it is in compliance in all material respects with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. Management is not aware of any environmental liability that it believes would have a material adverse impact on the Company’s financial position or results of operations. Management is unaware of any instances in which the Company would incur significant environmental costs if any or all properties were sold, disposed of or abandoned. However, there can be no assurance that any such
non-compliance,
liability, claim or expenditure will not arise in the future.
The Company is involved from time to time in lawsuits and other disputes which arise in the ordinary course of business. As of March 31, 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.
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.
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 no shares repurchased during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company completed the repurchase of 1,451,249 shares of its common stock for approximately $ 11.6 million.
Common Stock and Common Unit Distributions
O
n March 23, 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 March 31, 2021. The dividend was paid subsequent to quarter end on April 23, 2021 to common stockholders and common unitholders of record as of the close of business on April 9, 2021 , resulting in an aggregate payment of $ 6.5 million.
12
Preferred Stock Distributions
On March 23, 2021 the Company’s Board of Directors approved and the Company declared a cash dividend of $ 0.4140625 per share of the Company’s 6.625 % Series A Preferred Stock (“Series A Preferred Stock”) for an aggregate amount of $ 1.9 million for the quarterly period ended March 31, 2021. The dividend was paid subsequent to quarter end on
April 23, 2021 to the holders of record of Series A Preferred Stock as of the close of business on April 9, 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 “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.
During the three months ended March 31, 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 months ended March 31, 2021, the Company recognized net compensation expense of $ 0.5 million related to the RSUs. For the three months ended March 31, 2020, the Company recognized net compensation expense of $ 0.5 million related to the RSUs.
During the three months
ended March 31, 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 months ended March 31, 2021, the Company recognized net compensation expense of $ 0.2 million related to the Performance RSU Awards. For the three months ended March 31, 2020, the Company recognized net compensation expense of $ 0.1 million related to the Performance RSU Awards
.
11. Subsequent Events
Subsequent to March 31, 2021, the Company, through the Operating Partnership, entered into an Agreement of Purchase and Sale to acquire two properties located in San Diego, California for $ 43.3 million, exclusive of closing costs. The transaction is expected to close during the second quarter of 2021, subject to customary closing conditions.
13
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
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;
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•
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 March 31, 2021, we owned 24 properties comprised of 62 office buildings with a total of approximately 5.5 million square feet of net rentable area (“NRA”). As of March 31, 2021, our properties were approximately 90.5% leased.
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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, 2525 McKinnon, Sorrento Mesa and Canyon Park properties have triple net leases. Certain tenants at AmberGlen, Superior Pointe, Florida Research Park, Circle Point, The Quad, Cascade Station and Denver Tech have leases on a triple net basis. We are also a lessor for a fee simple ground lease at the AmberGlen property. All of our remaining leases are 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 have adopted new policies and procedures to incorporate best practices for the safety of our tenants, our vendors and our employees. However, the usage of our assets in the first quarter 2021 was significantly lower than normal. Usage of our assets in the near future depends on the duration of the pandemic, the implementation of
COVID-19
vaccines 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 March 31, 2021, as a result of
COVID-19
or governmental or tenant actions in response thereto, the Company granted rent relief to four 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 believe that some of the industries most impacted by
COVID-19
are coworking, retail, restaurant and café, travel and accommodation, live event related and energy. We generally have limited exposure to these industries, with these sectors comprising approximately 3% of our portfolio by square footage. However, the impact of
COVID-19
extends to all sectors of the U.S. economy and as such, we expect that tenants outside of these select industries will also face significant challenges. Rating agencies downgraded the credit rating and outlook of many businesses as a result of
COVID-19.
We have collected over 99% of contractually required base rents from our tenants for the three months ended March 31, 2021 and granted rent relief for another approximately 0.1% of contractually required base rents from our tenants for the three months ended March 31, 2021. The rate of collections in future months may be lower, as the length of the economic downturn continues to impact tenants. We have developed dedicated teams and processes to evaluate
non-payments
and rent relief requests. We evaluate each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests ultimately result in modification
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agreements, nor are we foregoing our contractual rights under our lease agreements. We believe many of these requests received were from tenants who had the ability to pay rent at the time and were seeking opportunistic deferral opportunities. We continue to work efficiently to find tailored resolutions in each case where warranted, including potential deferrals of rent, lease term extensions with short-term rent relief, temporary percentage rent opportunities, or, in limited circumstances, rent abatement particularly when the tenant is viewed as an amenity to the building. We may incur additional losses in future periods due to tenants that default on their leases, file for bankruptcy and/or otherwise experience significant financial difficulty as a result of the duration of the
COVID-19
pandemic, but the extent of those losses is 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 it will continue to be impacted by
COVID-19.
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. Because construction activities have generally been classified as essential activities throughout our markets during the pandemic, we do not currently expect meaningful delays in customers taking occupancy under recently signed leases.
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
COVID-19
remains fluid and we will continue to monitor and actively manage our response in collaboration with tenants, government officials and other third parties to optimally position the Company.
Business and Strategy
We focus on owning and acquiring office properties in our target markets. Our target markets generally possess what we believe are 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
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COVID-19
pandemic, that impair our ability to renew or
re-let
space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. In addition, growth in rental revenue will also partially depend on our ability to acquire additional properties that meet our investment criteria.
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Our Properties
As of March 31, 2021, we owned 24 properties comprised of 62 office buildings with a total of approximately 5.5 million square feet of NRA in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, San Diego, Seattle and Tampa. The following table presents an overview of our portfolio as of March 31, 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)
Phoenix, AZ

(22.2% of NRA)
Pima Center 100.0 % 272 67.9 % $ 27.79 $ 27.79 $ 5,130
SanTan
100.0 % 267 95.2 % $ 29.25 $ 29.25 $ 7,421
5090 N 40
th
St
100.0 % 175 90.5 % $ 30.16 $ 30.16 $ 4,781
Camelback Square
100.0 % 174 76.2 % $ 31.99 $ 31.99 $ 4,246
The Quad
100.0 % 163 97.4 % $ 30.42 $ 30.74 $ 4,829
Papago Tech
100.0 % 163 90.9 % $ 23.04 $ 23.04 $ 3,408
Tampa, FL

(19.0%)
Park Tower 94.8 % 470 88.0 % $ 26.77 $ 26.77 $ 11,070
City Center
95.0 % 243 90.9 % $ 26.81 $ 26.81 $ 5,914
Intellicenter
100.0 % 204 100.0 % $ 24.53 $ 24.53 $ 4,993
Carillon Point
100.0 % 124 100.0 % $ 28.94 $ 28.94 $ 3,594
Denver, CO

(14.7%)
Denver Tech
(3)
100.0 % 383 91.2 % $ 23.28 $ 27.39 $ 8,024
Circle Point
100.0 % 272 81.6 % $ 18.67 $ 32.54 $ 4,145
Superior Pointe
100.0 % 152 97.9 % $ 18.47 $ 30.96 $ 2,743
Orlando, FL

(13.2%)
Florida Research Park
(4)
96.6 % 397 98.5 % $ 23.86 $ 27.29 $ 9,311
Central Fairwinds
97.0 % 168 90.5 % $ 26.25 $ 26.25 $ 3,996
Greenwood Blvd
100.0 % 155 100.0 % $ 23.75 $ 23.75 $ 3,682
San Diego, CA

(10.6%)
Sorrento Mesa 100.0 % 297 85.3 % $ 34.28 $ 41.28 $ 8,675
Mission City
100.0 % 281 87.5 % $ 36.74 $ 36.74 $ 9,040
Dallas, TX

(10.5%)
190 Office Center 100.0 % 303 79.8 % $ 26.49 $ 26.49 $ 6,414
Lake Vista Pointe
100.0 % 163 100.0 % $ 16.50 $ 25.50 $ 2,695
2525 McKinnon
100.0 % 111 91.6 % $ 28.98 $ 47.98 $ 2,957
Portland, OR

(6.1%)
AmberGlen 76.0 % 203 98.4 % $ 22.43 $ 24.97 $ 4,471
Cascade Station
100.0 % 128 100.0 % $ 27.54 $ 29.47 $ 3,512
Seattle, WA

(3.7%)
Canyon Park 100.0 % 207 100.0 % $ 22.49 $ 27.49 $ 4,650
Total / Weighted Average – March 31, 2021
(5)
5,475
90.5
%
$
26.22
$
29.20
$
129,701
(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 March 31, 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.
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Operating Expenses
Our operating expenses generally consist of utilities, property and ad valorem taxes, insurance and site maintenance costs. Increases in these expenses over tenants’ base years (until the base year is reset at expiration) are generally passed along to tenants in our full-service gross leased properties and are generally paid in full by tenants in our net leased properties.
Conditions in Our Markets
Positive or negative changes in economic or other conditions in the markets we operate in, including state budgetary shortfalls, employment rates, natural hazards and other factors, may impact our overall performance. In addition, the recent
COVID-19
pandemic has caused significant disruption in global financial markets and economies. This global disruption could have a material impact on the markets in which we operate, our tenants and our ability to successfully execute our business strategy. The extent to which
COVID-19
will impact the Company is highly uncertain and 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 March 31, 2021 to Three Months Ended March 31, 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 $0.6 million, or 2%, to $39.5 million for the three months ended March 31, 2021 compared to $40.1 million for the three months ended March 31, 2020. The disposition of Cherry Creek in February 2021 contributed $1.1 million to the decrease. Rental revenue also decreased at 190 Office Center and Pima Center by $0.4 million and $0.3 million, respectively, due to a decrease in occupancy year over year. Offsetting these decreases, revenue increased by $0.4 million at our 7595 Tech property within the Denver Tech portfolio and by $0.6 million at our Sorrento Mesa property due to significant leasing transactions during the prior year, which lifted occupancy and rental income. 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 $1.1 million, or 3%, to $31.3 million for the three months ended March 31, 2021, from $32.4 million for the three months ended March 31, 2020. The disposition of Cherry Creek contributed $0.9 million to the decrease. The remaining expenses were marginally lower 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 $0.6 million, or 4%, to $14.1 million for the three months ended March 31, 2021, from $14.7 million for the three months ended March 31, 2020. The disposition of Cherry Creek contributed $0.3 million to the decrease. The remaining expenses were marginally lower in comparison to the prior period.
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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 were $2.8 million for the three months ended March 31, 2021, which is unchanged from the $2.8 million reported for the same period in 2020.
Depreciation and Amortization.
Depreciation and amortization decreased $0.6 million, or 4%, to $14.4 million for the three months ended March 31, 2021, from $15.0 million for the three months ended March 31, 2020. The disposition of Cherry Creek resulted in a $0.5 million decrease to depreciation and amortization. The remaining properties were relatively unchanged.
Other Expense (Income)
Interest Expense.
Interest expense decreased $0.1 million, or 2%, to $6.6 million for the three months ended March 31, 2021, from $6.7 million for the three months ended March 31, 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.
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 three months ended March 31, 2021 related to the sale of our Cherry Creek property in February 2021.
Cash Flows
Comparison of Three Months Ended March 31, 2021 to Three Months Ended March 31, 2020
Cash, cash equivalents and restricted cash were $33.2 million and $164.8 million as of March 31, 2021 and March 31, 2020, respectively.
Cash flow from operating activities.
Net cash provided by operating activities increased by $4.8 million to $15.5 million for the three months ended March 31, 2021 compared to $10.7 million for the same period in 2020. The increase was primarily attributable to changes in working capital.
Cash flow from investing activities.
Net cash provided by investing activities increased by $90.4 million to $85.1 million for the three months ended March 31, 2021 compared to $5.3 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 2021.
Cash flow to financing activities.
Net cash used in financing activities increased by $185.3 million to $113.4 million for the three months ended March 31, 2021 compared to $71.9 million provided by financing activities 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 three months ended March 31, 2021.
Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources
We had approximately $14.9 million of cash and cash equivalents and $18.3 million of restricted cash as of March 31, 2021.
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 March 31, 2021, we had approximately $55.0 million outstanding under our Unsecured Credit Facility and a $4.8 million letter of credit to satisfy escrow requirements for a mortgage lender.
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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”). The Company did not issue any shares of common stock or Series A Preferred Stock under the ATM Program during the three months ended March 31, 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.
Contractual Obligations and Other Long-Term Liabilities
The following table provides information with respect to our commitments as of March 31, 2021, including any guaranteed or minimum commitments under contractual obligations. The table does not reflect available debt extension options.
Payments Due by Period
(in thousands)
Contractual Obligations
Total
2021
2022-2023
2024-2025
More than
5 years
Principal payments on mortgage loans
$ 576,141 $ 4,483 $ 110,058 $ 221,297 $ 240,303
Interest payments
(1)
105,100 16,100 40,405 30,773 17,822
Tenant-related commitments
12,395 12,395 — — —
Lease obligations
29,172 403 1,492 1,193 26,084
Total
$ 722,808 $ 33,381 $ 151,955 $ 253,263 $ 284,209
(1)
Contracted interest on the floating rate borrowings under our Unsecured Credit Facility was calculated based on the balance and interest rate at March 31, 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%.
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Off-Balance
Sheet Arrangements
As of March 31, 2021, we had a $4.8 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We have used, and will use, derivative financial instruments to manage or hedge interest rate risks related to borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based upon their credit rating and other factors. See Note 6 to our 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 March 31, 2021, approximately $471.1 million, or 81.8%, of our debt had fixed interest rates and approximately $105.0 million, or 18.2%, had variable interest rates. Of the $105.0 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 90.5% of our debt was fixed rate debt and 9.5% was variable rate debt as of March 31, 2021. A 10% increase in LIBOR would result in a nominal increase to our annual interest costs on debt outstanding as of March 31, 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 March 31, 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 three months ended March 31, 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 March 31, 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of business. As of March 31, 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
None.
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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 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 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 Commission 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 Commission on September 30, 2016).
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CITY OFFICE REIT, INC.
Date: May 7, 2021
By:
/s/ James Farrar
James Farrar
Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 7, 2021
By:
/s/ Anthony Maretic
Anthony Maretic
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
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TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits

Exhibits

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 Companys Annual Report on Form10-Kfiled on March1, 2018). 3.2 Second Amended and Restated Bylaws of City Office REIT, Inc. (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form8-Kfiled on March14, 2017). 4.1 Certificate of Common Stock of City Office REIT, Inc. (incorporated by reference to Exhibit 4.1 of the Companys Registration Statement on FormS-11/Afiled with the Commission on February18, 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 Companys Registration Statement on Form8-Afiled with the Commission on September30, 2016). 31.1 Certification by Chief Executive Officer under Section302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by Chief Financial Officer under Section302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section1350 as Adopted Pursuant to Section906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section1350 as Adopted Pursuant to Section906 of the Sarbanes-Oxley Act of 2002.