City Office REIT, Inc.

Good morning and welcome to the Office REIT Inc 3rd Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. As a reminder, this conference call is being recorded. If you require operator assistance, please press star, then zero. It is now my pleasure to introduce you to Tony Maretic, the company's chief financial officer, treasurer, and corporate secretary. Thank you, Mr. Maretic. You may begin.

Good morning. Before we begin, I would like to direct you to our website at cioreets.com, where you can view our third quarter earnings press release and supplemental information package. The earnings release and supplemental package both include a reconciliation of non-GAAP measures that will be discussed today to their most directly comparable GAAP financial measures. Certain statements made today that discuss the company's beliefs or expectations or that are not based on historical fact may constitute forelooking statements within the meaning of the federal securities laws. Although the company believes that these expectations reflected in such forelooking statements are based upon reasonable assumptions, we give no assurance These expectations will be achieved. Please see the forelooking statements disclaimer in our third quarter earnings press release and the company's filings with the SEC for factors that could cause material differences between forelooking statements and actual results. The company undertakes no obligation to update any forelooking statements that may be made in the course of this call. I'll review our financial results after Jamie Farrar, our Chief Executive Officer, discusses some of the quarter's operational highlights. I'll now turn the call over to Jamie.

Good morning and thanks for joining today. In our time as a public company, we've faced several periods of macro uncertainty and sector-specific headwinds. As in the past, we intend to operate in a conservative and patient manner and to develop strategic opportunities to create long-term value. That strategy has aided in our company producing leading total returns and earnings growth across the office REIT sector. Before we discuss specifics of our operational approach, I would like to summarize the office market trends as we see them. The first trend is general pressure on leasing metrics across the industry. Year to date, net absorption across our nine markets is negative 3.9 million square feet. Vacancy has continued to edge higher across our cities, and we expect elevated levels of subleasing and downsizing will continue to put pressure on occupancy rates in general. While face rental rates continue to trend higher overall, net effective rents are trending lower due to more expensive tenanting costs and shorter leases that are being signed. As I'll discuss shortly, the highest quality properties in the best locations with desirable amenities are clearly outperforming across the country. The second trend is a gradual return to the office. The highest office utilization rates continue to be in the south and west. On a national scale, the office utilization rate increased 5.3% between late August and late September, according to JLL, indicating a significant movement post-Labor Day. Our internal tracking showed a similar increase. With workstation utilization now in the mid-50s at our properties, our own estimate is that our current utilization translates to being about two-thirds of the way back to where we were pre-COVID when you factor in vacation, travel, and sick days. A third trend continues to be the outperformance of Sunbelt markets. In terms of leasing volume, corporate relocation, employment growth, population growth, and real estate fundamentals, our Sunbelt markets are where both people and companies want to be. We've been investing across these markets since our inception, and our infrastructure, knowledge, and connections give us a competitive advantage. The last trend is one that we believe will be a driver of our industry over the next several quarters and the long term. To accelerate a return to the office and increase employee retention in a tight labor market, Employers are looking for highly amenitized office buildings that have outdoor spaces, fitness centers, lounges, food and beverage options, and updated finishes. Likewise, there's heightened demand for ready-to-leave space with desirable buildings. Our property, The Quad in Phoenix, is an excellent case study in this. The property has high-end amenities including a fitness center, outdoor tenant and common space, event and conference areas, and a great on-site restaurant. The property is 100% leased today with a waiting list, and we are continuing to achieve new high watermark lease rates with minimal tenant improvements. These office trends in the state of the broader market have formed the basis of our strategy and how we are approaching opportunities to outperform and create value while managing risk. Fortunately, we've assembled a quality portfolio and a high percentage of the value of our company is invested in properties that are very well positioned for these trends. Now we do recognize that a relatively small percentage of our overall asset value resides in less amenitized buildings targeting tenants seeking lower cost rent. This segment of the leasing market's been much slower than in the past. We continue to evaluate the best path forward for these types of properties which includes maintaining their current market position, elevating through capital enhancements, or selective dispositions when market conditions improve. As mentioned on prior calls, we're continuing to advance what we believe are the highest impact property enhancements and spec suites. In support of why we believe this is a prudent use of funds, we are pleased to report recent leasing activity at our 190 office center property in Dallas. Earlier in the year, we completed a renovation that included the addition of outdoor common areas, a new fitness center, modernized conference facility, and other upgrades. The renovation looks fantastic and has transformed the property for a modest budget of just over $2 million. During the third quarter, we signed two leases for a total of 49,000 square feet. We recently held a leasing broker event to reintroduce the property to the leasing community And the feedback we received was extremely positive. Included in our investor presentation is a slide that shows the before and after positioning of this property. Moving to our spec suite program, year to date, we have leased 19 of our spec suites totaling 71,000 square feet. We've also leased five spaces totaling 82,000 square feet, where we had completed substantial space conditioning. We have a remaining inventory of 15,000 square feet of spec suites with approximately 150,000 square feet planned for construction in the balance of 2022 and 2023. Our typical spec suites have a functional design with open ceilings, high-end finishes and fixtures, polished concrete floors, and ample glass that conveys an incredible feel. The initial upfront cost of these spec suites is somewhat higher than a traditional office building. However, the benefits far outweigh the incremental cost, and we found that the cost to release these spaces in the future are modest, driving a better long-term return. Further, we are pursuing long-term opportunities to create additional value. This includes exploring potential redevelopment at select properties where there's a higher and better use, or additional uses such as multi-family site on the property. These types of creative projects have a longer lead time, but we believe that over time significant incremental value can be generated. From a financial perspective, we continue to operate prudently with ample liquidity. The sale of our life science portfolio in 2021 significantly reduced our overall leverage levels, and we continue to operate conservatively. The last topic I will touch on is the completion of our $50 million share repurchase program. the average repurchase price was equivalent to us buying our own portfolio at approximately an 8% cap rate and $218 per square foot. We believe this offers great long-term value and a substantial discount to our internal net asset value estimation, even in this challenging climate. We are, however, mindful of reducing our equity market cap further and do not currently have any additional repurchases planned. In summary, We believe this is a time for both caution and strategic position. We will remain highly mindful of general market conditions while also actively deploying our team and select capital investments into impactful projects. I look forward to providing further updates on these initiatives and will hand the call over to Tony Maretic to discuss our financial results.