City Office REIT, Inc.

Good morning and welcome to the City Office REIT's first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. To ask a question, you may press star, then 1 on your touchtone phone. And 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'd like to direct you to our website at cioreet.com, where you can view our first 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 forward-looking statements within the meaning of the federal securities laws. While the company believes that these expectations reflect in such forward-looking statements are based upon reasonable assumptions and give no assurance that these expectations will be achieved. Please see the forward-looking statements disclaimer in our first quarter earnings press release and the company's filings of the SEC for factors that could cause material differences between forward-looking statements and actual results. The company undertakes no obligation to update any forward-looking 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.

I wanted to start today with a status update on the planned redevelopment of our city center property in downtown St. Petersburg, Florida. On our last call, we mentioned that we received site plan application approval from the city of St. Petersburg. This plan was for the redevelopment of city center's existing parking structure into a 49-story residential condominium and mixed-use tower. We're excited to announce that after quarter end, we entered into an agreement with Property Markets Group, or PMG, to lead the development. PMG is a very experienced developer who is currently building the Waldorf Astoria Residences in Miami. That project will rank as one of Miami's tallest residential towers upon completion. Our project is also expected to be sold under the luxury Waldorf Astoria Residences brand and capitalizes on our site's incredible water views and exposure. The agreement with PMG charges them with responsibility for all pre-development activities and the associated costs, which we anticipate will require them to invest $17 million of cash. There are various preconditions to be completed prior to the contribution of our land to the venture, including achievement of presales, financing, and return on cost targets. Upon contribution of our parking structure land to the development venture, we would receive a 50% interest in the partnership. Today the project sales center is nearing completion at city center and we expect that presales will commence shortly. Upon achieving the conditions to commence construction, we anticipate a construction period of approximately three years. Downtown Saint Pete, has seen a dramatic transformation over the past 10 years with luxury condo development in high demand and neighboring projects selling out quickly. We believe the announcement of this project is set to meet that demand as one of the premier offerings in the marketplace. In sum, we've created a unique venture that positions us to benefit alongside a highly experienced development partner. This exciting project has tremendous longer-term value creation potential for our shareholders. Turning to other highlights of the first quarter, we continue to see a positive trend in overall office real estate fundamentals. Nationally, office leasing volume was 15% higher than a year ago. JLL estimate that office leasing volume has returned to approximately 89% of typical pre-pandemic levels. Higher quality office spaces in Sunbelt markets continue to outperform. Moving to our leasing activity, the first quarter is typically one of the slowest quarters of the year. Despite this, we completed a healthy 144,000 square feet of new and renewal leasing. Our largest lease completed during the quarter was a 34,000 square foot new lease at our Papago Tech property in Phoenix. This lease represents the last vacancy that we have at that property. Subsequent to quarter end, we achieved another impactful new lease. Our Greenwood Boulevard property in Orlando was 100% leased to a single tenant with a lease expiration in 2028. We were successful in negotiating a transaction to bring a new 66,000 square foot tenant into the building prior to that existing tenant's expiration. The new tenant signed a 10 year lease expected to commence in the fourth quarter of this year. The current tenant will vacate that space and pay a sizable termination fee. On the remaining 89,000 square feet in the building, the current tenant will keep its 2028 expiration on 31,000 square feet and agree to extend the remaining 58,000 square feet on a longer-term basis to 2033. Overall, these were very important lease transactions that provide certainty around this asset's long-term cash flow. The transactions also position us favorably to extend the property's upcoming loan maturity, which is expected to be achieved in the second quarter. Portfolio wide, we continue to see rent growth upon renewals and have realized an 8.5% positive cash releasing spread on our renewals over the last 12 months. Our same store cash NOI also increased 4.4% in the first quarter as compared to the prior year. As far as our overall earnings and occupancy trends for the year, we are still on track within the guidance ranges we provided at the end of February. With that, I'll turn the call over to Tony to discuss our financial results in more detail.

Thanks, Jamie. Our net operating income in the first quarter was $26.0 million, which is $500,000 higher than the amount we reported in the fourth quarter. Higher revenue, partially driven by strong same store results, combined with lower operating expenses was the primary driver of the NOI increase. We also reported core FFO of 12.3 million or 30 cents per share for the first quarter. Core FFO was 600,000 higher than the amount we reported in the fourth quarter for the same reasons NOI was higher. Our first quarter AFFO was 6.5 million or 16 cents per share. There was no single TI or LC amount that impacted AFFO by more than 500,000. Our spending on property renovations also decreased in the first quarter relative to last year as we completed several property renovation projects and amenity upgrades in the fourth quarter. Moving on to some of our operational metrics. Our same store cash NOI trended higher in the first quarter. There was a healthy increase of 4.4% or $1.1 million as compared to the first quarter of 2024. The largest contributor to that was Raleigh again, where NOI continues to materially increase at block 83 as signed leases take occupancy. Our portfolio occupancy ended the quarter at 84.9%. This was slightly lower than the prior quarter, which we expected as a result of a couple of known vacates at our Denver Tech and 2525 McKinnon properties. These vacates occurred later in the quarter and as a result did not have a significant impact to NOI. We expect occupancy will decrease in the second quarter, this will be driven by the existing tenant at greenwood boulevard downsizing by 66,000 square feet that Jamie described. Prior to the commencement of a new tenant later this year, and also due to a 72,000 square foot tenant that vacate their abrogate property in portland after quarter end on April 1 as expected. At quarter end we had 143,000 square feet of sign leases that have not yet commenced. As those sign leases take occupancy, we expect occupancy will increase, and therefore we still anticipate year-end occupancy will end within the 85 to 87% range contained within our original guidance. Our total debt as of March 31st was $646 million. Our net debt, including restricted cash to EBITDA, was 6.7 times. As of March 31st, we had approximately $42 million undrawn and authorized on our credit facility. We also had cash restricted cash of $37 million as a quarter end. Our credit facility matures in November 2025 with an ability to extend it to November 2026. That option can be exercised in August, 90 days prior to the maturity, as long as we remain in compliance with our debt covenants, which we are comfortably projected to be. As such, we expect to exercise that option and continue discussions on a longer-term renewal. We have two property debt maturities in 2025. The loans for both Greenwood Boulevard in Orlando and IntelliCenter in Tampa mature in the fourth quarter. We are at an advanced stage of discussions on a three-year term extension with the existing lender for Greenwood Boulevard and have initiated discussions on a short-term extension with the existing lender in IntelliCenter. We expect to provide an update on next quarter's call. Last, we also have two high value properties block 83 in raleigh and city center in tampa that are completely unencumbered as the office debt capital markets continue to come back we may explore options to add financing to those properties to generate additional liquidity that concludes our prepared remarks and we'll open up the line for questions operator thank you very much just as a reminder to ask a question you may press star then one on your touch tone phone

If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star, then two. Our first question comes from Upal Rana with KeyBank Capital Markets. Upal, your line is now open. Please go ahead.

Great. Thank you. I was wondering, was this new developed project, how did that come about? Was this something that you seeked out or was it something you're approached on?

Sure. It's Jamie here. So this is something we started about two years ago, recognizing how strong the downtown St. Petersburg market was for development. And so we did a fairly deep canvas on options and how to best execute. And we landed on I think a great structure that will generate significant value over time for us. And actually on that point, for more information, Forbes actually published an article earlier this week, which has a lot of good information. So you could search Forbes Waldorf Astoria St. Petersburg and get a really good summary of the project.

Okay, great. And then, you know, I understand there's a lot of work still needs to be done prior to, you know, the shovels in the ground, but if you give a sense of timing and what that looks like and how shaping up to be you did mention three years of construction in your prepared remarks but i wonder if there's any other call you can provide us sure so pre-sales are about to commence uh we're building at a sales center within the ground floor of city center that's almost finished so

TAB, You know internally, we think it will be about a year, plus or minus a pre sales and then three years construction, so you know things go according to plan it's probably four years for the full project.

TAB, Okay, and will there be any disruption to the existing property that use that broad space.

Devin Glennie, So we've we've been working on alternative parking arrangements we've been keeping all of our tenants up to speed on what's going to happen so there'll be a period of time where tenants are offered alternative arrangements, including valet and when the structure is done it replaces the parking for the office building.

Devin Glennie, Okay, great last one for me, you know. Tony Doan- You're currently just below the low end of your occupancy guidance here, and you know, could you give us some color on the pace of occupancy this year in order to get you to the midpoint. Tony Doan- 86% you know I know you do have about 300,000 square feet expiring over the next couple quarters here so very great Thank you.

Tony Doan- yeah sure well, this is Tony. Tony Doan- yeah so we have 143,000 square feet. of leases at March 31st that have yet to take occupancy. That represents about 2.7% of our portfolio. So that's where the bulk of that's going to come from. The majority of that will move in over the next two quarters. And then beyond that, we have the move out that I mentioned on my prepared remarks in Portland. And then we have the activity that's happening at Greenwood Boulevard, which is a net positive, but will result in kind of occupancy dipping through the first two quarters. But we expect that new tenant will take occupancy before the end of the year to get us back within that range.

Okay, great. Thank you.

Our next question comes from Craig Cacera with Lucid Capital Markets. Craig, your line is now open. Please go ahead.

Yeah. Hey, good morning guys. Um, I just want to circle back to the Greenwood Boulevard transaction. Uh, I wasn't able to do the math quick enough in my head, but is there going to be ultimately any vacancy in that asset or, or does the new tenant. Um, taking, you know, the, the remaining space and the other tenant just downsizing and extending their lease. Thank you.

Yeah. Yeah. Hey Greg, it's Tony here. Um, yeah, it's the latter there. It's going to take the occupancy. It's currently a hundred percent. It'll dip down for this vacate and then get back to a hundred percent before the end of the year. But what it does do is it dramatically extends the vault of the property as that maturity was scheduled for 2028. And now the bulk of the space has been extended out. The new lease that we have is a 130-month, so just over 10 years, 10-year term. And the existing tenant is extending their space out by five years on two of the three floors. So it's a big win for the property.

Right. And as far as the rent there, I think the existing tenant was paying $2,575. Were there any changes in the rent per square foot, either for the new tenant or for the existing tenant?

So for the new tenant, it kind of steps back up over a period of time and gets back slightly above where the current rent is. So it'll dip down a little bit and then be back.

Okay, fair enough. Just one more for me. I mean, heading into this year, I think your expectation was that you would see the most leasing activity and traffic in Phoenix. And congrats on the lease at Papago. But I just would be curious to hear your read on sort of how your top Sunbelt markets are performing and with Phoenix in particular, if that's helpful. Thank you.

Sure, I'll start. Tony might have some comments as well. If you actually have our investor presentation on slide three shows the maps of really where our current markets are and our overall value. And I think what you can see is the bulk of our value is in the Sunbelt markets. And we're feeling really good about leasing there. So, you know, when Tony mentioned about some occupancy dipping down in Portland, That's unfortunate, but that's not a market that we're looking to invest capital in. Where we're investing capital is in the Sunbelt where we're creating the most value. And Phoenix has been very strong. In fact, a significant portion of the leasing this quarter was in Phoenix. So we continue to feel really good there and across the other Sunbelt markets that we have.

Yeah, just to echo some of Jamie's comments, the bulk of the leasing activity this quarter The 144,000 square feet of leasing this quarter was in Phoenix. And if you look at where the cash spreads are this quarter, you can see how strong that is. And that was largely driven by that activity in Phoenix.

Okay. Thanks, guys.

Thanks for the question, Craig.

Thanks, Craig. As a reminder, to ask a question, you may press start and one on your touchtone phone right now. We currently have no further questions, so I will hand back over to Jamie for any closing remarks.

Thank you for joining today. We look forward to updating you further next quarter. Goodbye.

Thank you very much, Jamie and Tony, for being our speakers today. That comes to the end of our conference call. We appreciate everyone for participating. You may now disconnect your line.