CIO - Earnings call transcript Q3 2020

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Operator

Good morning, and welcome to the City Office REIT, Inc.

Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] It is now my pleasure to introduce you to Tony Maretic, the chief – the company’s Chief Financial Officer, Treasurer and Corporate Secretary. Thank you. Mr. begin. now may you Maretic,

Tony Maretic

Good morning.

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

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

Jamie Farrar

Good morning. joining Thank you today. for us

the our to employees and some cities due strongest that markets. be markets Labor I’d continues of our and to The been the non-farm economy. the outsized growth provide of in population desirability Prior cities Southern data our accelerated for COVID, Western have office update what business believe the seeing to of the number and on that the that high impact U.S. of particular. on to returns payrolls discussing national employment the have employees doing was noteworthy investment time The up of X.X% life lower on nationally decline the X.X% payrolls Before thesis quality our from in outperform an It September reduction our year-over-year our Statistics poised and COVID cost September that would even we for like that our latest is of a to markets, performers. declined employment with have has relative quarter, chosen Gateway continue start results cities Bureau market COVID and much on over non-farm trends. We to seen of an XXXX are experiencing markets decline. to in better average Office’s has X.X%. In greater held a employment at City XXXX. highlights an in

employment COVID corporate of strong signs strong Despite benefit office in quarter. encouraged prior relative under reporting over continue levels, our quarter, markets. from our in third leasing XX% of tenants Nationally, the portfolio, and was We’re to at In markets office lower our to of The a that XX% activity renewal we’ve own the of activity. the shown and has in stabilizing lowest utilization usage. leasing levels many seen up activity our In new of social internal properties remained levels requirements our survey, utilization distancing buildings recent markets. utilization of continue with effects large trends. impact renewal

Lake XXXX property discussions Vista largest renewal Dallas, expiration in and progressing. is at Our our in upcoming January are

could pace signed the that no based long-term a While end discussions, of the on by renewal of we a completed see XXXX. the fourth of there’s be will certainty transaction quarter current

modestly. markets have in inquiries rising, been of new terms many In tenant our albeit leasing activity, of

vacancy in a lease life remaining However, discussion at our we’re Sorrento Diego. continues be strong in engaged a particularly science Mesa to and sector, San

approximately for Year square lease prospect terms We XX,XXX a date. early with are the them, signed commencement Should late lease with we feet. in be with New could to come discussions XXXX a a in

Moving on quarter to third our performance.

Our we’ve collected and us which This of of results rents. quarter our October reduce for were some to uncollectible shortly. guidance XX% of date, rate XXXX. IPO fourth To we’ve ongoing high third had discuss the provision quarter collections strongest since allowed I’ll our rents, in

diverse healthcare, underpinned proportion and high tenant tenants Our science, success. government services has mix life collection with of a our tech, professional

weighted in XXX,XXX at average and they’re years. quarter, discussed are square the that and expiring last of by life Mesa we occupancy property third lease X.X science base as incremental with rents. San leases rental driven the Sorrento feet revenue tenant will $X.X million year we to full of largely quarter. that These of completed encouraging Upon in XXXX, lease During new compared numbers, our renewal term Diego a the per approximately generate

XXXX, In increase rates and net automatically Today, a in building addition, which year If million on the rental rents this square-foot just net were a up revenue the is building market the will million indication in of rent pick accretive potential That rate A mark-to-market to to of as share foot per to rate receiving level, At $X.X sister per program base results. deal, XXXX, the quarter, will are the of further we the the per from where our we XXXX. repurchase rental to receiving XX,XXX foot extended rents share we tenant as with $XX today. completed has rental to part building’s corporate we been also in reset square of per benefit is further $XX the a lease was just this building reset good that annually. same XXXX. we square $XX achieved during annually. $XXX compared

results lower of plan, comparing third intend quarter healthy dividend produced conservatively step of execution to The Taking is continued share to share we also and to continue program FFO AFFO operate and collections, net we sizable we’ve increase a As levels a our XXXX operational and in healthy pre-COVID results, per coverage. core rent back positive our quarter. strides. our quarter third on liquidity. XXXX Notably, with share the leverage this transactions, higher made per our leasing execute business significant repurchase the impact

this and FFO per core AFFO We basis, reflected our performance similar. an has the from strong for these with decreased primarily cash net our are industry. Further, properties, sciences QX our our market stock derived based that our of Sorrento to was our These today. cap tenants don’t in have believe XX% guidance of private our of the on higher rate strong this is increased, the X% we leverage on we’ve At valuations tightened remainder over for almost and very cater rent dividend our on collections types debt-to-EBITDA the at believe life implied occupancy point, Our why extremely is and Park trading has basis, is which valuable NOI. and we an price remain is good a assets covered QX buildings annualized today, NOI increased of our share ranges. Canyon visibility Mesa are year,

renewal earlier. FFO higher the of primarily lease Mesa impact prior uncollectible core due mark-to-market the the the guidance, be expect reduced our impact to than of substantial Sorrento We to for discussed at rents provision and

occupancy also prior higher We and our be same-store growth to cash estimates. expect NOI than

value of continue strategic on end diverse and the our to the base maintaining our advancing renewals, XXXX, to in lease year focus into portfolio. finding tenant move we and unlock As begin we opportunities

plan. be We’re we’ll successful this confident with that

flow us caused results. liquidity despite it macro challenging future position by and now driving strong Tony focus turn over COVID. Our positions well on the to cash further financial provide on details I’ll environment to our

Tony Maretic

net updated to which a quarter’s address We Thanks, and third the from our lease On our income was operating $X.X in third Cherry year. the termination of turn million, basis, the amortization of property. higher results Jamie. than our million quarter outlook the reported $XX.X GAAP then in the remainder fee payment we second million Creek the I’ll the for was quarter. benefited $XX.X at a

recorded on as our total the of the positive we termination expanding million approximately remain in create quarter tenant State fee is the discussed last will call, the of in of $XXX,XXX state previously million We third XX,XXX the Therefore, departed space second That the $X.X loss square the termination million XX. We $X.X fee commences for in $X.X impact a Colorado until the space space. at on is generated terminated As tenant, existing an revenue fourth additional in remaining transaction and XXXX. state. a this quarter rental the an September of to feet occupy vacant X, the an of $XXX,XXX occupancy of and to quarter income prior net XXXX January expansion on our results. a

of feet square benefited X, X, space. begin from expansion signed in That tenant’s Sorrento XXXX, also feet XXXX, we lease for increase renewal of will the Mesa at rent XX,XXX mentioned. that December on on And Jamie XX,XXX for space. July for the square lease straight-line We September the renewal

reasons the calculations We a line GAAP cash For of $XXX,XXX in which $X.X was third quarter core in well quarter due our reporting to pay than for third from minimal lower costs of down costs. our interest higher the that share, $X.XX as reserves. lease NOI. renewal lower We were per to was as the to added on for $X.X $XX existing or credit $XX.X NOI quarter. decision straight-line execution marginally provision our date, reported The the we AR million FFO which totaled recorded approximately space purposes, and higher adjusted G&A interest that the same our million second million as million of

indicated leasing our or Due first was our dividend Jamie some leasing to quarter. of paid AFFO we activity had fourth the the previously impact could coverage, significant that some elevated leasing commissions $X.XX of AFFO the quarter numbers XXXX. per continue and return of in quarter we the around as or the of from relative quarter we XXXX as million see expected quarter-to-quarter. for one quarter, move Should in earlier, size we occur will third of to mentioned third $X.X any portfolio to Our share

Our last third quarter same-store negative was cash versus X.X% third quarter the year. NOI

the a later I rents period the new just free balance renewal mentioned, the Denver as will for the begin, until increase cash Tech and Mesa NOI Mesa in not AECOM increased as lease NOI While Denver and rates, to tenant a is not significantly benefit start significant cash GAAP Tech year. tenant of rent did under this XXXX Sorrento the at due lease the Sorrento at of

to are NOI Diego and As expecting the markets we due largest cash XXXX. The a decrease the growth to return to contribute positive QX to beginning in result, occupancy. Phoenix lower San same-store

sheet. Moving to balance our on

Our cash and totaled million. restricted cash at $XX September XX

our As decided of I by quarter. to million earlier pay in credit mentioned, the line down we $XX

debt million. was September Our $XXX total at XX

fixed. to average and debt had X.X total restricted our quarter cash Our weighted XX% was net effectively debt, years, debt EBITDA, of a our end, of times. At including was X.X maturity

debt maturity XXXX one no XXXX. in have and maturities May We only of in

have in year low expect press as refinancing properties Last, We opportunities a these XXXX we have have provided our updated release. to guidance ample relative leverage. of level full an

press COVID-XX on pleased As raised have the of range bad focus, our is business our our collections of ranges in detail impact balance main with high covers for comes in been here. therefore, highlight of more our will and The our updates execution guidance estimates have guidance the The more of the provisions. XXXX and, year. guidance driver rate I we into debt of release than revised

the was of debts quarter balance X.X% than less our for of change also we As FFO expectations provision renewal based operating substantially revenue. general now for have The total the income, the our and and was revised the Guidance higher to X.X%, bad Mesa Based for abatements we announced net year lowered our from at at all rents increased. guidance on third X.X% NOI significant have assumptions, been X% operating provision Sorrento to previously these lease on core same-store cash uncollectible rent impact provision. reflects rates.

and FFO full our core Our $X.XX December for is the original estimates revised year pre-COVID ending that levels It between $X.XX these XX, guidance per XXXX. worth exceeded noting guidance. share

Our is per $X.XX and XXXX share between $X.XX. guidance QX FFO for core implied

space termination from benefited the main that lower X, the expectation not until drivers Cherry termination is the Creek January State the of that income, quarter fee have the fourth quarter will third of income XXXX. One for not will the whereas Colorado the fee quarter behind that fourth occupy and

concludes other also lower. open move-outs the bring up a will and That have will remarks, known We questions. Operator? prepared for few occupancy line discussed which QX, we in our previously

Operator

you. Thank

question first We Stevenson question session answer will ahead. comes Our the now begin Instructions] and from Please go Rob from [Operator Janney.

Rob Stevenson

spend end, tenanting Guys. talking up cost Tony, the your to comments that just we at quarter first should be follow on fourth there quarter, how were the about? you viewing significant

Tony Maretic

question. Good Rob. morning, Good

don’t we currently, have QX, any significant So TIs progress. in

so not QX in we’re expecting costs And TIs. significant from

some mentioned that the QX. and leasing commissions to activity if Jamie in However, of QX comes fruition impacted leasing could be

little have those so QX a unknown – impact So QX. that significant. are this at are a because hasn’t those they’re an if activity large, known bit on significant not They’re they just point. But leases, of and today It could been concluded. because

Rob Stevenson

how leasing sort guys versus you potentially guys the is commission these wanting about the of tenants leases sort matrix out days? and uncertainty Okay. are of And How given trade-off as tenants versus sort improvements of that smaller with longer-term TI and shorter-term leases? cost you thinking have discussions flushing

Jamie Farrar

a that’s here. Rob, good question, Jamie Yes, it’s

tenants, a the as the to can across think a particularly making ones, I kick lot on board, decisions. of larger trying general are macro theme

a long-term quarter-after-quarter, flow, been thing secure stable the so and can And is our from cash consistently said this that’s do best focus. and we perspective, we’ve

better that, on each and and the kicking them alternatives these and work better our is would continuing you moving and prepared having to overall a that? is do said evaluate we give to stability, to preference something deal flow, we time transactions they’re Now at the But consider. were with down cash Absolutely. be sure, of alternative locking long-term if your and days out will some can to for that’s

Rob Stevenson

you sort then size as now talked with recently bought down illiquidity, this implied well? size-wise, think in year much the $X how stock renewed X% shrink you about to the market Jamie, do liquidity you smaller company? million, at if about – around and your or change, you about that the $XXX Board and But guys authorization. How versus and And that repurchases continue that the is of go you rate you given to Okay. future cap earlier are equity if cap matrix how thinking back

Jamie Farrar

mean, And we we Rob, conversation things that we’re a number to drive ultimately we’re at going think do can that I that. happy our there’s our a at not It’s been robust where Board meetings. with all, price is. share on focused of is

And our to point, the dry end into continue large the evaluate you liquidity, base possible, year, next keeping it’s a we as year, powder. So making so priority. at it. same as mentioned, of sure having keeping the equity as going But we’re

and as liquidity plan. we really large one can It’s So under a we’re we haven’t any base at. bought equity stock tool that’s today available, as our looking as of keeping But top as that we factoring priority. and it’s are a

Rob Stevenson

Okay. Thanks guys, appreciate it.

Jamie Farrar

Thanks, Rob.

Operator

Davidson. The ahead. next question comes from Barry Oxford go from Please D.A.

Barry Oxford

looking of Great, guys. also we Tony, at a that how rent, is to When question a about ramp? how line forward? going And item that straight-line for going you. should we’re think

Tony Maretic

Yes.

of rent that in see So balance good guidance provided we some press Barry. the for kind I the outlines of question, that you’ll see straight-line release the where year.

to want you bit little to... If look forward a

Barry Oxford

talking I’m yes. I’m XXXX, Yes, about – at looking as

Tony Maretic

at related come to you’re expected to Yes, because are paying that Yes.XXXX. that, Mesa. now They start right rent straight-line December. big at down least in rent seeing the adjustments Sorrento

paying they that rent, and as offset our will and their soon it rent come will And higher base as straight-line down, rent up. go start so

pay that my So in which that that I which expect other the up. our cash increase for of going is They’re me, to And an pardon same-store to AECOM comment about. with lease is – rent why QX. sales, starting rents beginning is Denver are I XXXX. respect at is likewise And one Tech, the was talked in

So be roughly, straight-line in calculation in cut rough talking numbers, that if you’re rent half expect XXXX. to

Barry Oxford

Perfect. it. Got

on how opportunities seeing rates to not acquisitions or And you question sense. for are office, bad. that little cap you makes And theories and Jamie. about then couple and the different are you look, one the one cap Now markets? a at comes When it buy at a cap rates? effect of that But good when look that can have more rates in but seeing our office, moved you really the you, a absolutely Barry,

Jamie Farrar

rates right of It’s numbers, interesting if that what’s of just major in kind thoughts at markets, the and really assets a are that’s happening factor the look the dynamic – around say you the When purely haven’t cap And around now, look I an transacting. think moved. sort you’d deals at Barry. valuations you

So And low-risk are really seeing still seeing you’re science of rates. where you’re value assets seeing prevalent, a that attractive then not core you’re add. and or you at wide high-quality, pretty plus ones pretty trading transactions being life cap office in very lot got gap of kind a

there’s a think, so there. I bid-ask And spread still,

So in XXXX seeing today. better acquisitions, just some aren’t We beyond. compelling going see I probably in terms think views our really you’re opportunities to of and own opportunities on

Barry Oxford

for thanks Great, color, the guys.

Jamie Farrar

welcome. You’re

Operator

Instructions] go Michael Carroll from ahead. from comes Please The question Markets. next RBC [Operator Capital

Michael Carroll

thanks. is you the Yes, Research or renewal you remarks, the talked XXXX? which large Point? now. that? that discussions I of color tenant expect Was with about expirations about? Jamie, that are prepared we Can Florida in Carillon having right some that that guess, Park additional at in lease provide a some your on we you’re talking guess, one I

Jamie Farrar

highlighted up. but Lake really dialogue No having we’re I think certainty is question, and that round can indication tenant. the own That’s the gave a a sorry, Vista, put to we’re as we’ve looking down which entire if you with it’s someone while I a is is my XX,XXX who one one going vacancy which for two. tenant And long-term event. tenant that’s feeling going tenant, at I I’m good, potentially it I mentioned, we’re about been which kind block the to Mesa, out first of one that breaking – it take that significant on get our as Sorrento lease a So a an to ultimately for summarized, we’ve opposed comes right science though, get there, into build-out. and it the that QX the second well life investment with was it Mike, renewal. as other you Ally A good for on Financial. basically got together, at a our And asked feet life science will piece,

sooner we’re that’s but transaction it’s we probably And it discussions. call XXXX, if our we’ve it together, I said so very on is than if first in think we’re about. in early comes come where that think possible together a it’s And the excited little comes that, that together, one time that something could actively

Michael Carroll

can a the believe you discussions in bit And had Point. and talk a expirations are you how about then Research larger XXXX? little going? I I Park two Florida you Carillon have mean, those

Tony Maretic

Mike, that. I’ll answer

can Carillon, have So have just at at there’s another expiry. having next XX,XXXX we to Research nothing yes, feet constructive discussions longer, short we has XX,XXX The a that has Florida August bit both discussions expires May this end kind we’re And quo, been that discussions, But call. update. hoping little XXXX. of Park We as that the then a the on and square constructive say them. answer at And reminder, of have a taking update the are no is the but an of point, we’re status on of just one it’s it concluded.

Michael Carroll

guess, some have, made tenants of expected square on little expiring large I retention next then, and a what’s discussions? lease that you those of those excluding year. feet or And XXX,XXX Can bit progress where mean, kind those guess, Okay. about, you’ve I I ratio are the you two what, about expirations, talk

Tony Maretic

Yes, sure.

of mentioned, year. our at We We I Research of It’s I XX. end take December through at feet. stats. year, – large right departing That’s building. to buildings. one at square occupancy foot Florida we’ve expiry in we’ll square end at it tenant That’s the subtenant all leased, next But Park, of So as is drive our the call XXX,XXX of main used year, the ingenuity the the and ones. XX,XXX have covered all of think basically the the the one the do

last frankly, kind already get feet. the renewal larger the of that backfill – budgeting expecting That’s So – Everything we’re and expect else would is, our any similar we’re and try to we’ve leases. than on XX,XXX the and to I course, of leasing actively probably feet just are be that. to completed of rest months budgeting of normal had XX square XX,XXX that’s historically process, that we and we’ve of back the our renewal space square rates have rates space actually to

Michael Carroll

for I Okay. had, XXXX, in going your And obviously, quarters, how XXXX. you expectations expectations I you Tony, should the which mean, know, few we reduced past bad bad about think moving year? mean, I debt in that with forward? be historical pretty we line to kind the that the you from more run estimates going those Or of rate? are it of beginning had Is into in conservative away

Tony Maretic

got time we I reason frame think conservative the became more the is shortened.

my short out we answer a is I range be, lower there’s go even lot we think election, QX, have longer still to wide. here, it and of so of don’t range. clarity, until in a yes. think And would would lens, there. quite that with But be out expect have QX, term, the we in the there’s I a possibilities unknowns Until I vaccine, frankly, the just

further when outlook. so the maintain think a conservative I go, guidance, provide And out we we do we’ll likely,

we but a don’t have just – just good conservative So QX more have because will set, clarity. that’s likely

Jamie Farrar

that, some put Mike. though, around to ranges Just

minimal I in some we was wide pretty the and height right loss. ranges bad think when had that the we great guidance, collections initially debt gave of with pandemic, this of out only proved our provisions we’ve had overall

next was wide But you tenant when be as pandemic. finalizing think as we probably that in we’re still I So range it what tenant. at height going kind isn’t look think of into the year, the of by to

overall feeling we’re seeing. about We’re better what

here. the to without FFO feeling and medium any reunderwritten equity delve term how raises far own kind we’ve about good, and each or future base, of good through our the we’re about long substantial utilization starting things levels, them. ability feeling drive our And tenant to better sort over come we’re are as of as back growth of frankly, to growth feeling We’re assets about core our as additional

of And unlock we tenants help flow, to looking of kind a cash is what assets, what at time lot drive do so our our internally and today. focus we’ve at that’s and value can spent and our kind of

Michael Carroll

Great, thank you.

Operator

As back Mr. conclude. questions, call no the Farrar will over I additional there to turn to are

Jamie Farrar

please for free us out we Goodbye. questions, miss today. reach Thanks to your feel to directly. joining If did any of

Operator

That conference for Thanks now concluded. presentation. my taking

You may now disconnect.

City Office REIT (CIO) 5 Nov 202020 Q3 Earnings call transcript