City Office REIT - 10-Q quarterly report FY2022 Q3

City Office REIT - 10-Q quarterly report FY2022 Q3

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2025-11-162026-11-160.000450.00020.0002250.0001250.0002150.000125falseQ3--12-310001593222BCAs of September 30, 2022, the Debt Service Coverage Ratio (“DSCR”) covenant for FRP Ingenuity Drive was not met, which triggered a ‘cash-sweep’ event that will begin in Q4 2022 where excess funds will be held in escrow to fund future tenant improvement expenses of current vacant space.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, the 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.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.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 included an accordion feature that allowed the Company to borrow up to $500 million, subject to customary terms and conditions. On November 16, 2021, the Company entered into an Amended and Restated Credit Agreement for the Unsecured Credit Facility that provides for commitments of up to $300 million. Combined with the Company’s existing five-year Term Loan, the total authorized borrowings increased from $300 million to $350 million. The Unsecured Credit Facility matures in November 2025 and may be extended 12 months 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 125 to 225 basis points depending upon the Company’s consolidated leverage ratio. As of September 30, 2022, the Unsecured Credit Facility had $185.0 million drawn and a $4.2 million letter of credit to satisfy escrow requirements for a mortgage lender. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.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 3 and 4 below.As of September 30, 2022, the one-month LIBOR rate was 3.14%.In June 2022, the loan balance of $16.8 million was repaid in full. 0001593222 2021-01-01 2021-12-31 0001593222 2022-01-01 2022-09-30 0001593222 2021-01-01 2021-09-30 0001593222 2021-07-01 2021-09-30 0001593222 2022-07-01 2022-09-30 0001593222 2021-12-31 0001593222 2022-09-30 0001593222 2021-04-01 2021-06-30 0001593222 2021-01-01 2021-03-31 0001593222 2022-04-01 2022-06-30 0001593222 2022-01-01 2022-03-31 0001593222 2022-05-04 0001593222 2019-05-02 0001593222 2022-11-02 0001593222 2020-08-05 0001593222 2020-03-09 0001593222 2020-12-31 0001593222 2021-09-30 0001593222 2022-03-31 0001593222 2022-06-30 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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 September 30, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

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		(I.R.S. Employer
of incorporation or organization)		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.

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 November 2, 2022

was 39,718,767.

Table of Contents

City Office REIT, Inc.

Quarterly Report on Form

10-Q

For the Quarter Ended September 30, 2022

Table of Contents


PART I. FINANCIAL INFORMATION			1

Item 1. Financial Statements			1

Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021			1

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021			2

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021			3

Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2022 and 2021			4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021			6

Notes to Condensed Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17

Item 3. Quantitative and Qualitative Disclosures about Market Risk			27

Item 4. Controls and Procedures			27

PART II. OTHER INFORMATION			28

Item 1. Legal Proceedings			28

Item 1A. Risk Factors			28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28

Item 3. Defaults Upon Senior Securities			29

Item 4. Mine Safety Disclosures			29

Item 5. Other Information			29

Item 6. Exhibits			29

Signatures			31

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)


	September 30, 2022			December 31, 2021

Assets
Real estate properties
Land	$	200,686		$	204,801
Building and improvement		1,233,713			1,244,177
Tenant improvement		134,785			119,011
Furniture, fixtures and equipment		673			664

		1,569,857			1,568,653
Accumulated depreciation		(178,237	)		(157,356	)

		1,391,620			1,411,297

Cash and cash equivalents		22,012			21,321
Restricted cash		19,669			20,945
Rents receivable, net		39,700			30,415
Deferred leasing costs, net		22,060			20,327
Acquired lease intangible assets, net		58,580			68,925
Other assets		30,638			28,283

Total Assets	$	1,584,279		$	1,601,513

Liabilities and Equity
Liabilities:
Debt	$	676,116		$	653,648
Accounts payable and accrued liabilities		38,091			27,101
Deferred rent		8,921			11,600
Tenant rent deposits		7,014			6,165
Acquired lease intangible liabilities, net		9,602			10,872
Other liabilities		20,199			21,532

Total Liabilities		759,943			730,918

Commitments and Contingencies (Note 9)
Equity:
6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares authorized, 4,480,000 issued and outstanding as of September 30, 2022 and December 31, 2021		112,000			112,000
Common stock, $0.01 par value, 100,000,000 shares authorized, 39,718,767 and 43,554,375 shares issued and outstanding as of September 30, 2022 and December 31, 2021		397			435
Additional paid-in capital		435,086			482,061
Retained earnings		273,843			275,502
Accumulated other comprehensive income/(loss)		2,819			(382	)

Total Stockholders’ Equity		824,145			869,616
Non-controlling interests in properties		191			979

Total Equity		824,336			870,595

Total Liabilities and Equity	$	1,584,279		$	1,601,513

The accompanying notes are an integral part of these condensed consolidated financial statements

Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021

Rental and other revenues	$	45,522		$	44,889		$	135,871		$	124,369
Operating expenses:
Property operating expenses		17,412			15,180			50,736			43,477
General and administrative		3,506			7,900			10,575			13,768
Depreciation and amortization		15,555			14,648			47,072			44,017

Total operating expenses		36,473			37,728			108,383			101,262

Operating income		9,049			7,161			27,488			23,107
Interest expense:
Contractual interest expense		(6,582	)		(5,650	)		(18,311	)		(17,533	)
Amortization of deferred financing costs and debt fair value		(303	)		(267	)		(917	)		(869	)

		(6,885	)		(5,917	)		(19,228	)		(18,402	)
Net gain on sale of real estate property		—			—			21,658			47,400

Net income		2,164			1,244			29,918			52,105
Less:
Net income attributable to non-controlling interests in properties		(175	)		(378	)		(510	)		(760	)

Net income attributable to the Company		1,989			866			29,408			51,345
Preferred stock distributions		(1,855	)		(1,855	)		(5,565	)		(5,565	)

Net income/(loss) attributable to common stockholders	$	134		$	(989	)	$	23,843		$	45,780

Net income/(loss) per common share:
Basic	$	0.00		$	(0.02	)	$	0.56		$	1.05

Diluted	$	0.00		$	(0.02	)	$	0.55		$	1.04

Weighted average common shares outstanding:
Basic		41,351			43,554			42,838			43,478

Diluted		42,125			43,554			43,663			44,091

Dividend distributions declared per common share	$	0.20		$	0.15		$	0.60		$	0.45

The accompanying notes are an integral part of these condensed consolidated financial statements

Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021

Net income	$	2,164		$	1,244		$	29,918		$	52,105
Other comprehensive income:
Unrealized cash flow hedge gain/(loss)		1,055			(22	)		3,119			458
Amounts reclassified to interest expense		(121	)		150			82			439

Other comprehensive income		934			128			3,201			897

Comprehensive income		3,098			1,372			33,119			53,002
Less:
Comprehensive income attributable to non-controlling interests in properties		(175	)		(378	)		(510	)		(760	)

Comprehensive income attributable to the Company	$	2,923		$	994		$	32,609		$	52,242

The accompanying notes are an integral part of these condensed consolidated financial statements

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			Retained earnings			Accumulated other comprehensive (loss)/income			Total stockholders’ equity			Non-controlling interests in properties			Total equity

Balance—December 31, 2021		4,480	$	112,000		43,554		$	435		$	482,061		$	275,502		$	(382	)	$	869,616		$	979		$	870,595
Restricted stock award grants and vesting		—		—		—			—			972			(68	)		—			904			—			904
Common stock dividend distribution declared		—		—		—			—			—			(8,711	)		—			(8,711	)		—			(8,711	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855	)		—			(1,855	)		—			(1,855	)
Contributions		—		—		—			—			—			—			—			—			3			3
Distributions		—		—		—			—			—			—			—			—			(254	)		(254	)
Net income		—		—		—			—			—			24,520			—			24,520			171			24,691
Other comprehensive income		—		—		—			—			—			—			1,754			1,754			—			1,754

Balance—March 31, 2022		4,480	$	112,000		43,554		$	435		$	483,033		$	289,388		$	1,372		$	886,228		$	899		$	887,127

Restricted stock award grants and vesting		—		—		171			2			1,020			(117	)		—			905			—			905
Common stock repurchased		—		—		(395	)		(4	)		(4,996	)		—			—			(5,000	)		—			(5,000	)
Common stock dividend distribution declared		—		—		—			—			—			(8,580	)		—			(8,580	)		—			(8,580	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855	)		—			(1,855	)		—			(1,855	)
Distributions		—		—		—			—			—			—			—			—			(180	)		(180	)
Net income		—		—		—			—			—			2,899			—			2,899			164			3,063
Other comprehensive income		—		—		—			—			—			—			513			513			—			513

Balance—June 30, 2022		4,480	$	112,000		43,330		$	433		$	479,057		$	281,735		$	1,885		$	875,110		$	883		$	875,993

Restricted stock award grants and vesting		—		—		—			—			1,075			(83	)		—			992			—			992
Common stock repurchased		—		—		(3,612	)		(36	)		(45,046	)		—			—			(45,082	)		—			(45,082	)
Common stock dividend distribution declared		—		—		—			—			—			(7,943	)		—			(7,943	)		—			(7,943	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855	)		—			(1,855	)		—			(1,855	)
Contributions		—		—		—			—			—			—			—			—			27			27
Distributions		—		—		—			—			—			—			—			—			(894	)		(894	)
Net income		—		—		—			—			—			1,989			—			1,989			175			2,164
Other comprehensive income		—		—		—			—			—			—			934			934			—			934

Balance—September 30, 2022		4,480	$	112,000		39,718		$	397		$	435,086		$	273,843		$	2,819		$	824,145		$	191		$	824,336

Table of Contents


	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

Restricted stock award grants and vesting		—		—		157		2		523		(76	)		—			449			—			449
Common stock dividend distribution declared		—		—		—		—		—		(6,533	)		—			(6,533	)		—			(6,533	)
Preferred stock dividend distribution declared		—		—		—		—		—		(1,855	)		—			(1,855	)		—			(1,855	)
Contributions		—		—		—		—		—		—			—			—			2			2
Distributions		—		—		—		—		—		—			—			—			(204	)		(204	)
Net income		—		—		—		—		—		1,662			—			1,662			190			1,852
Other comprehensive income		—		—		—		—		—		—			100			100			—			100

Balance—June 30, 2021		4,480	$	112,000		43,554	$	435	$	480,629	$	(139,358	)	$	(1,191	)	$	452,515		$	909		$	453,424

Restricted stock award grants and vesting		—		—		—		—		716		(50	)		—			666			—			666
Common stock dividend distribution declared		—		—		—		—		—		(6,533	)		—			(6,533	)		—			(6,533	)
Preferred stock dividend distribution declared		—		—		—		—		—		(1,855	)		—			(1,855	)		—			(1,855	)
Contributions		—		—		—		—		—		—			—			—			10			10
Distributions		—		—		—		—		—		—			—			—			(536	)		(536	)
Net income		—		—		—		—		—		866			—			866			378			1,244
Other comprehensive income		—		—		—		—		—		—			128			128			—			128

Balance—September 30, 2021		4,480	$	112,000		43,554	$	435	$	481,345	$	(146,930	)	$	(1,063	)	$	445,787		$	761		$	446,548

The accompanying notes are an integral part of these condensed consolidated financial statements

Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine Months Ended September 30,
	2022			2021

Cash Flows from Operating Activities:
Net income	$	29,918		$	52,105
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		47,072			44,017
Amortization of deferred financing costs and debt fair value		917			869
Amortization of above and below market leases		70			281
Straight-line rent/expense		(6,697	)		428
Non-cash stock compensation		2,887			1,976
Receipts from sales-type lease		43,549			—
Net gain on sale of real estate property		(21,658	)		(47,400	)
Changes in non-cash working capital:
Rents receivable, net		(3,895	)		635
Other assets		(158	)		(560	)
Accounts payable and accrued liabilities		6,977			8,558
Deferred rent		(2,679	)		3,468
Tenant rent deposits		849			1,354

Net Cash Provided By Operating Activities		97,152			65,731

Cash Flows (to)/from Investing Activities:
Additions to real estate properties		(28,533	)		(12,431	)
Acquisition of real estate		—			(43,256	)
Net proceeds from sale of real estate		—			122,103
Deferred leasing costs		(7,698	)		(6,830	)

Net Cash (Used In)/Provided By Investing Activities		(36,231	)		59,586

Cash Flows to Financing Activities:
Proceeds from borrowings		82,000			106,000
Repayment of borrowings		(60,472	)		(180,806	)
Dividend distributions paid to stockholders		(31,567	)		(25,117	)
Repurchases of common stock		(50,082	)		—
Distributions to non-controlling interests in properties		(1,328	)		(960	)
Shares withheld for payment of taxes on restricted stock unit vesting		(87	)		(216	)
Contributions from non-controlling interests in properties		30			12

Net Cash Used In Financing Activities		(61,506	)		(101,087	)

Net (Decrease)/ Increase in Cash, Cash Equivalents and Restricted Cash		(585	)		24,230
Cash, Cash Equivalents and Restricted Cash, Beginning of Period		42,266			45,951

Cash, Cash Equivalents and Restricted Cash, End of Period	$	41,681		$	70,181

Reconciliation of Cash, Cash Equivalents and Restricted Cash:
Cash and Cash Equivalents, End of Period		22,012			17,697
Restricted Cash, End of Period		19,669			52,484

Cash, Cash Equivalents and Restricted Cash, End of Period	$	41,681		$	70,181

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	16,660		$	17,568
Purchase of additions in real estate properties included in accounts payable	$	10,568		$	4,804
Purchase of deferred leasing costs included in accounts payable	$	1,904		$	1,351

The accompanying notes are an integral part of these condensed consolidated financial statements

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, 2021.

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,

Reference Rate Reform (Topic 848) (“ASU

2021-01”).

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. In October 2022, the FASB issued a tentative decision which would amend the date the guidance will be available to December 31, 2024. The new standard applies prospectively to contract modifications and hedging relationships and may be 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 consolidated financial statements and may elect optional expedients in future periods as reference rate reform activities occur.

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In July 2021, the FASB issued ASU

No. 2021-05

(“ASU

2021-05”),

Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. ASU

2021-05

requires lessors to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease if the lease would have been classified as a sales-type lease or a direct financing lease under the

pre-ASU

classification criteria, and sales-type or direct financing classification would result in a Day 1 loss. The ASU is effective for fiscal years beginning after December 15, 2021. The ASU may be early adopted and can be applied either retrospectively to leases that commenced or were modified on or after the adoption of ASU

No. 2016-02

or prospectively to leases that commence or are modified on or after the date that an entity first applies the amendments. The Company adopted ASU

2021-05

prospectively on January 1, 2022. The adoption of ASU

2021-05

did not have a material impact on the Company’s consolidated financial statements.

3. Real Estate Investments

Acquisitions

During the nine months ended September 30, 2022 and 2021 the Company acquired the following properties:


Property	Date Acquired		Percentage Owned
5910 Pacific Center and 9985 Pacific Heights		May 2021		100	%

The foregoing acquisition was accounted for as an asset acquisition.

The following table summarizes the Company’s allocation of the purchase price of assets acquired and liabilities assumed during the nine months ended September 30, 2021 (in thousands):


	5910 Pacific Center and 9985 Pacific Heights

Land	$	37,294
Building and improvement		2,979
Tenant improvement		917
Lease intangible assets		2,469
Other assets		19
Accounts payable and other liabilities		(319	)
Lease intangible liabilities		(103	)

Net assets acquired	$	43,256

Sale of Real Estate Property

During the first quarter of 2022, the sole tenant at the Lake Vista Pointe property exercised its lease option to purchase the building and the Company signed a purchase and sale agreement with the tenant. At the time the tenant exercised the option, the Company reassessed the lease classification of the lease, in accordance with ASC 842 – Leases, and determined that the lease should be reclassified from an operating lease to a sales-type lease. This reclassification resulted in a gain on sale of $21.7 million net of disposal related costs. On June 15, 2022, the Company sold the Lake Vista Pointe property in Dallas, Texas for a gross sales price of $43.8 million.

February 10, 2021, the Company sold the Cherry Creek property in Denver, Colorado for a gross sales price of $

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.

Table of Contents

4. Lease Intangibles

Lease intangibles and the value of assumed lease obligations as of September 30, 2022 and December 31, 2021 were comprised of the following (in thousands):


	Lease Intangible Assets												Lease Intangible Liabilities
September 30, 2022	Above Market Leases			In Place Leases			Leasing Commissions			Total			Below Market Leases			Below Market Ground Lease			Total

Cost	$	19,478		$	80,788		$	35,710		$	135,976		$	(16,531	)	$	(138	)	$	(16,669	)
Accumulated amortization		(9,298	)		(50,044	)		(18,054	)		(77,396	)		7,016			51			7,067

	$	10,180		$	30,744		$	17,656		$	58,580		$	(9,515	)	$	(87	)	$	(9,602	)


	Lease Intangible Assets												Lease Intangible Liabilities
December 31, 2021	Above Market Leases			In Place Leases			Leasing Commissions			Total			Below Market Leases			Below Market Ground Lease			Total

Cost	$	21,147		$	93,761		$	39,345		$	154,253		$	(16,743	)	$	(138	)	$	(16,881	)
Accumulated amortization		(9,627	)		(56,987	)		(18,714	)		(85,328	)		5,961			48			6,009

	$	11,520		$	36,774		$	20,631		$	68,925		$	(10,782	)	$	(90	)	$	(10,872	)

The estimated aggregate amortization expense for lease intangibles for the next five years and in the aggregate are as follows (in thousands):


2022	$	2,542
2023		9,027
2024		6,695
2025		6,507
2026		6,461
Thereafter		17,746

	$	48,978

5. Debt

The following table summarizes the indebtedness as of September 30, 2022 and December 31, 2021 (dollars in thousands):


Property	September 30, 2022		December 31, 2021		Interest Rate as of September 30, 2022 (1)			Maturity
Unsecured Credit Facility (3)(4)	$	185,000	$	142,000		LIBOR +1.30	% (2)		November 2025
Term Loan (3)		50,000		50,000		LIBOR +1.25	% (2)		September 2024
Mission City		47,000		47,000		3.78	%		November 2027
Canyon Park (5)		39,853		40,381		4.30	%		March 2027
Circle Point		39,598		39,650		4.49	%		September 2028
190 Office Center		39,071		39,581		4.79	%		October 2025
SanTan		32,309		32,807		4.56	%		March 2027
Intellicenter		31,447		31,883		4.65	%		October 2025
The Quad		30,600		30,600		4.20	%		September 2028
FRP Collection		26,974		27,535		3.10	%		September 2023

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Property	September 30, 2022			December 31, 2021			Interest Rate as of September 30, 2022 (1)			Maturity
2525 McKinnon		27,000			27,000			4.24	%	April 2027
Greenwood Blvd		21,529			21,920			3.15	%	December 2025
Cascade Station		21,291			21,581			4.55	%	May 2024
5090 N. 40 th St		20,917			21,233			3.92	%	January 2027
AmberGlen		20,000			20,000			3.69	%	May 2027
Central Fairwinds		16,383			16,707			3.15	%	June 2024
FRP Ingenuity Drive (6)		16,240			16,457			4.44	%	December 2024
Carillon Point		14,877			15,185			3.10	%	October 2023
Lake Vista Pointe ( 7 )		—			17,018			—		—

Total Principal		680,089			658,538
Deferred financing costs, net		(4,198	)		(5,223	)
Unamortized fair value adjustments		225			333

Total	$	676,116		$	653,648

(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 3 and 4 below.

(2)	As of September 30, 2022, the one-month LIBOR rate was 3.14%.

(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.

(4)

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 included an accordion feature that allowed the Company to borrow up to $500 million, subject to customary terms and conditions. On November 16, 2021, the Company entered into an Amended and Restated Credit Agreement for the Unsecured Credit Facility that provides for commitments of up to $300 million. Combined with the Company’s existing five-year Term Loan, the total authorized borrowings increased from $300 million to $350 million. The Unsecured Credit Facility matures in November 2025 and may be extended 12 months 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 125 to 225 basis points depending upon the Company’s consolidated leverage ratio. As of September 30, 2022, the Unsecured Credit Facility had $185.0 million drawn and a $4.2 million letter of credit to satisfy escrow requirements for a mortgage lender. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.

(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, the 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)	As of September 30, 2022, the Debt Service Coverage Ratio (“DSCR”) covenant for FRP Ingenuity Drive was not met, which triggered a ‘cash-sweep’ event that will begin in Q4 2022 where excess funds will be held in escrow to fund future tenant improvement expenses of current vacant space.

(7)	In June 2022, the loan balance of $16.8 million was repaid in full.

The scheduled principal repayments of debt as of September 30, 2022 are as follows (in thousands):


2022	$	1,623
2023		48,150
2024		108,480
2025		276,997
2026		4,536
Thereafter		240,303

	$	680,089

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

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Level 3 Inputs – unobservable inputs

In September 2019, the Company entered into the Interest Rate Swap for a notional amount of $

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 September 30, 2022, the Interest Rate Swap was reported as an asset at its fair value of approximately $2.8 million, which is included in other assets on the Company’s condensed consolidated balance sheet. For the nine months ended September 30, 2022, approximately $0.1 million of realized losses were reclassified to interest expense due to payments made to

or received from

the swap counterparty. For the nine months ended September 30, 2021, approximately $0.4 million of realized losses were reclassified to interest expense due to payments made to the swap counterparty.

As of December 31, 2021, the Interest Rate Swap was reported as a liability at its fair value of approximately $0.4 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.

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 $420.4 million and $478.1 million (compared to a carrying value of $445.1 million and $466.5 million) as of September 30, 2022, and December 31, 2021, 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 nine months ended September 30, 2022 and 2021, the Company earned $0.4 million and $0.5 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.

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The Company recognized fixed and variable lease payments for operating leases for the three and nine months ended September 30, 2022 and the three and nine months ended September 30, 2021 as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Fixed payments	$	39,117	$	38,963	$	115,746	$	106,825
Variable payments		6,067		5,868		18,687		17,404

	$	45,184	$	44,831	$	134,433	$	124,229

The Company recognized interest income of $0.6 million and variable lease payments of $0.2 million for the sales-type lease at the Lake Vista Pointe property for

the

nine months ended September 30, 2022.

Future minimum lease payments to be received by the Company as of September 30, 2022 under

non-cancellable

operating leases for the next five years and thereafter are as follows (in thousands):


2022	$	31,795
2023		121,218
2024		111,347
2025		99,896
2026		91,616
Thereafter		285,667

	$	741,539

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 September 30, 2022, these leases had remaining terms of under one year to 66 years and a weighted average remaining lease term of 50 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):


	September 30, 2022		December 31, 2021
Right-of-use asset – operating leases	$	13,734	$	14,114
Lease liability – operating leases	$	8,937	$	9,160
Right-of-use asset – financing leases	$	10,117	$	10,308
Lease liability – financing leases	$	1,463	$	1,425

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 6.2% 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.

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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 expenses for the three and nine months ended September 30, 2022 were $0.3 million and $0.8 million, respectively. Operating lease expenses for the three and nine months ended September 30, 2021 were $0.2 million and $0.7 million, respectively. Financing lease expenses for the three and nine months ended September 30, 2022 were $0.1 million and $0.3 million, respectively. Financing lease expenses for the three and nine months ended September 30, 2021 were nominal.

Future minimum lease payments to be paid by the Company as a lessee for operating and financing leases as of September 30, 2022 for the next five years and thereafter are as follows (in thousands):


	Operating Leases			Financing Leases
2022	$	83		$	9
2023		836			12
2024		770			7
2025		770			8
2026		724			8
Thereafter		27,151			6,946

Total future minimum lease payments		30,334			6,990
Discount		(21,397	)		(5,527	)

Total	$	8,937		$	1,463

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 September 30, 2022, 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.

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10. Stockholders’ Equity

Share Repurchase Plan

In September 2022, the Company completed the full August 2020 share repurchase plan. 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.

During the nine months ended September 30, 2022, the Company completed the repurchase of 4,006,897 shares of its common stock for approximately $50.0 million. There were no shares repurchased during the nine months ended September 30, 2021.

Common Stock and Common Unit Distributions

On September 15, 2022, the Company’s Board of Directors approved and the Company declared a cash dividend distribution of $0.20 per common share for the quarterly period ended September 30, 2022. The dividend was paid subsequent to quarter end on October 21, 2022 to common stockholders and common unitholders of record as of the close of business on October 7, 2022, resulting in an aggregate payment of $7.9 million.

Preferred Stock Distributions

On September 15, 2022, the Company’s Board of Directors approved and the Company declared a cash dividend distribution 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 September 30, 2022. The dividend was paid subsequent to quarter end on October 21, 2022 to the holders of record of Series A Preferred Stock as of the close of business on October 7, 2022.

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”). On May 4, 2022, the Company’s stockholders approved an amendment to the Equity Incentive Plan increasing the maximum number of shares of common stock that may be issued under the Equity Incentive Plan from 2,263,580 shares to 3,763,580 shares. To the extent an award granted under the Equity Incentive Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards.

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 of the year of grant (the “Measurement Period”) relative to the TSR of a defined peer group list of other US Office REIT companies (the “Peer

Group”) as of the first trading date in the year of grant.

The payouts under the Performance RSU Awards are evaluated on a sliding scale as follows: TSR below the 30th percentile of the Peer Group would result in a 50% payout; TSR at the 50th percentile of the Peer Group would result in a 100% payout; and TSR at or above the 75th percentile of the 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.

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The following table summarizes the activity of the awards under the Equity Incentive Plan for the three and nine months ended September 30, 2022:


	Number of RSUs			Number of Performance RSUs

Outstanding at December 31, 2021		342,159			217,500
Granted		237,986			90,000
Issuance of dividend equivalents		3,902			—

Outstanding at March 31, 2022		584,047			307,500
Issuance of dividend equivalents		7,451			—
Vested		(177,812	)		—

Outstanding at June 30, 2022		413,686			307,500
Issuance of dividend equivalents		6,185			—

Outstanding at September 30, 2022		419,871			307,500

The following table summarizes the activity of the awards under the Equity Incentive Plan for the three and nine months ended September 30, 2021:


	Number of RSUs			Number of Performance RSUs

Outstanding at December 31, 2020		332,435			97,500
Granted		169,500			120,000
Issuance of dividend equivalents		5,139			—

Outstanding at March 31, 2021		507,074			217,500
Issuance of dividend equivalents		6,884			—
Vested		(177,038	)		—

Outstanding at June 30, 2021		336,920			217,500
Issuance of dividend equivalents		3,963			—

Outstanding at September 30, 2021		340,883			217,500

During the nine months ended September 30, 2022 and September 30, 2021, the Company granted the following restricted stock units (“RSUs”) and Performance RSU Awards to directors, executive officers and certain

non-executive

employees:

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	Units Granted				Fair Value (in thousands)		Weighted Average Grant Fair Value Per Share
	RSUs		Performance RSUs		Fair Value (in thousands)		Weighted Average Grant Fair Value Per Share

2022		237,986		90,000	$	5,753	$	17.54
2021		169,500		120,000		2,808		9.70

The RSU Awards will vest in three equal, annual installments on each of the first three anniversaries of the grant date. The Performance RSU Awards will vest on the last day of the three-year measurement period.

During the three months ended September 30, 2022 and September 30, 2021, the Company recognized net compensation expense for the RSUs and Performance RSU Awards as follows (in thousands):


	RSUs		Performance RSUs		Total
2022	$	652	$	340	$	992
2021		457		208		665

During the nine months ended September 30, 2022 and September 30, 2021, the Company recognized net compensation expense for the RSUs and Performance RSU Awards as follows (in thousands):


	RSUs		Performance RSUs		Total
2022	$	1,902	$	985	$	2,887
2021		1,377		599		1,976

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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 Financial Condition and Results of Operations,” 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;

•

increased interest rates, any resulting increase in financing or operating costs and the impact of inflation;

•

changes in local, regional, national and international economic conditions, including as a result of the ongoing coronavirus disease

(“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;

•

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;

•

our failure to successfully operate acquired properties and operations;

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•

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 maintain our qualification as a REIT for U.S. federal income tax purposes;

•

government approvals, actions and initiatives, including the need for compliance with environmental requirements, vaccine mandates 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, 2021 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, 2021 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 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 September 30, 2022, we owned 25 properties comprised of 60 office buildings with a total of approximately 6.0 million square feet of net rentable area (“NRA”). As of September 30, 2022, our properties were approximately 85.8% 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 Canyon Park, Superior Pointe, The Terraces and 2525 McKinnon properties have triple net leases. Certain tenants at AmberGlen, Block 23, Bloc 83, 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

Economic Environment and Inflation

Over the last quarter, the economic conditions in the U.S. and globally have deteriorated, primarily due to rising inflation. As inflation continued to reach new highs, it set off a chain reaction of events, beginning with the Federal Reserve taking and signaling severe tightening measures, interest rates rising across the yield curve, volatility and losses in the public equity and debt markets, and now increasing concerns that the U.S. economy may experience a recession. This evolving operating environment impacts our operating activities as:

•

business leaders may generally become more reticent to make large capital allocation decisions, such as entry into a new lease, given the uncertain economic environment;

•

our capital costs have increased due to higher interest rates and credit spreads, and private market debt financing is significantly more challenging to arrange; and

•

retaining and attracting new tenants has become increasingly challenging due to potential business layoffs, downsizing and industry slowdowns.

Despite the challenging economic environment, there is increasing evidence that many businesses have or will tighten up

in-person

work policies as economic conditions worsen. Many of these companies increased their workforce during the pandemic without increasing their available space. We expect these factors to help offset, at least partially, the recessionary headwinds to space demand.

COVID-19

Our business has been and is continuing to be impacted by the

COVID-19

pandemic. In addition, our business has been and is continuing to be impacted by tenant uncertainty regarding office space needs given the evolving remote working trends as a result of the

COVID-19

pandemic. Throughout the

COVID-19

pandemic, all of our buildings have remained open and continue to operate. We have adopted 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 third quarter 2022 was significantly lower than

pre-pandemic

usage. Usage of our assets in the near future depends on the duration of the pandemic, the continued implementation and effectiveness of

COVID-19

vaccines and other therapeutics 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 September 30, 2022, as a result of

COVID-19

or governmental or tenant actions in response thereto, 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.

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Leasing activity has been impacted by the

COVID-19

pandemic. 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 could impact the pricing and competitiveness for leasing office space in our markets.

We will continue to actively evaluate business operations and strategies to optimally position ourselves given current economic and industry conditions.

Business and Strategy

We focus on owning and acquiring office properties in our footprint of growth markets predominantly in the Sun Belt. Our markets generally possess 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 believe these characteristics have made our markets desirable, as evidenced by domestic net migration generally towards our geographic footprint. We utilize our management’s market-specific knowledge and relationships as well as the expertise of local real estate property and leasing managers to identify acquisition opportunities that we believe will offer cash flow stability and long-term value appreciation.

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. 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 rising interest rates and the increasing likelihood of a U.S. recession, 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 September 30, 2022, we owned 25 properties comprised of 60 office buildings with a total of approximately 6.0 million square feet of NRA in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, Raleigh, San Diego, Seattle and Tampa. The following table presents an overview of our portfolio as of September 30, 2022.


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 (25.3% of NRA)	Block 23		100.0	%		307		94.0	%	$	29.63	$	31.88	$	8,552
	Pima Center		100.0	%		272		43.7	%	$	27.99	$	27.99	$	3,324
	SanTan		100.0	%		267		46.3	%	$	31.60	$	31.60	$	3,899
	5090 N. 40 th St		100.0	%		176		96.1	%	$	31.93	$	31.93	$	5,386
	Camelback Square		100.0	%		172		77.9	%	$	33.87	$	33.87	$	4,533
	The Quad		100.0	%		163		100.0	%	$	31.45	$	31.76	$	5,126
	Papago Tech		100.0	%		163		86.1	%	$	23.57	$	23.57	$	3,302
Tampa, FL (17.5%)	Park Tower		94.8	%		479		88.6	%	$	27.45	$	27.45	$	11,643
	City Center		95.0	%		245		89.4	%	$	27.24	$	27.24	$	5,956
	Intellicenter		100.0	%		204		100.0	%	$	25.64	$	25.64	$	5,219
	Carillon Point		100.0	%		124		100.0	%	$	30.07	$	30.07	$	3,734
Denver, CO (13.4%)	Denver Tech		100.0	%		381		93.2	%	$	24.10	$	28.21	$	8,465
	Circle Point		100.0	%		272		82.6	%	$	19.51	$	33.38	$	4,383
	Superior Pointe		100.0	%		152		93.2	%	$	18.78	$	31.78	$	2,667
Orlando, FL (12.0%)	Florida Research Park		96.5	%		393		82.2	%	$	25.56	$	27.48	$	8,184
	Central Fairwinds		97.0	%		168		94.6	%	$	27.57	$	27.57	$	4,387
	Greenwood Blvd		100.0	%		155		100.0	%	$	24.25	$	24.25	$	3,760
Dallas, TX (9.8%)	190 Office Center		100.0	%		303		75.5	%	$	27.11	$	27.11	$	6,210
	The Terraces		100.0	%		173		99.0	%	$	38.45	$	58.45	$	6,569
	2525 McKinnon		100.0	%		111		94.8	%	$	29.98	$	48.98	$	3,165
Raleigh, NC (8.3%)	Bloc 83		100.0	%		495		79.8	%	$	37.32	$	37.41	$	14,752
Portland, OR (5.5%)	AmberGlen		76.0	%		203		98.4	%	$	23.55	$	26.45	$	4,695
	Cascade Station		100.0	%		128		100.0	%	$	28.82	$	30.73	$	3,691
San Diego, CA (4.7%)	Mission City		100.0	%		281		86.8	%	$	38.40	$	38.40	$	9,374
Seattle, WA (3.5%)	Canyon Park		100.0	%		207		100.0	%	$	23.17	$	27.17	$	4,791

Total / Weighted Average – September 30, 2022						5,994		85.8	%	$	28.40	$	31.29	$	145,767

(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 September 30, 2022 by (ii) 12.

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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. While we generally expect the trend of population and economic growth outperformance in our cities to continue, there is no way for us to predict whether these trends will continue, especially in light of inflation and rising interest rates as well as the potential changes in tax policy, fiscal policy and monetary policy. In addition, it is uncertain and impossible to estimate the potential impact that the

COVID-19

pandemic will have on the short- and long-term demand for office space in our markets.

Critical Accounting Policies and Estimates

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, 2021 included in our Annual Report on Form

10-K

for the year ended December 31, 2021 except for the adoption of Accounting Standards Update (“ASU”)

2021-05,

Leases (Topic 842) as outlined in Note 2 of the condensed consolidated financial statements.

Results of Operations

Comparison of Three Months Ended September 30, 2022 to Three Months Ended September 30, 2021

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 increased $0.6 million, or 1%, to $45.5 million for the three months ended September 30, 2022 compared to $44.9 million for the three months ended September 30, 2021. Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 in December 2021 contributed increases of $2.7 million, $2.7 million and $4.8 million, respectively. Offsetting these increases, the disposition of Sorrento Mesa in December 2021 and Lake Vista Pointe in June 2022 decreased revenue by $3.5 million and $1.1 million, respectively. Revenue also decreased at Park Tower by $5.0 million due to a termination fee recognized in the prior period associated with an early tenant departure. 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 $1.2 million, or 3%, to $36.5 million for the three months ended September 30, 2022, from $37.7 million for the three months ended September 30, 2021. General and administrative expenses decreased by $4.4 million over the prior period primarily due to a

one-time

$5.0 million bonus accrual incurred as a result of the Sorrento Mesa sale transaction announced during the third quarter of 2021. Further, the disposition of Sorrento Mesa and Lake Vista Pointe decreased total operating expenses by $2.1 million and $0.5 million, respectively. Offsetting these decreases, the acquisitions of Block 23, The Terraces and Bloc 83 in December 2021 contributed increases of $1.7 million, $1.8 million and $2.9 million, respectively. The remaining properties’ expenses decreased a combined $0.6 million 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 increased by $2.2 million, or 15%, to $17.4 million for the three months ended September 30, 2022, from $15.2 million for the three months ended September 30, 2021. Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 in December 2021 contributed increases of $0.7 million, $0.8 million and $1.2 million, respectively. An increase of $0.2 million was attributable to the Ingenuity Drive property within the Florida Research Park portfolio as that property was converted from a single tenant property where the tenant paid for its own operating expenses into a multi-tenant property where expenses are paid by the landlord and reimbursements are charged to the tenants. Offsetting these increases, the disposition of Sorrento Mesa and Lake Vista Pointe decreased property operating expenses by $0.8 million and $0.3 million, respectively. The remaining properties’ expenses increased a combined $0.4 million.

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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 decreased $4.4 million, or 56%, to $3.5 million for the three months ended September 30, 2022, from $7.9 million for the three months ended September 30, 2021. In the prior period, general and administrative expenses increased due to a

one-time

$5.0 million bonus accrual incurred as a result of the Sorrento Mesa sale transaction announced during the third quarter of 2021. Offsetting this decrease were higher stock-based compensation expense and higher professional fees.

Depreciation and Amortization.

Depreciation and amortization increased $1.0 million, or 6%, to $15.6 million for the three months ended September 30, 2022, from $14.6 million reported for the same period in 2021. Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 in December 2021 contributed increases of $1.0 million, $0.9 million and $1.8 million, respectively. Offsetting these increases, the disposition of Sorrento Mesa and Lake Vista Pointe decreased depreciation and amortization expense by $1.3 million and $0.2 million, respectively. Also contributing to the decrease, depreciation and amortization for Park Tower decreased by $0.5 million as a result of the accelerated depreciation for an early tenant departure in the prior period. The remaining properties’ depreciation expenses decreased a combined $0.7 million.

Other Expense (Income)

Interest Expense.

Interest expense increased $1.0 million, or 16%, to $6.9 million for the three months ended September 30, 2022, from $5.9 million for the three months ended September 30, 2021. The increase was primarily attributable to the increase in the amount drawn and interest rates on our floating rate debt.

Comparison of Nine Months Ended September 30, 2022 to Nine Months Ended September 30, 2021

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 increased $11.5 million, or 9%, to $135.9 million for the nine months ended September 30, 2022 compared to $124.4 million for the nine months ended September 30, 2021. Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 in December 2021 contributed increases of $7.6 million, $8.1 million and $12.2 million, respectively. Also contributing to this increase was Mission City which increased $0.9 million over the prior year due to higher occupancy. Offsetting these increases, the disposition of Cherry Creek in February 2021, Sorrento Mesa in December 2021 and Lake Vista Pointe in June 2022 decreased revenue by $0.8 million, $9.4 million and $1.4 million, respectively. Revenue also decreased at Park Tower by $6.0 million due to a termination fee recognized in the prior year associated with an early tenant departure and the associated downtime in which a replacement tenant did not take occupancy until the middle of the second quarter of 2022. The remaining properties’ rental and other revenues increased a combined $0.3 million 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 increased by $7.1 million, or 7%, to $108.4 million for the nine months ended September 30, 2022, from $101.3 million for the nine months ended September 30, 2021. Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 in December 2021 contributed increases of $4.8 million, $5.2 million and $7.9 million, respectively. Offsetting these increases, the disposition of Cherry Creek, Sorrento Mesa and Lake Vista Pointe decreased total operating expenses by $0.3 million, $5.3 million and $1.0 million, respectively. General and administrative expenses decreased by $3.2 million over the prior period primarily due to a

one-time

$5.0 million bonus accrual incurred as a result of the Sorrento Mesa sale transaction announced during the third quarter of 2021. Also contributing to the decrease, depreciation and amortization for Pima Center decreased by $1.1 million from the prior period as the amortization expense associated with acquired lease intangible assets has now been fully amortized. The remaining properties’ expenses increased a combined $0.1 million.

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Property Operating Expenses.

re-leasing

costs. Property operating expenses increased by $7.2 million, or 17%, to $50.7 million for the nine months ended September 30, 2022, from $43.5 million for the nine months ended September 30, 2021. Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 in December 2021 contributed increases of $2.0 million, $2.5 million and $2.7 million, respectively. An increase of $0.7 million was attributable to the Ingenuity Drive property within the Florida Research Park portfolio as that property was converted from a single tenant property where the tenant paid for its own operating expenses into a multi-tenant property where expenses are paid by the landlord and reimbursements are charged to the tenants. An increase of $0.5 million was attributable to Park Tower due to higher

non-recoverable

expenses and utilities. Offsetting these increases, the disposition of Cherry Creek, Sorrento Mesa and Lake Vista Pointe decreased property operating expenses by $0.3 million, $1.9 million and $0.5 million, respectively. The remaining properties’ expenses increased a combined $1.5 million due to a combination of factors including higher utilization at our properties.

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 decreased $3.2 million, or 23%, to $10.6 million for the nine months ended September 30, 2022, from $13.8 million reported for the same period in 2021. In the prior period, general and administrative expenses increased due to a

one-time

Depreciation and Amortization.

Depreciation and amortization increased $3.1 million, or 7%, to $47.1 million for the nine months ended September 30, 2022, from $44.0 million reported for the same period in 2021. Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 in December 2021 contributed increases of $2.8 million, $2.8 million and $5.2 million, respectively. Offsetting these increases, the disposition of Sorrento Mesa and Lake Vista Pointe decreased depreciation and amortization expense by $3.4 million and $0.6 million, respectively. Also contributing to the decrease, depreciation and amortization for Pima Center decreased by $1.1 million from the prior period as the amortization expense associated with acquired lease intangible assets has now been fully amortized. The remaining properties’ depreciation and amortization expense decreased a combined $2.6 million compared to the prior year, mainly due to accelerated amortization of tenant-related assets recorded in the prior year at SanTan, Park Tower and Mission City associated with early lease terminations at those properties.

Other Expense (Income)

Interest Expense.

Interest expense increased $0.8 million, or 4%, to $19.2 million for the nine months ended September 30, 2022, from $18.4 million for the nine months ended September 30, 2021. The increase was primarily attributable to the increase in the amount drawn and interest rates on our floating rate debt.

Net Gain on the Sale of Real Estate Property.

During the first quarter of 2022, the sole tenant at the Lake Vista Pointe property exercised its lease option to purchase the building and we signed a purchase and sale agreement with the tenant. At the time the tenant exercised the option, we reassessed the lease classification of the lease, in accordance with ASC 842 – Leases, and determined that the lease should be reclassified from an operating lease to a sales-type lease. This reclassification resulted in a gain on sale of $21.7 million net of disposal related costs. The Lake Vista Pointe property was sold in June 2022. In the prior year, we recorded a net gain on the sale of real estate property of $47.4 million for the nine months ended September 30, 2021 related to the sale of our Cherry Creek property in February 2021.

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Cash Flows

Comparison of Nine Months Ended September 30, 2022 to Nine Months Ended September 30, 2021

Cash, cash equivalents and restricted cash were $41.7 million and $70.2 million as of September 30, 2022 and September 30, 2021, respectively.

Cash flow from operating activities.

Net cash provided by operating activities increased by $31.5 million to $97.2 million for the nine months ended September 30, 2022 compared to $65.7 million for the same period in 2021. The increase in cash provided by operating activities was primarily due to receipts received from the sales-type lease at the Lake Vista Pointe property, which was sold in June 2022.

Cash flow to investing activities.

Net cash used in investing activities increased by $95.8 million to $36.2 million for the nine months ended September 30, 2022 compared to $59.6 million provided by investing activities for the same period in 2021. The increase in cash used in investing activities was primarily due to a decrease in proceeds from sale of real estate for the nine months ended September 30, 2022 compared to the same period in 2021. The higher proceeds from sale of real estate in 2021 was attributable to the sale of the Cherry Creek property and the deposits received for the sale of the Sorrento Mesa portfolio in 2021.

This decrease was partially offset by higher acquisition of real estate in 2021 compared to 2022.

Cash flow to financing activities.

Net cash used in financing activities decreased by $39.6 million to $61.5 million for the nine months ended September 30, 2022 compared to $101.1 million for the same period in 2021. The decrease in cash used in financing activities was primarily due to lower repayment of borrowings, partially offset by higher repurchases of common stock in 2022.

Liquidity and Capital Resources

Analysis of Liquidity and Capital Resources

We had approximately $22.0 million of cash and cash equivalents and $19.7 million of restricted cash as of September 30, 2022.

On March 15, 2018, the Company entered into a credit agreement for the Unsecured Credit Facility that provided for commitments of up to $250 million, which included an accordion feature that allowed the Company to borrow up to $500 million, subject to customary terms and conditions. On November 16, 2021, the Company entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) that provides for commitments of up to $300 million on the Unsecured Credit Facility. Our Unsecured Credit Facility matures in November 2025 and may be extended 12 months 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 125 to 225 basis points depending upon the Company’s consolidated leverage ratio. Combined with the Term Loan, the total authorized borrowings increased from $300 million to $350 million. As of September 30, 2022, we had approximately $185.0 million outstanding under our Unsecured Credit Facility and a $4.2 million letter of credit to satisfy escrow requirements for a mortgage lender.

On September 27, 2019, the Company entered into the five-year $50 million 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 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.

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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 shares of Series A Preferred Stock through the Sales Agents, acting as agents or principals (the “ATM Program”). On May 7, 2021 the Company delivered to D.A. Davidson & Co. a notice of termination of the Agreement, effective May 7, 2021. The Company did not issue any shares of common stock or Series A Preferred Stock under the ATM Program during the nine months ended September 30, 2022.

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 and reserves established from existing cash. We have further sources such as proceeds from our public offerings, including under our ATM 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, interest rates, 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 September 30, 2022, 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		2022		2023-2024		2025-2026		More than 5 years
Principal payments on mortgage loans	$	680,089	$	1,623	$	156,630	$	281,533	$	240,303
Interest payments (1)		98,121		6,942		52,207		31,161		7,811
Tenant-related commitments		18,026		17,138		888		—		—
Lease obligations		37,324		92		1,625		1,510		34,097

Total	$	833,560	$	25,795	$	211,350	$	314,204	$	282,211

(1)

Contracted interest on the floating rate borrowings under our Unsecured Credit Facility was calculated based on the balance and interest rate at September 30, 2022. 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%.

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. However, a longer period of inflation could affect our cash flows or earnings, or impact our borrowings, as discussed elsewhere in this Report.

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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 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. We have entered, and we will only enter into, contracts with major financial institutions based on 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. The Financial Conduct Authority (the authority that regulates LIBOR) has announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR by June 30, 2023. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for future use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry-wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. We currently consider our interest rate exposure to be moderate because as of September 30, 2022, approximately $445.1 million, or 65.4%, of our debt had fixed interest rates and approximately $235.0 million, or 34.6%, had variable interest rates. Of the $235.0 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 72.8% of our debt was fixed rate debt and 27.2% was variable rate debt as of September 30, 2022. An increase of 1% in LIBOR would result in a $1.9 million increase to our annual interest costs on debt outstanding as of September 30, 2022 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 1% decrease in LIBOR would result in a $1.9 million decrease to our annual interest costs on debt outstanding as of September 30, 2022 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.

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 September 30, 2022.

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 September 30, 2022, 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

The following risk factor supplements the risk factors disclosed in the section entitled “Risk Factors” of our Annual Report on Form

10-K

for the year ended December 31, 2021. Except as presented below or in the section titled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report, there have been no material changes from the risk factors set forth in such Annual Report.

Inflation and price volatility in the global economy could negatively impact our tenants and our results of operations

Inflation in the United States has risen to levels not experienced in recent decades, including rising energy prices, prices for consumer goods, interest rates, wages and currency volatility. During the twelve months ended September 30, 2022, the consumer price index rose by approximately 8.2% compared to the twelve months ended September 30, 2021. These increases and any fiscal or other policy interventions by the U.S. government in reaction to such events could negatively impact our results of operations, and could also negatively impact our tenants’ businesses. While our leases generally provide for fixed annual rent increases, high levels of inflation could outpace our contractual rent increases. The leases at our properties are either full-service gross or net lease basis. Our full-service gross leases generally have 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. Additionally, our

triple-net

leases require the lessee to pay all property operating expenses. Therefore, increases in property-level expenses resulting from inflation could have an adverse impact on our lessees if increases in their operating expenses exceed increases in their revenue, which may adversely affect our lessees’ ability to pay rent or other obligations owed to us. An increase in our lessees’ expenses and a failure of their revenues to increase at least with inflation could adversely affect our lessees’ and our financial condition and our results of operations.

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 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. In September 2022, the Company completed the full August 2020 share repurchase plan. 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 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.

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Share repurchase activity under our share repurchase plans, on a trade date basis, for the three months ended September 30, 2022, was as follows:


Issuer Purchases of Equity Securities (1)
Period	Total Number of Shares of Common Stock Purchased		Average Price Paid per Share of Common Stock Repurchased		Total Number of Shares of Common Stock Purchased as Part of Share Repurchase Plans		Approximate Dollar Value of Shares of Common Stock that May Yet Be Purchased Under the Share Repurchase Plans (2) (thousands)
July 1 – 31, 2022		1,624,589	$	13.06		1,624,589	$	23,787
August 1 – 31, 2022		927,285		12.95		927,285		11,781
September 1 – 30, 2022		1,060,190		11.11		1,060,190		—

Total		3,612,064	$	12.46		3,612,064	$	—

(1)

The share repurchase plan was announced on August 5, 2020, approving the Company to repurchase an aggregate amount of $50 million of its outstanding shares of common stock. The share repurchase plan does not have an expiration date. In September 2022, the Company completed the full August 2020 share repurchase plan.

(2)	Represents approximate dollar value of shares that could have been purchased under the plans in effect at the end of the month.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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. †

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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: November 7, 2022

	By:	/s/ James Farrar
		James Farrar

		Chief Executive Officer and Director (Principal Executive Officer)
Date: November 7, 2022

	By:	/s/ Anthony Maretic
		Anthony Maretic

		Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company