• Net Operating Income (NOI): $24.6 million in Q3, $300,000 lower than Q2.
• Core Funds From Operations (FFO): $11.1 million or $0.27 per share in Q3, $400,000 lower than Q2.
• Adjusted Funds From Operations (AFFO): $4.8 million or $0.12 per share in Q3.
• Same Store Cash NOI Change: Increased by 0.2% or $55,000 compared to Q3 2023.
• Portfolio Occupancy: 83.4% at the end of Q3; 87.0% including signed leases not yet commenced.
• Total Debt: $648 million as of September 30th.
• Cash and Restricted Cash: $43 million as of quarter end.
• Credit Facility Availability: Approximately $42 million undrawn and authorized.

• Warning! GuruFocus has detected 5 Warning Signs with CIO.

Release Date: October 31, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• City Office REIT Inc (NYSE:CIO) achieved healthy leasing activity during the quarter with 141,000 square feet of total leasing, including 78,000 square feet of new leases.
• The company completed a full floor lease extension at Block 83 in Raleigh, resulting in the office component being 98% leased.
• Renovations at Pima Center in Phoenix are complete, leading to increased occupancy and positive leasing traction.
• City Office REIT Inc (NYSE:CIO) reported an increase in expected year-end occupancy and same-store cash NOI change due to strong leasing results.
• The company has no debt maturities until October 2025, providing financial stability and time to explore financing options for valuable properties like Block 83.

Negative Points

• Net operating income in the third quarter was $24.6 million, which is $300,000 lower than the second quarter due to the disposition of Cascade Station.
• Core FFO decreased by $400,000 from the second quarter, primarily due to lower net operating income and higher interest expenses.
• A $700,000 tenant improvement deduction related to a new lease impacted the third quarter's AFFO.
• Four significant property renovations resulted in a $1 million reduction to AFFO this quarter.
• Office capital markets activity remains suppressed, largely driven by limited debt availability for the sector.

Q & A Highlights

Q: Could you walk us through how the renewal with WeWork at Block 83 came to fruition, and do you have any plans after the lease expires in 2026? A: We were set to take back one of our three floors in Raleigh on November 1st. An enterprise tenant using the space wanted to extend their usage until the end of 2026. We agreed to extend WeWork's lease on this floor for 26 months, increasing the starting rent by approximately 6% to $42.50. We are pleased with the outcome and the economics of the deal.

Q: Regarding occupancy, what are some of the moving pieces that get you to the 85.5% midpoint of your guidance? A: A significant portion of signed leases will commence in Q4. We have about 74,000 square feet of leases commencing in Phoenix, 33,000 in Raleigh, and about 50,000 in Orlando. The single biggest tenant moving in Q4 is at our Ingenuity Pro Drive property, which will go to 100% occupancy with a 42,000 square foot tenant moving in October.

Q: Are you seeing interest from larger tenants, and what tenant demographics are you observing in leasing demand today? A: We are seeing increased interest from larger tenants, which is tied to a trend of companies wanting employees back in the office. Larger tenants are now more willing to commit to longer leases. The demand is particularly strong for modern, amenitized spaces, which is reflected in our leasing pipeline.

Q: When signing leases, are you seeing changes in concessions and free rent compared to a year ago? A: Construction costs have stabilized, and face rents continue to grow for good properties. Concessions on free rent are about the same as last year, typically one month per year of term. Overall, we are in a better position than a year ago.

Q: How do you plan to handle the 2025 debt maturities, especially after using liquidity in the third quarter? A: We are exploring financing options for Block 83, which is a valuable property. The CMBS market appears to be improving, and Block 83 is the type of asset that could secure financing. We have some time before deciding on the best course of action, and we have a one-year extension option on our operating line.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.