City Office REIT, Inc. - Quarter Report: 2019 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Form 10-Q

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, 2019

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

For the transition period from to

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 of

incorporation or organization)

(I.R.S. Employer

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

Former name, former address and former fiscal year, if changed since last report: N/A

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

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 October 29, 2019 was 54,547,063.

City Office REIT, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2019

Table of Contents


PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	4

	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018	5

	Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2019 and 2018	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	29

PART II. OTHER INFORMATION		30

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Mine Safety Disclosures	30

Item 5.	Other Information	30

Item 6.	Exhibits	30

Signatures		32

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, 2019			December 31, 2018
Assets
Real estate properties
Land	$	230,034		$	223,789
Building and improvement		782,576			704,113
Tenant improvement		91,016			77,426
Furniture, fixtures and equipment		285			319

		1,103,911			1,005,647
Accumulated depreciation		(93,623	)		(70,484	)

		1,010,288			935,163

Cash and cash equivalents		12,281			16,138
Restricted cash		20,240			17,007
Rents receivable, net		31,844			26,095
Deferred leasing costs, net		11,235			10,402
Acquired lease intangible assets, net		73,394			75,501
Other assets		16,830			2,755
Assets held for sale		13,905			17,370

Total Assets	$	1,190,017		$	1,100,431

Liabilities and Equity
Liabilities:
Debt	$	651,693		$	645,354
Accounts payable and accrued liabilities		28,431			25,892
Deferred rent		5,574			5,331
Tenant rent deposits		5,691			4,564
Acquired lease intangible liabilities, net		8,763			8,887
Other liabilities		21,349			11,148
Liabilities related to assets held for sale		356			878

Total Liabilities		721,857			702,054

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		112,000			112,000
Common stock, $0.01 par value, 100,000,000 shares authorized, 47,647,063 and 39,544,073 shares issued and outstanding		476			395
Additional paid-in capital		483,200			377,126
Accumulated deficit		(128,823	)		(92,108	)
Accumulated other comprehensive income		247			—

Total Stockholders’ Equity		467,100			397,413
Non-controlling interests in properties		1,060			964

Total Equity		468,160			398,377

Total Liabilities and Equity	$	1,190,017		$	1,100,431

Subsequent Events (Note 11)

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

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,
	2019			2018			2019			2018

Rental and other revenues	$	38,946		$	33,547		$	117,236		$	95,317

Operating expenses:
Property operating expenses		14,384			13,253			42,754			36,627
General and administrative		2,775			1,850			8,435			5,793
Depreciation and amortization		15,035			13,379			44,057			37,044

Total operating expenses		32,194			28,482			95,246			79,464

Operating income		6,752			5,065			21,990			15,853

Interest expense:
Contractual interest expense		(7,378	)		(5,915	)		(22,022	)		(16,184	)
Amortization of deferred financing costs and debt fair value		(321	)		(311	)		(992	)		(1,297	)

		(7,699	)		(6,226	)		(23,014	)		(17,481	)
Net gain on sale of real estate property		—			—			478			46,980

Net (loss)/income		(947	)		(1,161	)		(546	)		45,352
Less:
Net income attributable to non-controlling interests in properties		(164	)		(135	)		(498	)		(384	)

Net (loss)/income attributable to the Company		(1,111	)		(1,296	)		(1,044	)		44,968
Preferred stock distributions		(1,855	)		(1,855	)		(5,565	)		(5,565	)

Net (loss)/income attributable to common stockholders	$	(2,966	)	$	(3,151	)	$	(6,609	)	$	39,403

Net (loss)/income per common share:
Basic	$	(0.07	)	$	(0.08	)	$	(0.16	)	$	1.08

Diluted	$	(0.07	)	$	(0.08	)	$	(0.16	)	$	1.07

Weighted average common shares outstanding:
Basic		42,591			37,494			40,610			36,572

Diluted		42,591			37,494			40,610			36,920

Dividend distributions declared per common share	$	0.235		$	0.235		$	0.705		$	0.705

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

City Office REIT, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018

Net (loss)/income	$	(947	)	$	(1,161	)	$	(546	)	$	45,352
Unrealized cash flow hedge gains		247			—			247			—

Comprehensive (loss)/income		(700	)		(1,161	)		(299	)		45,352
Less:
Comprehensive income attributable to non-controlling interests in properties		(164	)		(135	)		(498	)		(384	)

Comprehensive (loss)/income attributable to the Company		(864	)		(1,296	)		(797	)		44,968
Preferred stock distributions		(1,855	)		(1,855	)		(5,565	)		(5,565	)

Comprehensive (loss)/income attributable to common stockholders	$	(2,719	)	$	(3,151	)	$	(6,362	)	$	39,403

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

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		Accumulated deficit			Accumulated other comprehensive income		Total stockholders’ equity			Non- controlling interests in properties			Total equity
Balance – December 31, 2018		4,480	$	112,000		39,544	$	395	$	377,126	$	(92,108	)	$	—	$	397,413		$	964		$	398,377
Restricted stock award grants and vesting		—		—		92		1		302		(83	)		—		220			—			220
Common stock dividend distributions declared		—		—		—		—		—		(9,314	)		—		(9,314	)		—			(9,314	)
Preferred stock dividend distributions declared		—		—		—		—		—		(1,855	)		—		(1,855	)		—			(1,855	)
Contributions		—		—		—		—		—		—			—		—			12			12
Distributions		—		—		—		—		—		—			—		—			(134	)		(134	)
Net income		—		—		—		—		—		(1,089	)		—		(1,089	)		169			(920	)

Balance – March 31, 2019		4,480	$	112,000		39,636	$	396	$	377,428	$	(104,449	)	$	—	$	385,375		$	1,011		$	386,386

Restricted stock award grants and vesting		—		—		11		—		509		(99	)		—		410			—			410
Common stock dividend distributions declared		—		—		—		—		—		(9,318	)		—		(9,318	)		—			(9,318	)
Preferred stock dividend distributions declared		—		—		—		—		—		(1,855	)		—		(1,855	)		—			(1,855	)
Contributions		—		—		—		—		—		—			—		—			10			10
Distributions		—		—		—		—		—		—			—		—			(156	)		(156	)
Net income		—		—		—		—		—		1,156			—		1,156			165			1,321

Balance – June 30, 2019		4,480	$	112,000		39,647	$	396	$	377,937	$	(114,565	)	$	—	$	375,768		$	1,030		$	376,798

Restricted stock award grants and vesting		—		—		—		—		527		(95	)		—		432			—			432
Net proceeds from sale of common stock		—		—		8,000		80		104,736		—			—		104,816			—			104,816
Common stock dividend distributions declared		—		—		—		—		—		(11,197	)		—		(11,197	)		—			(11,197	)
Preferred stock dividend distributions declared		—		—		—		—		—		(1,855	)		—		(1,855	)		—			(1,855	)
Contributions		—		—		—		—		—		—			—		—			46			46
Distributions		—		—		—		—		—		—			—		—			(180	)		(180	)
Net income		—		—		—		—		—		(1,111	)		—		(1,111	)		164			(947	)
Unrealized cash flow hedge gains		—		—		—		—		—		—			247		247			—			247

Balance – September 30, 2019		4,480	$	112,000		47,647	$	476	$	483,200	$	(128,823	)	$	247	$	467,100		$	1,060		$	468,160


	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 income		Total stockholders’ equity			Non- controlling interests in properties			Total equity
Balance—December 31, 2017		4,480	$	112,000		36,012	$	360	$	334,241		$	(86,977	)	$	—	$	359,624		$	208		$	359,832
Restricted stock award grants and vesting		—		—		120		1		356			(72	)		—		285			—			285
Common stock dividend distributions declared		—		—		—		—		—			(8,491	)		—		(8,491	)		—			(8,491	)
Preferred stock dividend distributions declared		—		—		—		—		—			(1,855	)		—		(1,855	)		—			(1,855	)
Distributions		—		—		—		—		—			—			—		—			(29	)		(29	)
Net income		—		—		—		—		—			47,063			—		47,063			135			47,198

Balance—March 31, 2018		4,480	$	112,000		36,132	$	361	$	334,597		$	(50,332	)	$	—	$	396,626		$	314		$	396,940

Restricted stock award grants and vesting		—		—		1		—		412			(80	)		—		332			—			332
Common stock dividend distributions declared		—		—		—		—		—			(8,491	)		—		(8,491	)		—			(8,491	)
Preferred stock dividend distributions declared		—		—		—		—		—			(1,855	)		—		(1,855	)		—			(1,855	)
Contributions		—		—		—		—		—			—			—		—			43			43
Distributions		—		—		—		—		—			—			—		—			(135	)		(135	)
Net income		—		—		—		—		—			(798	)		—		(798	)		114			(684	)

Balance—June 30, 2018		4,480	$	112,000		36,133	$	361	$	335,009		$	(61,556	)	$	—	$	385,814		$	336		$	386,150

Restricted stock award grants and vesting		—		—		—		—		436			(79	)		—		357			—			357
Net proceeds from sale of common stock		—		—		3,411		34		42,868			—			—		42,902			—			42,902
Common stock dividend distributions declared		—		—		—		—		—			(9,293	)		—		(9,293	)		—			(9,293	)
Preferred stock dividend distributions declared		—		—		—		—		—			(1,855	)		—		(1,855	)		—			(1,855	)
Minority interest buyout		—		—		—		—		(1,624	)		—			—		(1,624	)		485			(1,139	)
Distributions		—		—		—		—		—			—			—		—			(210	)		(210	)
Net income		—		—		—		—		—			(1,296	)		—		(1,296	)		135			(1,161	)

Balance—September 30, 2018		4,480	$	112,000		39,544	$	395	$	376,689		$	(74,079	)	$	—	$	415,005		$	746		$	415,751

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

City Office REIT, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine Months Ended September 30,
	2019			2018
Cash Flows from Operating Activities:
Net (loss)/income	$	(546	)	$	45,352
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
Depreciation and amortization		44,057			37,044
Amortization of deferred financing costs and debt fair value		992			1,297
Amortization of above/below market leases		(67	)		(143	)
Increase in straight-line rent/expense		(4,591	)		(3,491	)
Non-cash stock compensation		1,310			1,061
Net gain on sale of real estate property		(478	)		(46,980	)
Changes in non-cash working capital:
Rents receivable, net		(1,512	)		(1,177	)
Other assets		(337	)		(162	)
Accounts payable and accrued liabilities		(1,217	)		(1,434	)
Deferred rent		73			(1,428	)
Tenant rent deposits		(421	)		140

Net Cash Provided By Operating Activities		37,263			30,079

Cash Flows to Investing Activities:
Additions to real estate properties		(13,855	)		(15,785	)
Acquisition of real estate		(108,358	)		(162,462	)
Net proceeds from sale of real estate		33,941			84,839
Deferred leasing costs		(2,474	)		(3,222	)

Net Cash Used In Investing Activities		(90,746	)		(96,630	)

Cash Flows from Financing Activities:
Proceeds from sale of common stock		104,816			42,902
Debt issuance and extinguishment costs		(995	)		(2,662	)
Proceeds from borrowings		154,750			269,824
Repayment of borrowings		(171,575	)		(212,128	)
Shares withheld for payment of taxes on restricted stock unit vesting		(246	)		(87	)
Minority interest buyout		—			(1,139	)
Contributions from non-controlling interests in properties		68			43
Distributions to non-controlling interests in properties		(470	)		(374	)
Dividend distributions paid to stockholders and Operating Partnership unitholders		(33,489	)		(31,010	)

Net Cash Provided By Financing Activities		52,859			65,369

Net Decrease in Cash, Cash Equivalents and Restricted Cash		(624	)		(1,182	)
Cash, Cash Equivalents and Restricted Cash, Beginning of Period		33,145			35,014

Cash, Cash Equivalents and Restricted Cash, End of Period	$	32,521		$	33,832

Reconciliation of Cash, Cash Equivalents and Restricted Cash:
Cash and Cash Equivalents, End of Period	$	12,281		$	13,696
Restricted Cash, End of Period		20,240			20,136

Cash, Cash Equivalents and Restricted Cash, End of Period	$	32,521		$	33,832

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	22,262		$	15,967
Purchases of additions in real estate properties included in accounts payable	$	2,264		$	4,379
Purchases of deferred leasing costs included in accounts payable	$	298		$	430
Unrealized cash flow hedge gains	$	247		$	—
Debt assumed on acquisition of real estate	$	22,473		$	—

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

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, as amended, 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 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, 2018.

New Accounting Pronouncements

Adopted in the Current Year

In February 2016, the Financial Accounting Standards Board, or FASB, established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02, which requires lessors to classify leases as a sales-type, direct financing, or operating lease and requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.

The Company adopted the new standard effective January 1, 2019 and elected the effective date method for the transition. The Company elected the following practical expedients:

•

Transition method practical expedient – permits the Company to use the effective date as the date of initial application. Upon adoption, the Company did not have a cumulative-effect adjustment to the opening balance of retained earnings. Financial information and disclosures for periods before January 1, 2019 were not updated.

•

Package of practical expedients – permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. This allowed the Company to continue classifying its leases at transition in substantially the same manner.

•

Single component practical expedient – permits the Company to not separate lease and non-lease components of leases. Upon transition, rental income, expense reimbursement, and other were aggregated into a single line within rental and other revenues on the condensed consolidated statement of operations.

•

Land easement practical expedient – permits the Company not to reassess under the new standard its prior conclusions about land easements.

•

Short-term lease practical expedient – permits the Company not to recognize leases with a term equal to or less than 12 months.

Lessor Accounting

The accounting for lessors under the new standard remained relatively unchanged with a few targeted updates impacting the Company, which included: (i) narrower definition of initial direct costs that requires certain costs to be expensed rather than capitalized, and (ii) provisions for uncollectible rents to be recorded as a reduction in revenue rather than as bad debt expense.

Lessee Accounting

The new standard requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating at inception, with classification affecting the pattern and recording of expenses in the statement of operations. Upon transition the Company recognized right-of use assets and lease liabilities principally for its ground and office leases.

3. Real Estate Investments

Acquisitions

During the nine months ended September 30, 2019 and 2018 the Company acquired the following properties:


Property	Date Acquired		Percentage Owned
7601 Tech		September 2019		100	%
Cascade Station		June 2019		100	%
Canyon Park		February 2019		100	%
The Quad		July 2018		100	%
Circle Point		July 2018		100	%
Pima Center		April 2018		100	%

Each of the foregoing acquisitions were accounted for as asset acquisitions.

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, 2019 (in thousands):


	7601 Tech			Canyon Park			Cascade Station			Total Sept. 30, 2019
Land	$	10,865		$	7,098		$	—		$	17,963
Buildings and improvements		25,677			36,619			25,141			87,437
Tenant improvements		3,858			1,797			2,080			7,735
Lease intangible assets		7,401			8,109			3,134			18,644
Other assets		293			10			3,164			3,467
Debt		—			—			(697	)		(697	)
Accounts payable and other liabilities		(668	)		(1,266	)		(186	)		(2,120	)
Lease intangible liabilities		(79	)		(1,297	)		(220	)		(1,596	)

Net assets acquired	$	47,347		$	51,070		$	32,416		$	130,833

The acquisition of the Cascade Station property was partially funded through an assumption of debt in the amount of $22.5 million.

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, 2018 (in thousands):


	The Quad			Circle Point			Pima Center			Total Sept. 30, 2018
Land	$	8,079		$	8,744		$	—		$	16,823
Buildings and improvements		38,060			33,708			42,235			114,003
Tenant improvements		1,798			5,393			2,898			10,089
Lease intangible assets		4,209			10,299			10,691			25,199
Other assets		15			25			95			135
Accounts payable and other liabilities		(527	)		(1,157	)		(337	)		(2,021	)
Lease intangible liabilities		(1,247	)		(390	)		(129	)		(1,766	)

Net assets acquired	$	50,387		$	56,622		$	55,453		$	162,462

Sale of Real Estate Property

On May 7, 2019, the Company sold the 10455 Pacific Center building of the Sorrento Mesa property in San Diego, California for $16.5 million, resulting in an aggregate gain of $0.5 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.

On February 7, 2019, the Company sold the Plaza 25 property in Denver, Colorado for $17.9 million. No gain or loss was recognized on the sale as the property was carried at fair value less cost to sell on the date of disposition.

On March 8, 2018, the Company sold the Washington Group Plaza property in Boise, Idaho for $86.5 million, resulting in an aggregate net gain of $47.0 million, net of $1.7 million in costs, which has been classified as net gain on sale of real estate property in the condensed consolidated statements of operations. In connection with the sale of the property, certain debt repayments were made.

Assets Held for Sale

On May 10, 2019, the Company entered into a Purchase and Sale agreement to sell a land parcel at the Circle Point property for $6.5 million. The Company determined that the land parcel met the criteria for classification as held for sale as of September 30, 2019. The transaction is anticipated to close in the first quarter of 2020, subject to customary closing conditions. As of September 30, 2019, the Company has received a $0.5 million non-refundable deposit.

As of September 30, 2019 the Company determined that the Logan Tower property met the criteria for classification as held for sale.

These properties have been classified as held for sale as of September 30, 2019 (in thousands):


September 30, 2019	Logan Tower			Circle Point Land			Total
Real estate properties, net	$	9,034		$	4,441		$	13,475
Deferred leasing costs, net		239			—			239
Acquired lease intangible assets, net		2			—			2
Rents receivable, prepaid expenses and other assets		189			—			189

Assets held for sale	$	9,464		$	4,441		$	13,905

Acquired lease intangible liabilities, net		(10	)		—			(10	)
Accounts payable, accrued expenses, deferred rent and tenant rent deposits		(296	)		(50	)		(346	)

Liabilities related to assets held for sale	$	(306	)	$	(50	)	$	(356	)

On November 30, 2018, the Company entered into a Purchase and Sale agreement to sell the Plaza 25 property for $17.9 million. The transaction closed in February 2019. The property was presented as held for sale as of December 31, 2018 (in thousands):


December 31, 2018	Plaza 25
Real estate properties, net	$	16,149
Deferred leasing costs, net		419
Acquired lease intangible assets, net		11
Rents receivable, prepaid expenses and other assets		791

Assets held for sale	$	17,370

Accounts payable, accrued expenses, deferred rent and tenant rent deposits		(878	)

Liabilities related to assets held for sale	$	(878	)

4. Lease Intangibles

Lease intangibles and the value of assumed lease obligations as of September 30, 2019 and December 31, 2018 were comprised as follows (in thousands):


	Lease Intangible Assets														Lease Intangible Liabilities
September 30, 2019	Above Market Leases			Below Market Ground Lease⁽¹⁾		In Place Leases			Leasing Commissions			Total			Below Market Leases			Below Market Ground Lease⁽¹⁾			Total
Cost	$	15,510		$	—	$	87,957		$	36,523		$	139,990		$	(14,181	)	$	(138	)	$	(14,319	)
Accumulated amortization		(6,363	)		—		(44,822	)		(15,411	)		(66,596	)		5,517			39			5,556

	$	9,147		$	—	$	43,135		$	21,112		$	73,394		$	(8,664	)	$	(99	)	$	(8,763	)


	Lease Intangible Assets															Lease Intangible Liabilities
December 31, 2018	Above Market Leases			Below Market Ground Lease⁽¹⁾			In Place Leases			Leasing Commissions			Total			Below Market Leases			Below Market Ground Lease⁽¹⁾			Total
Cost	$	10,595		$	1,855		$	82,474		$	31,706		$	126,630		$	(12,925	)	$	(138	)	$	(13,063	)
Accumulated amortization		(4,800	)		(19	)		(34,273	)		(12,037	)		(51,129	)		4,140			36			4,176

	$	5,795		$	1,836		$	48,201		$	19,669		$	75,501		$	(8,785	)	$	(102	)	$	(8,887	)

(1)

For the below market ground lease asset, the Company is the lessee, whereas, for the below market ground lease liability, the Company is the lessor. Upon the adoption of Topic 842 on January 1, 2019, the Company derecognized the below market ground lease intangible asset related to one of its lessee ground leases and included the net carrying value of the intangible asset within the right-of-use asset recognized upon transition to the new standard.

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


2019	$	5,098
2020		19,302
2021		15,990
2022		8,223
2023		5,361
Thereafter		10,657

	$	64,631

5. Debt

The following table summarizes the indebtedness as of September 30, 2019 and December 31, 2018 (dollars in thousands):


Property	September 30, 2019			December 31, 2018			Interest Rate as of September 30, 2019 ⁽¹⁾			Maturity
Unsecured Credit Facility ⁽³⁾	$	43,325		$	147,500			LIBOR +1.50	%⁽²⁾		March 2022
Term Loan ⁽⁴⁾		50,000			—			LIBOR +1.40	⁽²⁾		September 2024
Midland Life Insurance ⁽⁵⁾		85,720			86,973			4.34			May 2021
Mission City		47,000			47,000			3.78			November 2027
190 Office Center		41,007			41,250			4.79			October 2025
Canyon Park ⁽⁶⁾		40,950			—			4.30			March 2027
Circle Point		39,650			39,650			4.49			September 2028
SanTan		34,250			34,682			4.56			March 2027
Intellicenter		33,102			33,481			4.65			October 2025
The Quad		30,600			30,600			4.20			September 2028
FRP Collection ⁽⁷⁾		29,142			29,589			3.10			September 2023
2525 McKinnon		27,000			27,000			4.24			April 2027
Cascade Station		22,390			—			4.55			May 2024
Greenwood Blvd ⁽⁷⁾		22,425			22,425			3.15			December 2025
5090 N 40^th St		22,000			22,000			3.92			January 2027
AmberGlen		20,000			20,000			3.69			May 2027
Lake Vista Pointe		17,800			18,044			4.28			August 2024
Central Fairwinds ⁽⁸⁾		17,626			17,882			3.15			September 2024
FRP Ingenuity Drive		17,000			17,000			4.44			December 2024
Carillon Point ⁽⁷⁾		16,067			16,330			3.10			October 2023

Total Principal		657,054			651,406
Deferred financing costs, net		(6,058	)		(6,052	)
Unamortized fair value adjustments		697			—

Total	$	651,693		$	645,354

(1)	All interest rates are fixed interest rates with the exception of the unsecured credit facility (“Unsecured Credit Facility”) and the term loan (“Term Loan”) as explained in footnotes 3 and 4 below.

(2)	As of September 30, 2019, the one month LIBOR rate was 2.09%.

(3)

On March 15, 2018, the Company entered into a $250 million Unsecured Credit Facility, which includes an accordion feature that will permit the Company to borrow up to $500 million, subject to customary terms and conditions. The Unsecured Credit Facility matures in March 2022, which may be extended to March 2023 at the Company’s option upon meeting certain conditions. As of September 30, 2019, the Unsecured Credit Facility had $43.3 million drawn and $7.0 million of letters of credit to satisfy escrow requirements for mortgage lenders. Borrowings under the Unsecured Credit Facility will bear interest at a rate equal to the LIBOR rate plus a margin of between 140 to 225 basis points depending upon the Company’s consolidated leverage ratio. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.

(4)

In September 2019, the Company entered into a $50 million Term Loan increasing its authorized borrowings from $250 million to $300 million. Borrowings under the Term Loan will 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 pay-fixed receive-variable interest rate swap with a five year term, effectively fixing the LIBOR component of the Term Loan at approximately 1.27% (the “Interest Rate Swap”). See Note 6 – Fair Value of Financial Measurements.

(5)	The mortgage loan is cross-collateralized by Cherry Creek, City Center and 7595 Tech (formerly “DTC crossroads”).

(6)

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, 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.

(7)	In August 2019, the Company entered into loan modification agreements for FRP Collection, Carillon Point and Greendwood Blvd reducing the interest rates from 3.85% to 3.1%, 3.5% to 3.1% and 4.6% to 3.15% respectively.

(8)	In September 2019, the Company entered into a loan modification agreement for Central Fairwinds reducing the interest rate from 4.0% to 3.15%.

The scheduled principal repayments of debt as of September 30, 2019 are as follows (in thousands):


2019	$	1,400
2020		6,328
2021		89,314
2022		49,853
2023		48,528
Thereafter		461,631

	$	657,054

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

Level 3 Inputs – unobservable inputs

During the three months ended September 30, 2019, the Company entered into an interest rate swap agreement for a notional amount of $50.0 million, which became effective September 2019. The five-year swap agreement terminates in September 2024. Pursuant to the agreement, 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.

The Interest Rate Swap qualifies as a cash flow hedge and has been recognized on the consolidated balance sheets at fair value. Gains and losses resulting from changes in the fair value of derivatives that 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, 2019, the Interest Rate Swap was reported as an asset at its fair value of approximately $0.2 million, which is included in other assets on the Company’s condensed consolidated balance sheet. For the nine months ended September 30, 2019 the amount of realized gains reclassified to interest expense due to payments received by the swap counterparty were nominal. Accordingly, the fair value of the Interest Rate Swap has been classified as a Level 2 fair value measurement.

As of December 31, 2018, the Company did not have any hedges or derivatives.

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 $586.1 million and $503.3 million as of September 30, 2019 and December 31, 2018, 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, 2019 and 2018, the Company earned $0.4 million and $0.5 million, respectively, in administrative services performed for Second City Real Estate II Corporation and its affiliates (collectively, “Second City”). Also during the nine months ended September 30, 2019, the Company was assigned a purchase contract which had been entered into by an entity affiliated with principals of Second City, which principals are also officers of the Company. The Company subsequently assigned the purchase contract to a third party during the nine months ended September 30, 2019. The Company paid no consideration to the related party for the contract other than return of deposits which the Company subsequently recovered from a third party in addition to an assignment fee. The Company recognized income of $2.6 million on the assignment of the purchase contract to the third party, which was recorded in rental and other revenues on the condensed consolidated statement of operations.

During the three months ended September 30, 2019, an indirect, wholly-owned subsidiary of the Company entered into an Administrative Services Agreement (the “Administrative Services Agreement”) with Clarity Real Estate III GP, Limited Partnership and Clarity Real Estate Ventures GP, Limited Partnership (together, “Clarity”), entities affiliated with principals of Second City and officers of the Company. Pursuant to the Administrative Services Agreement, the Company will provide various administrative services and support to the related entities managing the Clarity funds. During the three months ended September 30, 2019 the amounts earned by the Company for the administrative services performed for Clarity were nominal.

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. The Company elected the practical expedient to account for its lease and non-lease components as a single combined operating lease component under the new leasing standard. As a result, rental income, expense reimbursement, and other were aggregated into a single line within rental and other revenues on the condensed consolidated statement of operations.

For the three and nine months ended September 30, 2019, the Company recognized $38.9 million and $114.5 million, respectively, of rental and other revenue related to its operating leases (in thousands):


	Three months ended September 30, 2019		Nine months ended September 30, 2019
Fixed payments	$	33,495	$	98,555
Variable payments		5,441		15,967

	$	38,936	$	114,522

Future minimum lease payments to be received by the Company as of September 30, 2019 under non-cancellable operating leases for the next five years and thereafter are as follows (in thousands):


2019	$	31,253
2020		116,812
2021		106,709
2022		89,349
2023		71,209
Thereafter		161,614

	$	576,946

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. Seven state government tenants currently have the exercisable right to terminate their leases if the applicable state legislature does not appropriate rent in its annual budget. The Company has determined that the occurrence of any government tenant not being appropriated the rent in the applicable annual budget is a remote contingency and accordingly recognizes lease revenue on a straight-line basis over the respective lease term. These tenants represent approximately 7.9% of the Company’s total future minimum lease payments as of September 30, 2019.

Lessee Accounting

As a lessee, the Company has ground and office leases classified as operating leases and one office lease classified as a financing lease. Upon adoption of Topic 842, on January 1, 2019, the Company recognized right-of-use assets of $9.2 million and lease liabilities of $7.2 million. The difference between the recorded right-of-use assets and lease liabilities is mainly due to the reclassification of the below market ground lease intangible asset, which was included within the right-of-use assets recognized upon transition. As of September 30, 2019, these leases had remaining terms of 2 to 69 years and a weighted average remaining lease term of 56 years. Operating and financing 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):


	As of September 30, 2019
Right-of-use asset – operating leases	$	13,125
Lease liability – operating leases	$	8,213
Right-of-use asset – financing leases	$	85
Lease liability – financing leases	$	84

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 6.31% 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.

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 expense for the three and nine months ended September 30, 2019 was $0.2 million and $0.6 million, respectively. Financing lease expense for the three and nine months ended September 30, 2019 was nominal.

Future minimum lease payments to be paid by the Company as a lessee as of September 30, 2019 for the next five years and thereafter are as follows (in thousands):


	Operating Leases			Financing Leases
2019	$	144		$	6
2020		782			27
2021		781			27
2022		741			27
2023		659			4
Thereafter		27,277			—

Total future minimum lease payments		30,384			91
Discount		(22,170	)		(7	)

Total	$	8,214		$	84

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, 2019, 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.

10. Stockholders’ Equity

up to 1,000,000 shares of Series A Preferred Stock through the Sales Agents, acting as agents or principals (the “ATM Program”). Pursuant to the EDAs, the shares may be offered and sold through the Sales Agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the New York Stock Exchange or sales made to or through a market maker other than on an exchange or, with the prior consent of the Company, in privately negotiated transactions. The Sales Agents will be entitled to compensation of up to 2.0% of the gross proceeds of shares sold through the Sales Agents from time to time under the EDAs. The Company has no obligation to sell any of the shares under the EDAs and may at any time suspend solicitations and offers under, or terminate, the EDAs. During the nine month period ended September 30, 2019, the Company issued 8,000,000 shares of common stock under the ATM Program. The Company raised $106.5 million in aggregate gross proceeds, resulting in aggregate net proceeds to the Company of approximately $104.8 million after deducting sales commissions and offering expenses.

Common Stock and Common Unit Distributions

On September 16, 2019, the Company’s Board of Directors approved and the Company declared a cash dividend distribution of $0.235 per common share for the quarterly period ended September 30, 2019. The dividend was paid subsequent to quarter end on October 25, 2019 to common stockholders and common unitholders of record as of the close of business on October 11, 2019, resulting in an aggregate payment of $11.2 million.

Preferred Stock Distributions

On September 16, 2019, the Company’s Board of Directors approved and the Company declared a cash dividend of $0.4140625 per preferred share for the quarterly period ended September 30, 2019. The dividend was paid subsequent to quarter end on October 25, 2019 to preferred stockholders of record as of the close of business on October 11, 2019, resulting in an aggregate payment of $1.9 million.

Restricted Stock Units

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 2, 2019, 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 1,263,580 shares to 2,263,580 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.

During the nine months ended September 30, 2019, 162,500 restricted stock units (“RSUs”) were granted to executive officers, directors and certain non-executive employees with a fair value of $1.8 million. The awards will vest in three equal, annual installments on each of the first three anniversaries of the date of grant. For the three and nine months ended September 30, 2019, the Company recognized net compensation expense of $0.4 million and $1.3 million, respectively, related to the RSUs. For the three and nine months ended September 30, 2018 the Company recognized net compensation expense of $0.4 million and $1.1 million, respectively, related to the RSUs.

A RSU award represents the right to receive shares of the Company’s common stock in the future, after the applicable vesting criteria, determined by the Plan Administrator, has been satisfied. The holder of an award of RSU has no rights as a stockholder until shares of common stock are issued in settlement of vested RSUs. The Plan Administrator may provide for a grant of dividend equivalent rights in connection with the grant of RSU; provided, however, that if the RSUs do not vest solely upon satisfaction of continued employment or service, any payment in respect to the related dividend equivalent rights will be held by the Company and paid when, and only to the extent that, the related RSU vests.

11. Subsequent Events

On October 7, 2019, the Company completed a public offering pursuant to which the Company sold 6,900,000 shares of its common stock, inclusive of the overallotment option, for aggregate gross proceeds of $95.6 million.

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.

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 quarterly report on Form 10-Q, including “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition,” 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. These forward looking statements are not based on historical facts, but rather reflect our current expectations and projections about our future results, performance, prospects and opportunities. These forward looking statements may be identified by the use of words including “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar terms and phrases. These forward looking statements are subject to a number of known and unknown risks, uncertainties and other factors that are difficult to predict and which could cause our actual future results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward looking statements. These risks, uncertainties and other factors include, among others:

•

adverse economic or real estate developments in the office sector or the markets in which we operate;

•

changes in local, regional, national and international economic conditions;

•

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;

•

defaults on or non-renewal of leases by tenants;

•

increased interest rates and any resulting increase in financing or operating costs;

•

decreased rental rates or increased vacancy rates;

•

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;

•

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 qualify and maintain our status as a real estate investment trust (“REIT”);

•

government approvals, actions and initiatives, including the need for compliance with environmental requirements;

•

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;

•

uncertainty regarding the Company’s obligations under its floating rate debt instruments upon discontinuation of LIBOR;

•

a material increase in institutional ownership of real estate in secondary markets that could result in, among others, compression of cap rates and fewer acquisition opportunities being available to the Company; and

•

other factors described in our news releases and filings with the United States Securities and Exchange Commission (the “SEC”), including but not limited to those described in our Annual Report on Form 10-K for the year ended December 31, 2018 under the heading “Risk Factors” and in our subsequent reports filed with the SEC.

The forward looking statements included in this report are made only as of the date of this report, and except as otherwise required by federal securities law, we do not have any obligation to publicly update or revise any forward looking statements to reflect subsequent events or circumstances.

Overview

Company

We were formed as a Maryland corporation on November 26, 2013. On April 21, 2014, we completed our initial public offering (“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, 2019, we owned 28 properties comprised of 66 office buildings with a total of approximately 5.9 million square feet of net rentable area (“NRA”). As of September 30, 2019, our properties were approximately 91.2% leased.

Office Leases

Historically, most leases for our properties were 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 our Lake Vista Pointe, 2525 McKinnon, Sorrento Mesa, and Canyon Park properties have triple net leases. Certain tenants at AmberGlen, Superior Pointe, 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 full-service gross leases.

Factors That May Influence Our Operating Results and Financial Condition

Business and Strategy

We focus on owning and acquiring office properties in our target markets. Our target markets generally possess what we believe are favorable economic growth trends, growing populations with above-average employment growth forecasts, a large number of government offices, large international, national and regional employers across diversified industries, are generally low-cost centers for business operations, and exhibit favorable occupancy trends. We utilize our management’s market-specific knowledge and relationships as well as the expertise of local real estate operators and our investment partners to identify acquisition opportunities that we believe will offer cash flow stability and long-term value appreciation. Our target markets are attractive, among other reasons, because we believe that ownership is often concentrated among local real estate operators that typically do not benefit from the same access to capital as public REITs and there is a relatively low level of participation of large institutional investors. We believe that these factors result in attractive pricing levels and risk-adjusted returns.

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. We believe that the average rental rates for our portfolio of properties are generally in-line or slightly below the current average quoted market rates. 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 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.

Our Properties

As of September 30, 2019, we owned 28 office complexes comprised of 66 office buildings with a total of approximately 5.9 million square feet of NRA in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, San Diego, Seattle and Tampa. The following table presents an overview of our portfolio as of September 30, 2019 (properties listed by descending NRA by market).


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 (20.6% of NRA)	Pima Center		100.0	%		272		87.0	%	$	27.19	$	27.19	$	6,431
	SanTan		100.0	%		267		91.7	%	$	27.85	$	27.85	$	6,807
	5090 N 40^th St		100.0	%		175		95.8	%	$	29.03	$	29.03	$	4,861
	Camelback Square		100.0	%		173		67.1	%	$	29.89	$	29.89	$	3,472
	The Quad		100.0	%		163		100.0	%	$	28.66	$	28.91	$	4,672
	Papago Tech		100.0	%		163		86.7	%	$	21.78	$	21.78	$	3,072
Denver, CO (19.7%)	Cherry Creek		100.0	%		356		100.0	%	$	18.59	$	18.59	$	6,612
Denver, CO (19.7%)	Circle Point		100.0	%		272		94.3	%	$	17.58	$	30.47	$	4,506
	Denver Tech ⁽⁴⁾		100.0	%		380		66.9	%	$	22.86	$	27.69	$	5,646
	Superior Pointe		100.0	%		151		96.5	%	$	17.66	$	29.17	$	2,579
Tampa, FL (17.6%)	Park Tower		94.8	%		471		92.4	%	$	24.58	$	24.58	$	10,696
Tampa, FL (17.6%)	City Center		95.0	%		241		91.8	%	$	25.49	$	25.49	$	5,652
	Intellicenter		100.0	%		204		100.0	%	$	23.99	$	23.99	$	4,881
	Carillon Point		100.0	%		124		100.0	%	$	28.16	$	28.16	$	3,498
Orlando, FL (12.2%)	Florida Research Park ⁽⁵⁾		96.6	%		397		89.4	%	$	23.44	$	27.25	$	8,262
Orlando, FL (12.2%)	Central Fairwinds		97.0	%		168		92.1	%	$	25.32	$	25.32	$	3,921
	Greenwood Blvd		100.0	%		155		100.0	%	$	22.75	$	22.75	$	3,527
San Diego, CA (9.9%)	Sorrento Mesa		100.0	%		296		85.3	%	$	25.27	$	31.27	$	6,380
San Diego, CA (9.9%)	Mission City		100.0	%		286		96.9	%	$	35.01	$	35.01	$	9,703
Dallas, TX (9.8%)	190 Office Center		100.0	%		303		89.5	%	$	25.64	$	25.64	$	6,960
	Lake Vista Pointe		100.0	%		163		100.0	%	$	16.00	$	24.00	$	2,613
	2525 McKinnon		100.0	%		111		92.5	%	$	27.41	$	44.41	$	2,823
Portland, OR (5.6%)	AmberGlen		76.0	%		201		96.9	%	$	21.30	$	23.89	$	4,151
Portland, OR (5.6%)	Cascade Station		100.0	%		128		100.0	%	$	26.45	$	32.45	$	3,372
Seattle, WA (3.4%)	Canyon Park		100.0	%		207		100.0	%	$	21.20	$	29.20	$	4,384

Total / Weighted Average – Excluding Assets Held For Sale ⁽³⁾						5,827		91.4	%	$	24.35	$	27.18	$	129,481
Denver, CO (1.2%)	Logan Tower		100.0	%		72		69.8	%	$	21.60	$	21.60	$	1,084

Total / Weighted Average – September 30, 2019 ⁽³⁾						5,899		91.2	%	$	24.32	$	27.13	$	130,565

(1)

Lake Vista Pointe, 2525 McKinnon, Sorrento Mesa, and Canyon Park the annualized base rent per square foot on a triple net basis was increased by $8, $17, $6, and $8 respectively, to estimate a gross equivalent base rent. AmberGlen has a net lease for one tenant which has been grossed up by $7 on a pro rata basis. Superior Pointe has net leases for eight tenants which have been grossed up by $12 on a pro-rata basis. Florida Research Park has net leases for six tenants which have been grossed up by $8 on a pro-rata basis. Circle Point has net leases for twelve tenants which have been grossed up by $13 on a pro-rata basis. The Quad has one tenant with a net lease, which has been grossed up by $8 on a pro-rata basis. Cascade Station has net leases for six tenants which have been grossed up by $7 on a pro-rata basis. Denver Tech has a net lease for one tenant which has been grossed up by $12 on a pro-rata basis.

(2)	Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month ended September 30, 2019 by (ii) 12.

(3)	Averages weighted based on the property’s NRA, adjusted for occupancy

(4)	Denver Tech comprises of 7601 Tech, which was acquired during the third quarter of 2019, and 7595 Tech (formerly “DTC Crossroads”).

(5)	Florida Research Park comprises of FRP Collection and FRP Ingenuity Drive.

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.

Summary of Significant Accounting Policies

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, 2018 included in our Annual Report on Form 10-K for the year ended December 31, 2018 except for the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) as outlined in Note 2 of the condensed consolidated financial statements.

Results of Operations

Comparison of Three Months Ended September 30, 2019 to Three Months Ended September 30, 2018

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 $3.7 million, or 13%, to $32.2 million for the three months ended September 30, 2019, from $28.5 million for the three months ended September 30, 2018, primarily due to the acquisitions described above. Total operating expenses increased by $0.2 million, $0.7 million, $1.3 million, $0.6 million, $0.6 million and $0.3 million, respectively, from the acquisitions of The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech properties. Plaza 25 operating expenses decreased by $0.8 million due to its sale in February 2019. General and Administrative Expenses increased by approximately $0.8 million, related to higher payroll costs. The remaining operating expenses were relatively unchanged in comparison to the prior-year period.

property operating expenses was primarily due to the acquisitions described above. The acquisition of the The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech contributed an additional $0.3 million, $0.4 million, $0.4 million, $0.1 million, $0.2 million and $0.1 million, respectively, in additional property operating expenses. Plaza 25 decreased by $0.5 million due to the sale of that property in February 2019. The remaining property operating expenses aggregate to a net $0.1 million increase in comparison to the prior-year period.

Depreciation and Amortization. Depreciation and amortization increased $1.6 million, or 12%, to $15.0 million for the three months ended September 30, 2019 compared to $13.4 million for the three months ended September 30, 2018, primarily due to the addition of the The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech properties partially offset by a decrease at Plaza 25 due to the sale of the property.

Other Expense (Income)

Interest Expense. Interest expense increased $1.5 million, or 24%, to $7.7 million for the three months ended September 30, 2019, compared to $6.2 million for the three months ended September 30, 2018. The increase was primarily due to interest expense related to acquisitions. Interest expense for the Circle Point, The Quad, Greenwood Blvd, Canyon Park and Cascade Station property level debt increased by $0.2 million, $0.2 million, $0.2 million, $0.5 million and $0.2 million, respectively, and the interest on the line of credit increased by $0.3 million as a result of acquisitions funded by our $250 million Unsecured Credit Facility (as defined below). These increases were partially offset by a $0.2 million decrease in the Plaza 25 debt as a result of its sale and the extinguishment of its property level debt.

Comparison of Nine Months Ended September 30, 2019 to Nine Months Ended September 30, 2018

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 $21.9 million, or 23%, to $117.2 million for the nine months ended September 30, 2019 compared to $95.3 million for the nine months ended September 30, 2018. Of this increase, $1.8 million was attributable to the acquisition of Pima Center in April 2018, $4.5 million from the acquisition of Circle Point in July 2018, $3.3 million from the acquisition of The Quad in July 2018, $3.4 million from the acquisition of Greenwood Blvd in December 2018, $3.5 million from the acquisition of Camelback Square in December 2018, $3.3 million from the acquisition of Canyon Park in February 2019, $1.1 million from the acquisition of Cascade Station in June 2019 and $0.3 million from the acquisition of 7601 Tech in September 2019. Revenue from Central Fairwinds, Park Tower, Mission City and FRP Collection also increased by $0.4 million, $0.8 million, $0.6 million and $0.5 million, respectively, as a result of increased average occupancy over the prior year. Partially offsetting these increases, Washington Group Plaza decreased by $1.7 million due to the sale of the property in March 2018 and Plaza 25 decreased by $1.7 million due to the sale of the property in February 2019. Revenue from 7595 Tech (formerly “DTC Crossroads”) decreased $0.6 million as a result of decreased occupancy over the prior year and Sorrento Mesa also decreased by $1.3 million as a result of the termination fee payment received in the prior year. The remaining properties’ revenues were modestly higher in comparison to the prior year primarily as a result of modest mark-to-market increases in rents upon renewal. Other Revenues benefited from a one-time payment of $2.6 million received as consideration for the assignment of a purchase contract. The assignment fee originated through our administrative services relationship. Upon adoption of Topic 842, prior year amounts disclosed in rental income, expense reimbursement, and other have been combined into a single line to conform to current period presentation.

Operating Expenses

20%, to $95.2 million for the nine months ended September 30, 2019, from $79.5 million for the nine months ended September 30, 2018, primarily due to the acquisitions described above. Total operating expenses increased by $1.8 million, $4.0 million, $2.1 million, $2.2 million, $3.4 million, $1.6 million, $0.8 million and $0.3 million, respectively, from the acquisitions of Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech properties. Park Tower operating expenses also increased by $0.6 million due to the higher occupancy at that property. Washington Group Plaza operating expenses decreased by $0.8 million due to its sale in March 2018 and Plaza 25 operating expenses decreased by $2.1 million due to its sale in February 2019. Sorrento Mesa decreased by $1.5 million due to the sale of the 10455 Pacific Center building of the Sorrento Mesa property in May 2019. General and Administrative Expenses increased by approximately $2.4 million, of which $1.1 million was the result of one-time expenses and accruals incurred as a result of the assignment fee income earned during the nine months ended September 30, 2019 and the balance related to higher payroll costs. The remaining operating expenses were modestly higher in comparison to the prior-year period primarily due to higher occupancy at the properties.

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 $6.2 million, or 17%, to $42.8 million for the nine months ended September 30, 2019 from $36.6 million for the nine months ended September 30, 2018. The increase in property operating expenses was primarily due to the acquisitions described above. The acquisition of the Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech contributed an additional $0.7 million, $2.0 million, $1.0 million, $1.2 million, $1.1 million, $0.4 million, $0.3 million and $0.1 million, respectively, in additional property operating expenses. Park Tower operating expenses also increased by $0.2 million due to the higher occupancy at that property. Washington Group Plaza decreased by $0.8 million due to the sale of that property in March 2018 and Plaza 25 decreased by $1.1 million due to the sale of that property in February 2019. The remaining property operating expenses aggregate to an overall $1.1 million increase in comparison to the prior-year period.

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 increased $2.6 million, or 46%, to $8.4 million for the nine months ended September 30, 2019 compared to $5.8 million for the nine months ended September 30, 2018. Of this increase, $1.1 million can be attributed to the one-time expenses and accruals incurred as a result of the assignment fee income earned during the nine months ended September 30, 2019 as described above and the balance of the increase was primarily attributable to higher payroll costs.

Depreciation and Amortization. Depreciation and amortization increased $7.1 million, or 19%, to $44.1 million for the nine months ended September 30, 2019 compared to $37.0 million for the nine months ended September 30, 2018, primarily due to the addition of the Pima Center, Circle Point, The Quad, Greenwood Blvd, Camelback Square, Canyon Park, Cascade Station and 7601 Tech properties. These increases were partially offset by a decrease at Washington Group Plaza, Plaza 25, and the 10455 Pacific Center building of the Sorrento Mesa property due to the sale of those properties.

Other Expense (Income)

Interest Expense. Interest expense increased $5.5 million, or 32%, to $23.0 million for the nine months ended September 30, 2019, compared to $17.5 million for the nine months ended September 30, 2018. The increase was primarily due to interest expense related to acquisitions. Interest expense for the Circle Point, The Quad, Greenwood Blvd, Canyon Park and Cascade Station property level debt increased by $1.2 million, $0.9 million, $0.8 million, $1.0 million and $0.3 million, respectively, and the interest on the line of credit increased by $2.3 million as a result of acquisitions funded by our $250 million Unsecured Credit Facility. These increases were partially offset by a $0.2 million and $0.5 million, respective decrease in the Washington Group Plaza and Plaza 25 debt as a result of the sale of those properties and the extinguishment of its property level debt.

Cash Flows

Comparison of Nine Months Ended September 30, 2019 to Nine Months Ended September 30, 2018

Cash, cash equivalents and restricted cash were $32.5 million and $33.8 million as of September 30, 2019 and September 30, 2018, respectively.

Cash flow from operating activities. Net cash provided by operating activities increased by $7.2 million to $37.3 million for the nine months ended September 30, 2019 compared to $30.1 million for the nine months ended September 30, 2018. The increase was primarily attributable to increased operating cash flows from acquired properties.

Cash flow to investing activities. Net cash used in investing activities decreased by $5.9 million to $90.7 million for the nine months ended September 30, 2019 compared to $96.6 million used in investing activities for the nine months ended September 30, 2018. The decrease in cash used in investing activities was primarily due to lower cost of acquisitions of real estate in 2019 compared to 2018. Additionally, we realized lower proceeds from the sale of real estate in 2019 compared to 2018 which included proceeds from the sale of Washington Group Plaza in 2018.

Cash flow from financing activities. Net cash provided by financing activities decreased by $12.5 million to $52.9 million for the nine months ended September 30, 2019 compared to $65.4 million used in financing activities in the nine months ended September 30, 2018. Cash flow provided by financing activities decreased primarily due to lower net proceeds from borrowings compared to 2018. The decrease was partially offset by higher proceeds from sales of common stock in 2019 compared to 2018.

Liquidity and Capital Resources

Analysis of Liquidity and Capital Resources

We had approximately $12.3 million of cash and cash equivalents and $20.2 million of restricted cash as of September 30, 2019.

On March 15, 2018 the Company entered into a $250 million unsecured credit facility, which includes an accordion feature that allows the Company to borrow up to $500 million, subject to customary terms and conditions (the “Unsecured Credit Facility”). The Company’s previous secured credit facility was replaced and repaid in full from the proceeds of our Unsecured Credit Facility. Our Unsecured Credit Facility matures in March 2022, and may be extended to March 2023 at the Company’s option upon meeting certain conditions. Borrowings under our Unsecured Credit Facility bear an interest at a rate equal to the LIBOR rate plus a margin of between 140 to 225 basis points depending upon the Company’s consolidated leverage ratio. As of September 30, 2019, we had approximately $43.3 million outstanding under our Unsecured Credit Facility and $7.0 million of letters of credit to satisfy escrow requirements for mortgage lenders.

In September 2019, the Company executed a third amendment to the Unsecured Credit Facility. The amendment increased the commitment under the facility from $250 million to $300 million by issuing a new tranche of term loan commitments in the principal amount of $50 million (the “Term Loan”). The five-year Term Loan bears interest at a rate of LIBOR plus a spread of 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the Company entered into a pay-fixed receive-variable interest rate swap with a notional amount of $50 million, effectively fixing the LIBOR component of the borrowing rate at approximately 1.27% (the “Interest Rate Swap”). Both the Term Loan and Interest Rate Swap mature in September 2024.

The Company and the Operating Partnership previously entered into the amended equity distribution agreements (collectively, the “EDAs”) with the sales agents named therein (collectively, the “Sales Agents”), pursuant to which the Company may issue and sell from time to time up to 8,000,000 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”). Pursuant to the EDAs, the shares may be offered and sold through the Sales Agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the New York Stock Exchange or sales made to or through a market maker other than on an exchange or, with the prior consent of the Company, in privately negotiated transactions. The Sales Agents will be entitled to compensation of up to 2.0% of the gross proceeds of shares sold through the Sales Agents

from time to time under the EDAs. The Company has no obligation to sell any of the shares under the EDAs and may at any time suspend solicitations and offers under, or terminate, the EDAs. During the nine month period ended September 30, 2019, the Company issued 8,000,000 shares of common stock under the ATM Program. The Company raised $106.5 million in aggregate gross proceeds, resulting in aggregate net proceeds to the Company of approximately $104.8 million after deducting sales commissions and offering expenses.

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, reserves established from existing cash, proceeds from our public offerings, including under our at the market issuance 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, 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, 2019, 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		2019		2020-2021		2022-2023		More than 5 years
Principal payments on mortgage loans	$	657,054	$	1,400	$	95,642	$	98,381	$	461,631
Interest payments ⁽¹⁾		146,206		6,567		49,921		40,737		48,981
Tenant-related commitments		11,885		6,304		4,982		599		—
Operating and financing lease obligations		30,475		150		1,617		1,431		27,277

Total	$	845,620	$	14,421	$	152,162	$	141,148	$	537,889

(1)

Contracted interest on the floating rate Unsecured Credit Facility was calculated based on balance and interest rate at September 30, 2019. 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%.

Off-Balance Sheet Arrangements

As of September 30, 2019, we had $7.0 million of letters of credit outstanding under our Unsecured Credit Facility to satisfy escrow requirements for mortgage lenders.

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.

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 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. We consider our interest rate exposure to be minimal, because as of September 30, 2019, approximately $563.7 million, or 85.8%, of our debt had fixed interest rates and approximately $93.3 million, or 14.2%, had variable interest rates. Of the $93.3 million variable rate debt, $50 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 93.4% of our debt had fixed rate debt and 6.6% had variable rate debt as of September 30, 2019. A 10% increase in LIBOR would increase our annual interest costs by approximately $0.2 million on debt outstanding as of September 30, 2019, 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 10% decrease in LIBOR would decrease our annual interest costs by approximately $0.2 million on debt outstanding as of September 30, 2019 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 rate 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, 2019.

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.

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, 2019, 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 replaces the risk factor disclosed under a similar heading in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018. Except as presented below, there have been no material changes from the risk factors set forth in such Annual Report.

Our commitments to Second City Real Estate II Corporation (“Second City”), Clarity Real Estate III GP, Limited Partnership (“Clarity RE”), Clarity Real Estate Ventures GP, Limited Partnership (together with Clarity RE, “Clarity”), and their respective affiliates may give rise to various conflicts of interest.

We are subject to conflicts of interest arising out of our relationship with Second City and Clarity. As a result of the internalization of our former external advisor on February 1, 2016, we agreed to allow our management to continue to provide services to Second City under the terms of an administrative services agreement. In addition, the terms of the administrative services agreement and the employment agreements we entered into with each of our executive officers permit, under certain circumstances and subject to the oversight of our Board of Directors, our executive officers to advise or oversee new or additional funds in the future. On July 31, 2019, we, through an indirect, wholly-owned subsidiary, entered into a separate administrative services agreement with Clarity to provide administrative services to Clarity similar to those provided to Second City. These arrangements with Second City and Clarity may create potential conflicts of interests, including competition for the time and services of personnel that work for us and our affiliates.

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

None.

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).


Exhibit Number		Description

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).

10.1		Amendment No. 1 to the City Officer REIT, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 6, 2019).

10.2		Administrative Services Agreement, dated July 31, 2019, by and among CIO Administrative Services, LLC, Clarity Real Estate III GP, Limited Partnership and Clarity Real Estate Ventures GP, Limited Partnership. (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019).

10.3		Amendment No. 1 to Executive Employment Agreement, dated as of July 31, 2019, by and between City Office Management Ltd. and James Farrar.* (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019).

10.4		Amendment No. 1 to Executive Employment Agreement, dated as of July 31, 2019, by and between City Office Management Ltd. and Gregory Tylee.* (Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019).

10.5		Amendment No. 1 to Executive Employment Agreement, dated as of July 31, 2019, by and between City Office Management Ltd. and Anthony Maretic.* (Incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019).

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. †

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**

†	Filed herewith.

*	Compensatory Plan or arrangement

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.

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 1, 2019
	By:	/s/ James Farrar
		James Farrar

		Chief Executive Officer and Director
		(Principal Executive Officer)

Date: November 1, 2019
	By:	/s/ Anthony Maretic
		Anthony Maretic

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