City Office REIT, Inc. - Quarter Report: 2020 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

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, 2020

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

For the transition period from

Commission File Number:

001-36409

CITY OFFICE REIT, INC.

(Exact name of registrant as specified in its charter)


Maryland		98-1141883
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

666 Burrard Street

Suite 3210

Vancouver, BC

V6C 2X8

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (604)

806-3366

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of each Exchange on Which Registered
Common Stock, $0.01 par value 6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share	“CIO” “CIO.PrA”	New York Stock Exchange New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes ☐ ☒ No

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at November 2, 2020 was 43,397,117.

Table of Contents

City Office REIT, Inc.

Quarterly Report on Form

10-Q

For the Quarter Ended September 30, 2020

Table of Contents


PART I. FINANCIAL INFORMATION			3

Item 1. Financial Statements			3

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019			3

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019			4

Condensed Consolidated Statements of Comprehensive Income/(Loss) for the Three and Nine Months Ended September 30, 2020 and 2019			5

Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2020 and 2019			6

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019			8

Notes to Condensed Consolidated Financial Statements			9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19

Item 3. Quantitative and Qualitative Disclosures about Market Risk			31

Item 4. Controls and Procedures			31

PART II. OTHER INFORMATION			32

Item 1. Legal Proceedings			32

Item 1A. Risk Factors			32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33

Item 3. Defaults Upon Senior Securities			34

Item 4. Mine Safety Disclosures			34

Item 5. Other Information			34

Item 6. Exhibits			35

Signatures			36

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

City Office REIT, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except par value and share data)


	September 30, 2020			December 31, 2019
Assets
Real estate properties
Land	$	230,034		$	230,034
Building and improvement		790,981			784,636
Tenant improvement		107,335			94,218
Furniture, fixtures and equipment		285			285

		1,128,635			1,109,173
Accumulated depreciation		(129,620	)		(101,835	)

		999,015			1,007,338

Cash and cash equivalents		38,399			70,129
Restricted cash		17,962			17,394
Rents receivable, net		34,756			32,112
Deferred leasing costs, net		14,954			12,393
Acquired lease intangible assets, net		51,552			67,533
Other assets		16,174			17,061
Assets held for sale		—			4,514

Total Assets	$	1,172,812		$	1,228,474

Liabilities and Equity
Liabilities:
Debt	$	678,533		$	607,250
Accounts payable and accrued liabilities		32,633			28,786
Deferred rent		6,103			6,593
Tenant rent deposits		5,418			5,658
Acquired lease intangible liabilities, net		6,484			8,194
Other liabilities		18,523			22,794
Liabilities related to assets held for sale		—			67

Total Liabilities		747,694			679,342

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, 43,397,117 and 54,591,047 shares issued and outstanding		433			545
Additional paid-in capital		478,774			577,131
Accumulated deficit		(164,917	)		(142,383	)
Accumulated other comprehensive (loss)/income		(2,190	)		715

Total Stockholders’ Equity		424,100			548,008
Non-controlling interests in properties		1,018			1,124

Total Equity		425,118			549,132

Total Liabilities and Equity	$	1,172,812		$	1,228,474

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

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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,
	2020			2019			2020			2019
Rental and other revenues	$	41,261		$	38,946		$	121,000		$	117,236
Operating expenses:
Property operating expenses		14,886			14,384			43,666			42,754
General and administrative		2,546			2,775			8,025			8,435
Depreciation and amortization		15,189			15,035			45,222			44,057

Total operating expenses		32,621			32,194			96,913			95,246

Operating income		8,640			6,752			24,087			21,990
Interest expense:
Contractual interest expense		(6,620	)		(7,378	)		(19,773	)		(22,022	)
Amortization of deferred financing costs and debt fair value		(328	)		(321	)		(993	)		(992	)

		(6,948	)		(7,699	)		(20,766	)		(23,014	)
Net gain on sale of real estate property		1,347			—			1,347			478

Net income/(loss)		3,039			(947	)		4,668			(546	)
Less:
Net income attributable to non-controlling interests in properties		(153	)		(164	)		(514	)		(498	)

Net income/(loss) attributable to the Company		2,886			(1,111	)		4,154			(1,044	)
Preferred stock distributions		(1,855	)		(1,855	)		(5,565	)		(5,565	)

Net income/(loss) attributable to common stockholders	$	1,031		$	(2,966	)	$	(1,411	)	$	(6,609	)

Net income/(loss) per common share:
Basic	$	0.02		$	(0.07	)	$	(0.03	)	$	(0.16	)

Diluted	$	0.02		$	(0.07	)	$	(0.03	)	$	(0.16	)

Weighted average common shares outstanding:
Basic		43,593			42,591			48,508			40,610

Diluted		44,014			42,591			48,508			40,610

Dividend distributions declared per common share	$	0.150		$	0.235		$	0.450		$	0.705

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

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City Office REIT, Inc.

Condensed Consolidated Statements of Comprehensive Income/(Loss)

(Unaudited)

(In thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Net income/(loss)	$	3,039		$	(947	)	$	4,668		$	(546	)
Other comprehensive income/(loss):
Unrealized cash flow hedge (loss)/gain		(7	)		279			(3,091	)		279
Amounts reclassified to interest expense		141			(32	)		186			(32	)

Other comprehensive income/(loss)		134			247			(2,905	)		247

Comprehensive income/(loss)		3,173			(700	)		1,763			(299	)
Less:
Comprehensive income attributable to non-controlling interests in properties		(153	)		(164	)		(514	)		(498	)

Comprehensive income/(loss) attributable to the Company		3,020			(864	)		1,249			(797	)
Preferred stock distributions		(1,855	)		(1,855	)		(5,565	)		(5,565	)

Comprehensive income/(loss) attributable to common stockholders	$	1,165		$	(2,719	)	$	(4,316	)	$	(6,362	)

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

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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 (loss)/income			Total stockholders’ equity			Non- controlling interests in properties			Total equity
Balance—December 31, 2019		4,480	$	112,000		54,591		$	545		$	577,131		$	(142,383)		$	715		$	548,008		$	1,124		$	549,132
Restricted stock award grants and vesting		—		—		35			—			599			(79)			—			520			—			520
Common stock repurchased		—		—		(1,451	)		(14	)		(11,608	)		—			—			(11,622	)		—			(11,622	)
Common stock dividend distribution declared		—		—		—			—			—			(7,771)			—			(7,771	)		—			(7,771	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855)			—			(1,855	)		—			(1,855	)
Contributions		—		—		—			—			—			—			—			—			3			3
Distributions		—		—		—			—			—			—			—			—			(200	)		(200	)
Net income		—		—		—			—			—			824			—			824			182			1,006
Other comprehensive loss		—		—		—			—			—			—			(2,741	)		(2,741	)		—			(2,741	)

Balance—March 31, 2020		4,480	$	112,000		53,175		$	531		$	566,122		$	(151,264)		$	(2,026	)	$	525,363		$	1,109		$	526,472

Restricted stock award grants and vesting		—		—		135			2			659			(66	)		—			595			—			595
Common stock repurchased		—		—		(8,799	)		(88	)		(77,961	)		—			—			(78,049	)		—			(78,049	)
Common stock dividend distribution declared		—		—		—			—			—			(6,649	)		—			(6,649	)		—			(6,649	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855	)		—			(1,855	)		—			(1,855	)
Distributions		—		—		—			—			—			—			—			—			(184	)		(184	)
Net income		—		—		—			—			—			444			—			444			179			623
Other comprehensive loss		—		—		—			—			—			—			(298	)		(298	)		—			(298	)

Balance—June 30, 2020		4,480	$	112,000		44,511		$	445		$	488,820		$	(159,390)		$	(2,324	)	$	439,551		$	1,104		$	440,655

Restricted stock award grants and vesting		—		—		—			—			636			(49	)		—			587			—			587
Common stock repurchased		—		—		(1,114	)		(12	)		(10,682	)		—			—			(10,694	)		—			(10,694	)
Common stock dividend distribution declared		—		—		—			—			—			(6,509	)		—			(6,509	)		—			(6,509	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855	)		—			(1,855	)		—			(1,855	)
Distributions		—		—		—			—			—			—			—			—			(239	)		(239	)
Net income		—		—		—			—			—			2,886			—			2,886			153			3,039
Other comprehensive income		—		—		—			—			—			—			134			134			—			134

Balance—September 30, 2020		4,480	$	112,000		43,397		$	433		$	478,774		$	(164,917)		$	(2,190)		$	424,100		$	1,018		$	425,118

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	Number of shares of preferred stock		Preferred stock		Number of shares of common stock		Common stock		Additional paid-in capital		Accumulated deficit			Accumulated other comprehensive (loss)/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 distribution declared		—		—		—		—		—		(9,314)			—		(9,314	)		—			(9,314	)
Preferred stock dividend distribution 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 distribution declared		—		—		—		—		—		(9,318	)		—		(9,318	)		—			(9,318	)
Preferred stock dividend distribution 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 distribution declared		—		—		—		—		—		(11,197	)		—		(11,197	)		—			(11,197	)
Preferred stock dividend distribution declared		—		—		—		—		—		(1,855	)		—		(1,855	)		—			(1,855	)
Contributions		—		—		—		—		—		—			—		—			46			46
Distributions		—		—		—		—		—		—			—		—			(180	)		(180	)
Net income		—		—		—		—		—		(1,111	)		—		(1,111	)		164			(947	)
Other comprehensive income		—		—		—		—		—		—			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

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

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City Office REIT, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine Months Ended September 30,
	2020			2019
Cash Flows from Operating Activities:
Net income/(loss)	$	4,668		$	(546	)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Depreciation and amortization		45,222			44,057
Amortization of deferred financing costs and debt fair value		993			992
Amortization of above and below market leases		(70	)		(67	)
Straight-line rent/expense		(2,354	)		(4,591	)
Non-cash stock compensation		1,745			1,310
Net gain on sale of real estate property		(1,347	)		(478	)
Changes in non-cash working capital:
Rents receivable, net		(235	)		(1,512	)
Other assets		(110	)		(337	)
Accounts payable and accrued liabilities		(151	)		(1,217	)
Deferred rent		(490	)		73
Tenant rent deposits		(240	)		(421	)

Net Cash Provided By Operating Activities		47,631			37,263

Cash Flows to Investing Activities:
Additions to real estate properties		(17,105	)		(13,855	)
Acquisition of real estate		—			(108,358	)
Net proceeds from sale of real estate.		6,340			33,941
Deferred leasing costs		(4,479	)		(2,474	)

Net Cash Used In Investing Activities		(15,244	)		(90,746	)

Cash Flows (to)/from Financing Activities:
Repurchases of common stock		(100,365	)		—
Proceeds from sale of common stock		—			104,816
Debt issuance and extinguishment costs		—			(995	)
Proceeds from borrowings		130,000			154,750
Repayment of borrowings		(59,707	)		(171,575	)
Shares withheld for payment of taxes on restricted stock unit vesting		(43	)		(246	)
Contributions from non-controlling interests in properties .		3			68
Distributions to non-controlling interests in properties		(623	)		(470	)
Dividend distributions paid to stockholders		(32,814	)		(33,489	)

Net Cash (Used In)/Provided By Financing Activities		(63,549	)		52,859

Net Decrease in Cash, Cash Equivalents and Restricted Cash		(31,162	)		(624	)
Cash, Cash Equivalents and Restricted Cash, Beginning of Period		87,523			33,145

Cash, Cash Equivalents and Restricted Cash, End of Period	$	56,361		$	32,521

Reconciliation of Cash, Cash Equivalents and Restricted Cash:
Cash and Cash Equivalents, End of Period		38,399			12,281
Restricted Cash, End of Period		17,962			20,240

Cash, Cash Equivalents and Restricted Cash, End of Period	$	56,361		$	32,521

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	19,681		$	22,262
Purchase of additions in real estate properties included in accounts payable	$	9,778		$	2,264
Purchase of deferred leasing costs included in accounts payable	$	797		$	298
Debt assumed on acquisition of real estate	$	—		$	22,473

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

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City Office REIT, Inc.

Notes to the Condensed Consolidated Financial Statements

1. Organization and Description of Business

City Office REIT, Inc. (the “Company”) was organized in the state of Maryland on November 26, 2013. On April 21, 2014, the Company completed its initial public offering (“IPO”) of shares of the Company’s common stock. The Company contributed the net proceeds of the IPO to City Office REIT Operating Partnership, L.P., a Maryland limited partnership (the “Operating Partnership”), in exchange for common units of limited partnership interest in the Operating Partnership (“common units”).

The Company’s interest in the Operating Partnership entitles the Company to share in distributions from, and allocations of profits and losses of, the Operating Partnership in proportion to the Company’s percentage ownership of common units. As the sole general partner of the Operating Partnership, the Company has the exclusive power under the Operating Partnership’s partnership agreement to manage and conduct the Operating Partnership’s business, subject to limited approval and voting rights of the limited partners.

The Company has elected to be taxed and will continue to operate in a manner that will allow it to continue to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Subject to qualification as a REIT, the Company will be permitted to deduct dividend distributions paid to its stockholders, eliminating the U.S. federal taxation of income represented by such distributions at the Company level. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and, for tax years beginning before 2018, any applicable alternative minimum tax.

2. Summary of Significant Accounting Policies

Basis of Preparation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with Securities and Exchange Commission 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, 2019.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board established Topic 848, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, by issuing Accounting Standards Update (“ASU”)

No. 2020-04.

ASU

2020-04

provides companies with optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. For contracts affected by reference rate reform, if certain criteria are met, companies can elect to not remeasure contracts at the modification date or reassess a previous accounting conclusion. Companies can also elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met. ASU

2020-04

can be applied as of the beginning of the interim period that includes March 12, 2020, however, the guidance will only be available for optional use through December 31, 2022. The new standard applies prospectively to contract modifications and hedging relationships and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of ASU

2020-04

on its consolidated financial statements and may elect optional expedients in future periods as reference rate reform activities occur.

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On April 10, 2020, the Financial Accounting Standards Board (the “FASB”) issued a Staff Q&A to respond to some frequently asked questions about accounting for rent relief related to the effects of the

COVID-19

pandemic. Consequently, for rent relief related to the effects of the

COVID-19

pandemic, an entity will not be required to analyze each contract to determine whether enforceable rights and obligations for abatements exist in the contract and can elect to apply or not apply the lease modification guidance to those contracts. Entities may make the elections for any lessor-provided rent relief related to the effects of the

COVID-19

pandemic (e.g., deferrals of lease payments, reduced future lease payments, etc.) as long as the rent relief does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. To date, the Company granted rent relief to certain tenants, most often in the form of a rent deferral or rent abatement. For rent relief granted that did not result in a substantial increase in the rights of the lessor or the obligations of the lessee, the Company elected to not apply the lease modification guidance and instead account for the rent relief as though the enforceable rights and obligations for the relief existed in the original contract. For rent relief granted that resulted in a substantial increase in the rights of the lessor or the obligations of the lessee, the Company applied the lease modification guidance to the applicable contracts.

3. Real Estate Investments

Acquisitions

During the nine months ended September 30, 2020 and 2019 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 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):


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

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

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

Sale of Real Estate Property

On July 23, 2020, the Company sold a land parcel at the Circle Point property in Denver, Colorado for $6.5 million, resulting in an aggregate gain of $1.3 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.

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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.

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 December 31, 2019. On July 23, 2020, the Company completed the sale of the land parcel at the Circle Point property.

The property was

classified as held for sale as of December 31, 2019 (in thousands):


Circle Point Land	December 31, 2019
Real estate properties, net	$	4,514

Assets held for sale	$	4,514

Accounts payable, accrued expenses, deferred rent and tenant rent deposits	$	(67	)

Liabilities related to assets held for sale	$	(67	)

4. Lease Intangibles

Lease intangibles and the value of assumed lease obligations as of September 30, 2020 and December 31, 2019 were comprised as follows (in thousands):


	Lease Intangible Assets												Lease Intangible Liabilities
September 30, 2020	Above Market Leases			In Place Leases			Leasing Commissions			Total			Below Market Leases			Below Market Ground Lease			Total
Cost	$	14,870		$	87,163		$	35,885		$	137,918		$	(13,862	)	$	(138	)	$	(14,000	)
Accumulated amortization		(7,972	)		(58,947	)		(19,447	)		(86,366	)		7,473			43			7,516

	$	6,898		$	28,216		$	16,438		$	51,552		$	(6,389	)	$	(95	)	$	(6,484	)


	Lease Intangible Assets												Lease Intangible Liabilities
December 31, 2019	Above Market Leases			In Place Leases			Leasing Commissions			Total			Below Market Leases			Below Market Ground Lease			Total
Cost	$	15,242		$	87,320		$	36,048		$	138,610		$	(13,878	)	$	(138	)	$	(14,016	)
Accumulated amortization		(6,704	)		(48,229	)		(16,144	)		(71,077	)		5,782			40			5,822

	$	8,538		$	39,091		$	19,904		$	67,533		$	(8,096	)	$	(98	)	$	(8,194	)

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


2020	$	4,702
2021		15,890
2022		8,229
2023		5,355
2024		3,077
Thereafter		7,815

	$	45,068

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5. Debt

The following table summarizes the indebtedness as of September 30, 2020 and December 31, 2019 (dollars in thousands):


Property	September 30, 2020			December 31, 2019			Interest Rate as of September 30, 2020 (1)			Maturity
Unsecured Credit Facility (3)(4)	$	75,000		$	—			LIBOR +1.50	% (2)		March 2022
Term Loan (4)		50,000			50,000			LIBOR +1.40	% (2)		September 2024
Midland Life Insurance (5)		83,983			85,293			4.34	%		May 2021
Mission City		47,000			47,000			3.78	%		November 2027
Canyon Park (6)		40,950			40,950			4.30	%		March 2027
190 Office Center		40,396			40,854			4.79	%		October 2025
Circle Point		39,650			39,650			4.49	%		September 2028
SanTan		33,599			34,053			4.56	%		March 2027
Intellicenter		32,579			32,971			4.65	%		October 2025
The Quad		30,600			30,600			4.20	%		September 2028
FRP Collection		28,442			28,969			3.10	%		September 2023
2525 McKinnon		27,000			27,000			4.24	%		April 2027
Greenwood Blvd		22,425			22,425			3.15	%		December 2025
Cascade Station		22,043			22,304			4.55	%		May 2024
5090 N 40 th St		21,740			22,000			3.92	%		January 2027
AmberGlen		20,000			20,000			3.69	%		May 2027
Lake Vista Pointe		17,461			17,717			4.28	%		August 2024
Central Fairwinds		17,230			17,534			3.15	%		June 2024
FRP Ingenuity Drive		16,804			17,000			4.44	%		December 2024
Carillon Point		15,683			15,972			3.10	%		October 2023

Total Principal		682,585			612,292
Deferred financing costs, net		(4,563	)		(5,660	)
Unamortized fair value adjustments		511			618

Total	$	678,533		$	607,250

(1)	All interest rates are fixed interest rates with the exception of the Unsecured Credit Facility (“Unsecured Credit Facility”) and the Term Loan (as defined herein), as explained in footnotes 3 and 4 below.

(2)	As of September 30, 2020, the one-month LIBOR rate was 0.15%.

(3)

In March 2018, the Company entered into the Credit Agreement for the Unsecured Credit Facility that provides for commitments of up to $250 million, which includes an accordion feature that allows the Company to borrow up to $500 million, subject to customary terms and conditions. The 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 the Unsecured Credit Facility 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. As of September 30, 2020, the Unsecured Credit Facility had $75.0 million drawn and $7.0 million of letters of credit to satisfy escrow requirements for mortgage lenders. 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 five-year $50 million Term Loan (the “Term Loan”) increasing its authorized borrowings under the Unsecured Credit Facility from $250 million to $300 million. Borrowings under the Term Loan bear interest at a rate equal to the LIBOR rate plus a margin between 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the Company also entered into a five-year interest rate swap for a notional amount of $50 million (the “Interest Rate Swap”). Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate

30-day

LIBOR payments.

(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.

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The scheduled principal repayments of debt as of September 30, 2020 are as follows (in thousands):


2020	$	1,571
2021		89,356
2022		81,529
2023		48,529
2024		124,725
Thereafter		336,875

	$	682,585

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

In September 2019, the Company entered into a five-year Interest Rate Swap for a notional amount of $50 million. Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate

30-day

LIBOR payments. Accordingly, the fair value of the Interest Rate Swap has been classified as a Level 2 fair value measurement.

The Interest Rate Swap has been designated and qualifies as a cash flow hedge and has been recognized on the condensed consolidated balance sheets at fair value. Gains and losses resulting from changes in the fair value of derivatives that have been designated and qualify as cash flow hedges are reported as a component of other comprehensive income/(loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.

As of September 30, 2020, the Interest Rate Swap was reported as a liability at its fair value of approximately $2.2 million, which is included in other

liabilities on the Company’s condensed

consolidated balance sheet. For the nine months ended September 30, 2020 approximately $0.2 million of realized losses were reclassified to interest expense due to payments

made to

the swap counterparty.

As of December 31, 2019, the Interest Rate Swap was reported as an asset at its fair value of approximately $0.7 million, which is included in other assets on the

Company’s condensed

consolidated balance sheet.

Cash, Cash Equivalents, Restricted Cash, Rents Receivable, Accounts Payable and Accrued Liabilities

The Company estimates that the fair value approximates carrying value due to the relatively short-term nature of these instruments.

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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 $579.8 million and $576.9 million as of September 30, 2020 and December 31, 2019, 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, 2020 and 2019, the Company earned $0.3 million and $0.4 million, respectively, in administrative services performed for Second City Real Estate II Corporation and its affiliates (“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.

On July 31, 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 nine months ended September 30, 2020, the Company earned $0.2 million in administrative services performed for Clarity. During the nine 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 recognized fixed and variable lease payments for the three and nine months ended September 30, 2020 and the three and nine months ended September 30, 2019 as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Fixed payments	$	35,071	$	33,495	$	103,070	$	98,555
Variable payments		6,151		5,441		17,864		15,967

	$	41,222	$	38,936	$	120,934	$	114,522

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Future minimum lease payments to be received by the Company as of September 30, 2020 under

non-cancellable

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


2020	$	30,755
2021		122,511
2022		104,734
2023		86,989
2024		67,752
Thereafter		175,205

	$	587,946

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.

Lessee Accounting

As a lessee, the Company has ground and office leases which are classified as operating and financing leases. As of September 30, 2020, these leases had remaining terms of 1 to 68 years and a weighted average remaining lease term of 56 years.

Right-of-use

assets and lease liabilities have been included within other assets and other liabilities on the Company’s condensed consolidated balance sheet as follows (in thousands):


	September 30, 2020		December 31, 2019
Right-of-use asset – operating leases	$	12,838	$	13,130
Lease liability – operating leases	$	7,908	$	8,033
Right-of-use asset – financing leases	$	61	$	79
Lease liability – financing leases	$	61	$	79

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 6.3% 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 expenses for the three and nine months ended September 30, 2020 were $0.2 million and $0.6

million,

respectively. Operating lease expenses for the three and nine months ended September 30, 2019 were $0.2 million and $0.6 million

respectively. Financing lease expenses for the three and nine months ended September 30, 2020 and 2019 were nominal.

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Future minimum lease payments to be paid by the Company as a lessee for operating and financing leases as of September 30, 2020 for the next five years and thereafter are as follows (in thousands):


	Operating Leases			Financing Leases
2020	$	45		$	7
2021		817			27
2022		798			27
2023		663			4
2024		597			—
Thereafter		26,680			—

Total future minimum lease payments		29,600			65
Discount		(21,692	)		(4	)

Total	$	7,908		$	61

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, 2020, 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

Share Repurchase Plan

On March 9, 2020, the Company’s Board of Directors approved a share repurchase plan authorizing the Company to repurchase up to $100 million of its outstanding shares of common stock. In July 2020, the Company completed the full March 2020 share repurchase plan. On August 5, 2020, the Company’s Board of Directors approved an additional share repurchase plan authorizing the Company to repurchase up to an additional aggregate amount of $50 million of its outstanding shares of common stock. Under the share repurchase programs, the shares may be repurchased from time to time using a variety of methods, which may include open market transactions, privately negotiated transactions or otherwise, all in accordance with the rules of the Securities and Exchange Commission and other applicable legal requirements.

Repurchased shares of common stock will be classified as authorized and unissued shares. The Company recognizes the cost of shares of common stock it repurchases, including direct costs incurred, as a reduction in stockholders’ equity. Such reductions of stockholders equity due to the repurchases of shares of common stock will be applied first, to reduce common stock in the amount of the par value associated with the shares of common stock repurchased and second, to reduce additional

paid-in

capital by the amount that the purchase price for the shares of common stock repurchased exceed the par value.

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During the nine months ended September 30, 2020, the Company completed the repurchase of 11,363,851 shares of its common stock for approximately $100.0 million. There were no shares repurchased during the nine months ended September 30, 2019.

Common Stock and Common Unit Distributions

On September 15, 2020, the Company’s Board of Directors approved and the Company declared a cash dividend distribution of $0.15 per common share for the quarterly period ended September 30, 2020. The dividend was paid subsequent to quarter end on October 22, 2020 to common stockholders and common unitholders of record as of the close of business on October 8, 2020, resulting in an aggregate payment of $6.5 million.

Preferred Stock Distributions

On September 15, 2020 the Company’s Board of Directors approved and the Company declared a cash dividend of $0.4140625 per share of the Company’s 6.625% Series A Preferred Stock (“Series A Preferred Stock”) for an aggregate amount of $1.9 million for the quarterly period ended September 30, 2020. The dividend was paid subsequent to quarter end on October 22, 2020 to the holders of record of Series A Preferred Stock as of the close of business on October 8, 2020.

Equity Incentive Plan

The Company has an

equity incentive plan (“Equity Incentive Plan”) for executive officers, directors and certain

non-executive

employees, and with approval of the Board of Directors, for subsidiaries and their respective affiliates. The Equity Incentive Plan provides for grants of restricted common stock, restricted stock units, phantom shares, stock options, dividend equivalent rights and other equity-based awards (including LTIP Units), subject to the total number of shares available for issuance under the plan. The Equity Incentive Plan is administered by the compensation committee of the Board of Directors (the “Plan Administrator”).

On May 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.

On January 27, 2020, each of the Board of Directors and the Compensation Committee approved a new form of performance-based restricted unit award agreement (the “Performance RSU Award Agreement”) that will be used to grant performance-based restricted stock unit awards (“Performance RSU Awards”) pursuant to the Equity Incentive Plan. The Performance RSU Awards are based upon the total stockholder return (“TSR”) of the Company’s common stock over a three-year measurement period beginning January 1, 2020 and ending on December 31, 2022 (the “Measurement Period”) relative to the TSR of the companies in the SNL US REIT Office index as of January 2, 2020 (the “2020 RSU Peer Group”). The payouts under the Performance RSU Awards are evaluated on a sliding scale as follows: TSR below the 30th percentile of the 2020 RSU Peer Group would result in a 50% payout; TSR at the 50th percentile of the 2020 RSU Peer Group would result in a 100% payout; and TSR at or above the 75th percentile of the 2020 RSU Peer Group would result in a 150% payout. Payouts are mathematically interpolated between these stated percentile targets, subject to a 150% maximum. To the extent earned, the payouts of the Performance RSU Awards are intended to be settled in the form of shares of the Company’s common stock, pursuant to the Equity Incentive Plan. Upon satisfaction of the vesting conditions, dividend equivalents in an amount equal to all regular and special dividends declared with respect to the Company’s common stock during each annual measurement period during the Measurement Period are determined and paid on a cumulative, reinvested basis over the term of the applicable Performance RSU Award, at the time such award vests and based on the number of shares of the Company’s common stock that are earned.

During the nine months ended September 30, 2020, 147,050 restricted stock units (“RSUs”) were granted to executive officers, directors and certain

non-executive

employees with a fair value of $2.0 million. The RSU 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, 2020, the Company recognized net compensation expense of $0.5 and $1.4 million, respectively, related to the RSUs. 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.

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During the nine months ended September 30, 2020, 97,500 Performance RSU Awards were granted to executive officers with a fair value of $1.3 million. The Performance RSU Awards will vest on the last day of the three-year measurement period of January 1, 2020 through December 31, 2022. For the three and nine months ended September 30, 2020, the Company recognized net compensation expense of $0.1 million and $0.3 million, respectively, related to the Performance RSU Awards. There was no compensation expense related to the Performance RSU Awards for the three and nine months ended September 30, 2019.

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

The following discussion and analysis is based on, and should be read in conjunction with, the condensed, consolidated financial statements and the related notes thereto of the City Office REIT, Inc. contained in this Quarterly Report on Form

10-Q

(this “Report”).

As used in this section, unless the context otherwise requires, references to “we,” “our,” “us,” and “our company” refer to City Office REIT, Inc., a Maryland corporation, together with our consolidated subsidiaries, including City Office REIT Operating Partnership L.P., a Maryland limited partnership, of which we are the sole general partner and which we refer to in this section as our Operating Partnership, except where it is clear from the context that the term only means City Office REIT, Inc.

Cautionary Statement Regarding Forward-Looking Statements

This 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. We have used the words “approximately,” “anticipate,” “assume,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this Report. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including:

•

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

•

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

COVID-19

pandemic;

•

requests from tenants for rent deferrals, rent abatement or relief from other contractual obligations, or a failure to pay rent, as a result of changes in business behavior stemming from the ongoing

COVID-19

pandemic or the availability of government assistance programs;

•

our inability to compete effectively;

•

our inability to collect rent from tenants or renew tenants’ leases on attractive terms if at all;

•

demand for and market acceptance of our properties for rental purposes;

•

defaults on or

non-renewal

of leases by tenants, including as a result of the ongoing

COVID-19

pandemic;

•

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

•

decreased rental rates or increased vacancy rates, including as a result of changes in business behavior or market dynamics related to the ongoing

COVID-19

pandemic;

•

our failure to obtain necessary financing or access the capital markets on favorable terms or at all;

•

changes in the availability of acquisition opportunities;

•

availability of qualified personnel;

•

our inability to successfully complete real estate acquisitions or dispositions on the terms and timing we expect, or at all;

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•

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 or actions in response to the

COVID-19

pandemic;

•

outcome of claims and litigation involving or affecting us;

•

financial market fluctuations;

•

changes in real estate, taxation and zoning laws and other legislation and government activity and changes to real property tax rates and the taxation of REITs in general; and

•

other factors described in our news releases and filings with the 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, 2019 under the heading “Risk Factors” and in our subsequent reports filed with the SEC.

The forward-looking statements contained in this Report are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to the factors, risks and uncertainties described above, changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors described in our news releases and filings with the SEC, including but not limited to those described in our Annual Report on Form

10-K

for the year ended December 31, 2019 under the heading “Risk Factors” and in our subsequent reports filed with the SEC, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Report speaks only as of the date of this Report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.

Overview

Company

We were formed as a Maryland corporation on November 26, 2013. On April 21, 2014, we completed our 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, 2020, we owned 25 properties comprised of 65 office buildings with a total of approximately 5.8 million square feet of net rentable area (“NRA”). As of September 30, 2020, our properties were approximately 93.1% leased.

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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 within rental and other revenues 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 within rental and other revenues. All tenants in the Lake Vista Pointe, 2525 McKinnon, Sorrento Mesa and Canyon Park properties have triple net leases. Certain tenants at AmberGlen, Cherry Creek, 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

COVID-19

During the first quarter of 2020, the World Health Organization declared the

COVID-19

outbreak a pandemic. There have been mandates from international, federal, state and local authorities requiring forced closures of businesses and other facilities, and most of the markets in which our buildings are located are subject to some form of ongoing pandemic-related restrictions. These forced closures and restrictions have had a material adverse effect on the global economy and the regional U.S. economies in which we operate, including negatively impacting some of our tenants’ ability to pay their rent.

All of our buildings are open and continue to operate. We have adopted new policies and procedures to incorporate best practices for the safety of our tenants, our vendors and our employees. However, the usage of our assets in the third quarter 2020 was significantly lower than normal. Usage of our assets in the near future depends on the duration of the pandemic and pace of economic

re-opening,

which is impossible to estimate.

We continue to closely monitor the impact of the

COVID-19

pandemic on all aspects of our business and geographies. While we did not experience any significant disruptions during the nine months ended September 30, 2020, as a result of

COVID-19

or governmental or tenant actions in response thereto, the Company granted rent relief to nine tenants comprising approximately 1.0% of the Company’s NRA, most often in the form of a rent deferral or rent abatement. Subsequent to September 30, 2020, the Company granted additional rent abatements to two tenants who previously received relief, which combined comprises approximately 0.1% of the Company’s NRA. Although the rent deferrals and rent abatements granted to date did not have a material impact on our net rental revenue, the long-term impact of the pandemic on our tenants and the world-wide economy is uncertain and impossible to estimate, and will depend on the scope, severity and duration of the pandemic.

We believe that some of the industries most impacted by

COVID-19

are coworking, retail, restaurant and café, travel and accommodation, live event related and energy. We generally have limited exposure to these industries, with these sectors comprising approximately 3% of our portfolio by square footage. However, the impact of

COVID-19

extends to all sectors of the U.S. economy and as such, we expect that tenants outside of these select industries will also face significant challenges. Rating agencies have downgraded the credit rating and outlook of many businesses, including one of our ten largest tenants.

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Through November 2, 2020, we have collected over 99% of contractually required base rents from our tenants for the three months ended September 30, 2020 and granted rent relief for another approximately 0.5% of contractually required base rents from our tenants for the three months ended September 30, 2020. The rate of collections in future months may be lower, as the length of the economic downturn continues to impact tenants. We have developed dedicated teams and processes to evaluate

non-payments

and rent relief requests. We evaluate each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests ultimately result in modification agreements, nor are we foregoing our contractual rights under our lease agreements. We believe many of these requests received were from tenants who had the ability to pay rent at the time and were seeking opportunistic deferral opportunities. We continue to work efficiently to find tailored resolutions in each case where warranted, including potential deferrals of rent, lease term extensions with short-term rent relief, temporary percentage rent opportunities, or, in limited circumstances, rent abatement particularly when the tenant is viewed as an amenity to the building. We may incur additional losses in future periods due to tenants that default on their leases, file for bankruptcy and/or otherwise experience significant financial difficulty as a result of the duration of the

COVID-19

pandemic, but the extent of those losses is impossible to predict given the fluidity of the pandemic and its uncertain impact on economic activity.

Leasing activity has been slow and we believe it will continue to be impacted by

COVID-19.

We have experienced and we expect that we will experience slower than originally anticipated speculative new leasing and there remains uncertainty over existing tenants’ long-term space requirements. Overall, this would reduce our anticipated rental revenues. In addition, we anticipate that as the

COVID-19

pandemic continues, certain tenants in our markets may explore opportunities to sublease all or a portion of their leased square footage to other tenants or third parties. While subleasing generally does not impact the ability to collect payment from the original lessee and will not result in any decrease in the rental revenues expected to be received from the primary tenant, this trend could reduce our ability to lease incremental square footage to new tenants, could increase the square footage of our properties that “goes dark”, reduce anticipated rental revenue should tenants determine their long-term needs for square footage are lower than originally anticipated and potentially impact the pricing and competitiveness for lease office space in our markets. Because construction activities have generally been classified as essential activities throughout our markets during the pandemic, we do not currently expect meaningful delays in customers taking occupancy under recently signed leases.

Strategically, we have made adjustments to our business operations as a result of

COVID-19.

We have ceased acquisition activities, allocated capital towards our share repurchase programs and adjusted our common stock dividend which will allow us to operate with lower leverage and higher levels of liquidity than previously planned. For a discussion of the impact of the

COVID-19

pandemic on our liquidity and balance sheet, see “Liquidity and Capital Resources” below.

The situation surrounding

COVID-19

remains fluid and we will continue to monitor and actively manage our response in collaboration with tenants, government officials and other third parties to optimally position the Company.

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. Although there have been higher

COVID-19

cases in some of our markets, the long-term impact of the pandemic on these markets is uncertain and impossible to estimate, and will depend on the scope, severity and duration of the pandemic.

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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, including as a result of the

COVID-19

pandemic, that impair our ability to renew or

re-let

space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. In addition, growth in rental revenue will also partially depend on our ability to acquire additional properties that meet our investment criteria.

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Our Properties

As of September 30, 2020, we owned 25 properties comprised of 65 office buildings with a total of approximately 5.8 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, 2020.


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 (20.8% of NRA)	Pima Center		100.0	%		272		85.0	%	$	27.58	$	27.58	$	6,371
	SanTan		100.0	%		267		93.1	%	$	28.75	$	28.75	$	7,133
	5090 N 40 th St		100.0	%		175		95.8	%	$	29.79	$	29.79	$	4,998
	Camelback Square		100.0	%		174		79.8	%	$	29.50	$	29.50	$	4,098
	The Quad		100.0	%		163		100.0	%	$	30.11	$	30.43	$	4,909
	Papago Tech		100.0	%		163		90.9	%	$	22.63	$	22.63	$	3,347
Denver, CO (19.9%)	Cherry Creek		100.0	%		356		100.0	%	$	18.95	$	19.67	$	6,740
	Circle Point		100.0	%		272		94.3	%	$	18.16	$	32.16	$	4,658
	Denver Tech (3)		100.0	%		381		93.7	%	$	23.02	$	27.08	$	8,213
	Superior Pointe		100.0	%		151		94.6	%	$	18.16	$	30.62	$	2,600
Tampa, FL (17.9%)	Park Tower		94.8	%		471		88.3	%	$	26.47	$	26.47	$	11,015
	City Center		95.0	%		242		90.3	%	$	26.26	$	26.26	$	5,748
	Intellicenter		100.0	%		204		100.0	%	$	24.53	$	24.53	$	4,993
	Carillon Point		100.0	%		124		100.0	%	$	28.77	$	28.77	$	3,572
Orlando, FL (12.4%)	Florida Research Park (4)		96.6	%		397		98.5	%	$	23.44	$	26.87	$	9,147
	Central Fairwinds		97.0	%		168		90.5	%	$	26.20	$	26.20	$	3,990
	Greenwood Blvd		100.0	%		155		100.0	%	$	23.25	$	23.25	$	3,605
San Diego, CA (9.9%)	Sorrento Mesa		100.0	%		296		85.3	%	$	26.02	$	34.02	$	6,570
	Mission City		100.0	%		281		91.1	%	$	36.35	$	36.35	$	9,316
Dallas, TX (9.9%)	190 Office Center		100.0	%		303		81.2	%	$	25.65	$	25.65	$	6,313
	Lake Vista Pointe		100.0	%		163		100.0	%	$	16.50	$	25.50	$	2,695
	2525 McKinnon		100.0	%		111		91.6	%	$	28.60	$	45.60	$	2,918
Portland, OR (5.7%)	AmberGlen		76.0	%		203		98.4	%	$	22.01	$	24.55	$	4,388
	Cascade Station		100.0	%		128		100.0	%	$	27.12	$	28.49	$	3,457
Seattle, WA (3.5%)	Canyon Park		100.0	%		207		100.0	%	$	21.84	$	29.84	$	4,515

Total / Weighted Average – September 30, 2020 (5)						5,827		93.1	%	$	24.95	$	27.91	$	135,309

(1)	Annualized gross rent per square foot includes adjustment for estimated expense reimbursements of triple net leases for the year ended September 30, 2020.

(2)	Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month ended September 30, 2020 by (ii) 12.

(3)	Denver Tech is comprised of 7601 Tech and 7595 Tech (formerly “DTC Crossroads”).

(4)	Florida Research Park is comprised of FRP Collection and FRP Ingenuity Drive.

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

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Operating Expenses

Our operating expenses generally consist of utilities, property and ad valorem taxes, insurance and site maintenance costs. Increases in these expenses over tenants’ base years (until the base year is reset at expiration) are generally passed along to tenants in our full-service gross leased properties and are generally paid in full by tenants in our net leased properties.

Conditions in Our Markets

Positive or negative changes in economic or other conditions in the markets we operate in, including state budgetary shortfalls, employment rates, natural hazards and other factors, may impact our overall performance. In addition, the recent

COVID-19

pandemic has caused significant disruption in global financial markets and economies. This global disruption could have a material impact on the markets in which we operate, our tenants and our ability to successfully execute our business strategy. The extent to which

COVID-19

will impact the Company is highly uncertain and is not reasonably estimable at this time. Refer to “Item 1A. Risk Factors” in this Report for further information.

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, 2019 included in our Annual Report on Form

10-K

for the year ended December 31, 2019.

Results of Operations

Comparison of Three Months Ended September 30, 2020 to Three Months Ended September 30, 2019

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 $2.4 million, or 6%, to $41.3 million for the three months ended September 30, 2020 compared to $38.9 million for the three months ended September 30, 2019. Of this increase, $1.1 million was attributable to the acquisition of the 7601 Tech property, part of our Denver Tech property, in September 2019. Rental Revenue also benefited from higher straight-line rent at our Denver Tech and Sorrento Mesa properties. Denver Tech revenue increased by $0.5 million due to the occupancy of a major tenant at the beginning of July who is in a free rent period and Sorrento Mesa revenue increased by $0.8 million due to a significant lease renewal at higher rental rates relative to the expiring leases, which the tenant will begin paying in the fourth quarter of 2020. Our Cherry Creek property also benefited from a $0.5 million lease termination fee payment during the three months ended September 30, 2020. Partially offsetting these increases, rental revenue decreased by $0.3 million for the three months ended September 30, 2020 as a result of the sale of the Logan Tower property in December 2019. Further rental revenue decreases were a result of lower occupancy at the 190 Office Center and Pima Center properties which resulted in aggregate revenue decreases of $0.3 million, and $0.3 million, respectively. The remaining properties’ rental and other revenues were relatively unchanged.

Operating Expenses

Total Operating Expenses.

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Property Operating Expenses.

Property operating expenses are comprised mainly of building common area and maintenance expenses, insurance, property taxes, property management fees, as well as certain expenses that are not recoverable from tenants, the majority of which are related to costs necessary to maintain the appearance and marketability of vacant space. In the normal course of business, property expenses fluctuate and are impacted by various factors including, but not limited to, occupancy levels, weather, utility costs, repairs, maintenance and

re-leasing

costs. Property operating expenses increased by $0.5 million, or 3%, to $14.9 million for the three months ended September 30, 2020, from $14.4 million for the three months ended September 30, 2019. Total operating expenses increased by $0.4 million, due to the acquisition of the 7601 Tech property, part of our Denver Tech property in September 2019. Partially offsetting these increases, property operating expenses decreased by $0.2 million due to the sale of the Logan Tower property in December 2019. The remaining expenses were marginally higher 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 decreased $0.3 million, or 8%, to $2.5 million for the three months ended September 30, 2020, from $2.8 million for the three months ended September 30, 2019. General and administrative expenses were lower primarily due to lower payroll, travel and professional expenses due to

COVID-19.

Depreciation and Amortization.

Depreciation and amortization increased $0.2 million, or 1%, to $15.2 million for the three months ended September 30, 2020, from $15.0 million for the three months ended September 30, 2019, primarily due to the acquisition of the 7601 Tech property, part of our Denver Tech property in September 2019. This increase was partially offset by a decrease due to the sale of the Logan Tower property.

Other Expense (Income)

Interest Expense.

Interest expense decreased $0.8 million, or 10%, to $6.9 million for the three months ended September 30, 2020, from $7.7 million for the three months ended September 30, 2019. The decrease was primarily attributable to a decrease of interest expense on our Unsecured Credit Facility (as defined herein) primarily as a result of repayments using the net proceeds of the equity raises in the second half of 2019.

Net Gain on the Sale of Real Estate Property.

We recorded a net gain on the sale of real estate property of $1.3 million for the three months ended September 30, 2020 related to the sale of the land parcel at the Circle Point property in July 2020. The gross gain on sale was reduced by disposal-related costs and taxes paid by our taxable REIT subsidiary.

Comparison of Nine Months Ended September 30, 2020 to Nine Months Ended September 30, 2019

Rental and Other Revenues.

one-time

payment of $2.6 million in the prior-year period received as consideration for the assignment of a purchase contract. The assignment fee originated through our administrative services relationship. Increases in rental revenue for the nine months ended September 30, 2020 were also partially offset as a result of the sale of Logan Tower in December 2019, the 10455 Pacific Center building in our Sorrento Mesa portfolio in May 2019 and Plaza 25 in February 2019, which decreased overall revenue by $1.0 million, $0.4 million and $0.2 million, respectively. The remaining properties’ rental and other revenues were relatively unchanged.

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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 $1.7 million, or 2%, to $96.9 million for the nine months ended September 30, 2020, from $95.2 million for the nine months ended September 30, 2019. Total operating expenses increased by $2.8 million, $1.2 million and $1.0 million, respectively, from the acquisitions of 7601 Tech, Cascade Station and Canyon Park properties. Partially offsetting these increases, total operating expenses decreased by $1.0 million, $0.4 million and $0.2 million, respectively, due to the sale of Logan Tower, the 10455 Pacific Center building in our Sorrento Mesa portfolio and Plaza 25 properties. Operating expenses at our San Diego properties decreased by a combined $0.3 million primarily due to a property tax refund received during the nine months ended September 30, 2020 related to a prior-year appeal. General and administrative expenses were also lower in the current year period primarily because in the prior-year period, there were $1.1 million of

one-time

expenses incurred as a result of the assignment fee income earned during the prior-year period. The remaining expenses were marginally lower in comparison to the prior-year period.

Property Operating Expenses.

re-leasing

costs. Property operating expenses increased by $0.9 million, or 2%, to $43.7 million for the nine months ended September 30, 2020, from $42.8 million for the nine months ended September 30, 2019. Property operating expenses increased by $1.6 million, $0.5 million and $0.5 million, respectively, from the acquisitions of 7601 Tech, Cascade Station and Canyon Park properties. Partially offsetting these increases, property operating expenses decreased by $0.6 million, $0.2 million and $0.2 million, respectively, due to the sale of Logan Tower, the 10455 Pacific Center building in our Sorrento Mesa portfolio and Plaza 25. Operating expenses at our San Diego properties decreased by a combined $0.3 million primarily due to a property tax refund received during the nine months ended September 30, 2020 related to a prior-year appeal. The remaining expenses were marginally lower 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 decreased $0.4 million, or 5%, to $8.0 million for the nine months ended September 30, 2020, from $8.4 million for the nine months ended September 30, 2019. The decrease was primarily because in the prior-year period, there were $1.1 million of

one-time

expenses incurred as a result of the assignment fee income partially offset by higher payroll and stock-based compensation costs for the current year.

Depreciation and Amortization.

Depreciation and amortization increased $1.1 million, or 3%, to $45.2 million for the nine months ended September 30, 2020, from $44.1 million for the nine months ended September 30, 2019, primarily due to the addition of the Canyon Park, Cascade Station and 7601 Tech properties. These increases were partially offset by a decrease at Logan Tower and the 10455 Pacific Center building of the Sorrento Mesa portfolio due to the sale of those properties.

Other Expense (Income)

Interest Expense.

Interest expense decreased $2.2 million, or 10%, to $20.8 million for the nine months ended September 30, 2020, from $23.0 million for the nine months ended September 30, 2019. The decrease was primarily attributable to a decrease of interest expense on our Unsecured Credit Facility (as defined herein) primarily as a result of the repayments using the net proceeds of the equity raises during the second half of 2019.

Net Gain on the Sale of Real Estate Property.

We recorded a net gain on the sale of real estate property of $1.3 million for the nine months ended September 30, 2020 related to the sale of the land parcel at the Circle Point property in July 2020. The gross gain on sale was reduced by disposal-related costs and taxes paid by our taxable REIT subsidiary. Net gain on the sale of real estate property of $0.5 million for the nine months ended September 30, 2019 related to the sale of the 10455 Pacific Center building of the Sorrento Mesa property in May 2019.

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Cash Flows

Comparison of Nine Months Ended September 30, 2020 to Nine Months Ended September 30, 2019

Cash, cash equivalents and restricted cash were $56.4 million and $32.5 million as of September 30, 2020 and September 30, 2019, respectively.

Cash flow from operating activities.

Net cash provided by operating activities increased by $10.3 million to $47.6 million for the nine months ended September 30, 2020 compared to $37.3 million for the same period in 2019. The increase was primarily attributable to increased operating cash flows from acquired properties and changes in working capital.

Cash flow to investing activities.

Net cash used in investing activities decreased by $75.5 million to $15.2 million for the nine months ended September 30, 2020 compared to $90.7 million for the same period in 2019. The decrease in cash used in investing activities was primarily due to no acquisitions of real estate and lower proceeds from the sale of real estate during the nine months ended September 30, 2020 compared to aggregate $108.4 million of acquisitions and aggregate $33.9 million of dispositions for the same period in 2019.

Cash flow to financing activities.

Net cash used in financing activities increased by $116.4 million to $63.5 million for the nine months ended September 30, 2020 compared to $52.9 million provided by financing activities for the same period in 2019. The increase in cash used in financing activities was primarily due to repurchases of our common stock and no proceeds from sale of our common stock for the nine months ended September 30, 2020. The increase was partially offset by higher net proceeds from our Unsecured Credit Facility borrowings in 2020 compared to 2019.

Liquidity and Capital Resources

Analysis of Liquidity and Capital Resources

We had approximately $38.4 million of cash and cash equivalents and $18.0 million of restricted cash as of September 30, 2020.

On March 15, 2018, the Company entered into a credit agreement for the Unsecured Credit Facility (our “Unsecured Credit Facility”) that provided for commitments of up to $250 million, which includes an accordion feature that allows the Company to borrow up to $500 million, subject to customary terms and conditions. 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, 2020, we had approximately $75.0 million outstanding under our Unsecured Credit Facility and a $7.0 million letter of credit to satisfy escrow requirements for a mortgage lender.

On September 27, 2019, the Company entered into the five-year $50 million Term Loan (the “Term Loan”), increasing its authorized borrowings under the Company’s Unsecured Credit Facility from $250 million to $300 million. Borrowings under the Term Loan bear interest at a rate equal to the LIBOR rate plus a margin between 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the Company also entered into the five-year interest rate swap for a notional amount of $50 million (the “Interest Rate Swap”). Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate

30-day

LIBOR payments.

On June 16, 2017, the Company and the Operating Partnership previously entered into equity distribution agreements (collectively, the “Initial Agreements”) with each of KeyBanc Capital Markets Inc., Raymond James & Associates, Inc. and BMO Capital Markets Corp., (collectively, the “Initial Sales Agents”), pursuant to which the Company may issue and sell from time to time shares of common stock and the Company’s 6.625% Series A Preferred Stock (“Series A Preferred Stock”) through the Initial Sales Agents, acting as agents or principals (the “Prior ATM Program”). On November 1, 2018, the Company and the Operating Partnership entered into amendments (the “Initial Amendments”) to the Initial Agreements (as amended by the Amendments, the “Prior EDAs”) with each of the Initial Sales Agents to increase the number of shares of common stock issuable under the Prior ATM Program. The Company terminated the Prior EDAs effective February 25, 2020. The Company did not issue any shares of common stock or Series A Preferred Stock under the Prior ATM Program for the period beginning on January 1, 2020 through the date the Prior EDAs were terminated or during the nine months ended September 30, 2020.

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On February 26, 2020, the Company and the Operating Partnership entered into equity distribution agreements (collectively, the “Agreements”) with each of KeyBanc Capital Markets Inc., Raymond James & Associates, Inc., BMO Capital Markets Corp., RBC Capital Markets, LLC, B. Riley FBR, Inc., D.A. Davidson & Co. and Janney Montgomery Scott LLC (the “Sales Agents”) pursuant to which the Company may issue and sell from time to time up to 15,000,000 shares common stock and up to 1,000,000 Series A Preferred Stock through the Sales Agents, acting as agents or principals (the “ATM Program”). The Company did not issue any shares of common stock or Series A Preferred Stock under the ATM Program during the nine months ended September 30, 2020.

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, 2020, 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		2020		2021-2022		2023-2024		More than 5 years
Principal payments on mortgage loans	$	682,585	$	1,571	$	170,885	$	173,254	$	336,875
Interest payments (1)		119,184		6,425		44,222		37,089		31,448
Tenant-related commitments		7,467		2,310		5,157		—		—
Lease obligations		29,665		52		1,669		1,264		26,680

Total	$	838,901	$	10,358	$	221,933	$	211,607	$	395,003

(1)

Contracted interest on the floating rate borrowings under our Unsecured Credit Facility was calculated based on the balance and interest rate at September 30, 2020. 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, 2020, we had a $7.0 million letter of credit outstanding under our Unsecured Credit Facility to satisfy escrow requirements for a mortgage lender.

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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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We have used, and will 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. 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, 2020, approximately $557.6 million, or 81.7%, of our debt had fixed interest rates and approximately $125.0 million, or 18.3%, had variable interest rates. Of the $125.0 million variable rate debt, $50.0 million relates to the Term Loan against which we have applied the Interest Rate Swap. The Interest Rate Swap effectively fixes the

30-day

LIBOR rate at approximately 1.27% until maturity of the Term Loan. When factoring in the Term Loan as fixed rate debt through the Interest Rate Swap, approximately 89.0% of our debt was fixed rate debt and 11.0% was variable rate debt as of September 30, 2020. A 10% increase in LIBOR would result in a nominal increase to our annual interest costs on debt outstanding as of September 30, 2020, 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 result in a nominal decrease to our annual interest costs on debt outstanding as of September 30, 2020 and would increase the fair value of our outstanding debt, as well as decrease interest costs associated with future debt issuances or borrowings under our Unsecured Credit Facility.

Interest risk amounts are our management’s estimates based on our Company’s capital structure and were determined by considering the effect of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. We may take actions to further mitigate our exposure to changes in interest rates. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our Company’s financial structure. In addition, the uncertainty that exists with respect to the economic impact of the

COVID-19

pandemic introduced significant volatility in global financial markets and economies during and subsequent to the nine months ended September 30, 2020. The long-term impacts of such volatility on the Company are uncertain and impossible to estimate, and will depend on the scope, severity and duration of the pandemic.

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, 2020.

Management’s Report on Internal Control Over Financial Reporting

There have been no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of business. As of September 30, 2020, 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 updates the risk factor in Part II, Item 1A of our Quarterly Report on Form

10-Q

for the quarterly report ended June 30, 2020 and supplements the risk factors disclosed in the section entitled “Risk Factors” of our Annual Report on Form

10-K

for the year ended December 31, 2019. Except as presented below or in the section titled “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition” in this Quarterly Report on Form

10-Q,

there have been no material changes from the risk factors set forth in such Annual Report.

The current pandemic of the novel coronavirus

(“COVID-19”),

and the future outbreak of other highly infectious or contagious diseases, could have an adverse effect on our financial condition, results of operations, cash flow, ability to pay dividends and the per share market price of our common stock or preferred stock.

Since being reported in December 2019,

COVID-19

has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared

COVID-19

a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to

COVID-19.

Since that time, the global impact of the outbreak has been rapidly evolving and, as cases of

COVID-19

have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel.

The

COVID-19

pandemic has had, and a future outbreak of other highly infectious or contagious diseases could have, repercussions across regional and global financial markets and economies. The outbreak of

COVID-19

in many countries, including the United States, has adversely impacted global economic activity and has contributed to significant volatility in financial markets.

Certain states and cities, including where we own properties and where our principal place of business is located, have also reacted by instituting quarantines, restrictions on travel,

“stay-at-home”

rules and restrictions on the types of businesses that may continue to operate. The Company cannot predict if additional states and cities will implement similar restrictions, whether or how the nature of these restrictions may evolve or when restrictions currently in place or modified restrictions in the future will expire. As a result, the

COVID-19

pandemic is negatively impacting many industries and governmental operations directly or indirectly, including the industries in which the Company and our tenants operate. A number of our tenants have announced temporary closures of their offices and other operations, and requested rent deferral or rent abatements during this pandemic. In addition, many of our employees in our principal offices are currently working remotely. The effects of an extended period of remote work arrangements, could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. To date, we have provided temporary relief to certain tenants in the form of rent deferral and rent abatements, the financial impacts of which have been immaterial to the Company. However, it is impossible to predict the extent to which future requests from tenants for rent deferrals, rent abatements or relief from other contractual obligations, or a failure to pay rent, as a result of changes in business behavior stemming from the ongoing

COVID-19

pandemic, the availability of government assistance programs or otherwise, may impact our financial condition, results of operations and cash flow.

The

COVID-19

pandemic, or a future outbreak of other highly infectious or contagious diseases, could also have adverse effects on our financial condition, results of operations, cash flow, ability to pay dividends and the per share market price of our common stock or preferred stock, among other factors:

•

a complete or partial closure of, decline or cessation in the usage of, or other operational issues at, one or more of our properties resulting from government or tenant action;

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•

the reduced economic activity severely impacts our tenants’ businesses, financial condition, liquidity and creditworthiness, which may cause one or more of our tenants to be unable to meet their obligations to us in full, or at all, seek modifications of such obligations or exercise early termination rights;

•

a decrease in the usage of our properties or the demand for office space, or the Company’s ability to maintain or increase rents, which may have an adverse effect on our financial condition, results of operations and cash flow than if we owned a more diversified real estate portfolio;

•

difficulty accessing sources of capital on attractive terms, or at all, impacts to our credit ratings, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to debt or equity capital necessary to fund future capital needs (including redevelopment, acquisition, expansion and renovation activities, payments of principal and interest on and the refinancing of our existing debt, tenant improvements and leasing costs) or refinancings on a timely basis and our tenants’ ability to fund their business operations and meet their obligations to us;

•

the financial impact of the

COVID-19

pandemic could negatively impact our future compliance with financial covenants of our Unsecured Credit Facility, including the Term Loan, and other debt agreements and result in a default and potentially an acceleration of indebtedness, which

non-compliance

could negatively impact our ability to make additional borrowings and pay dividends on our common stock or preferred stock;

•

any impairment in value of our tangible or intangible assets which could be recorded as a result of a weaker economic conditions;

•

a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow our portfolio of properties due to a lack of suitable acquisition opportunities;

•

a general decline in the attractiveness of our properties due to changes in the demand for office space, which may adversely impact our ability to consummate pending or future dispositions on terms that allow us to recover expected carrying values of a real estate investment; and

•

the potential negative impact on the health of a significant number of our employees could result in a deterioration in our ability to ensure business continuity or maintain adequate disclosure reporting or internal controls through the duration of this disruption.

The extent to which the

COVID-19

pandemic impacts our financial condition, results of operations and cash flow, and those of our tenants, will depend on future developments, which continue to be highly uncertain and are not reasonably estimable, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. In addition,

non-payment

of rent or early lease terminations by our tenants could reduce our cash flows, which could impact our ability to pay dividends to the holders of our common stock and preferred stock.

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

On March 9, 2020, the Company’s Board of Directors approved a share repurchase plan authorizing the Company to repurchase up to $100 million of its outstanding shares of common stock. In July 2020, the Company completed the full March 2020 share repurchase program. On August 5, 2020, the Company’s Board of Directors approved an additional share repurchase plan authorizing the Company to repurchase up to an additional aggregate amount of $50 million of its outstanding shares of common stock. Under the share repurchase programs, the shares may be repurchased from time to time using a variety of methods, which may include open market transactions, privately negotiated transactions or otherwise, all in accordance with the rules of the Securities and Exchange Commission and other applicable legal requirements.

Repurchased shares of common stock will be classified as authorized and unissued shares. The Company recognizes the cost of shares of common stock it repurchases, including direct costs incurred, as a reduction in stockholders’ equity. Such reductions of stockholders equity due to the repurchases of shares of common stock repurchased will be applied first, to reduce common stock in the amount of the par value associated with the shares of common stock repurchased and second, to reduce additional

paid-in

capital by the amount that the purchase price for the shares of common stock repurchased exceed the par value.

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Share repurchase activity under our share repurchase plans, on a trade date basis, for the three months ended September 30, 2020, was as follows:


Issuer Purchases of Equity Securities
Period	Total Number of Shares of Common Stock Purchased		Average Price Paid per Share of Common Stock Repurchased		Total Number of Shares of Common Stock Purchased as Part of Share Repurchase Plans		Approximate Dollar Value of Shares of Common Stock that May Yet Be Purchased Under the Share Repurchase Plans (1) (thousands)
July 1 – 31, 2020		1,114,196	$	9.58		1,114,196	$	—
August 1 – 31, 2020		—		—		—		50,000
September 1 – 30, 2020		—		—		—		50,000

Total		1,114,196	$	9.58		1,114,196	$	50,000

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


Exhibit Number		Description

3.1		Articles of Amendment and Restatement of City Office REIT, Inc., as amended and supplemented (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on March 1, 2018).

3.2		Second Amended and Restated Bylaws of City Office REIT, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 14, 2017).

4.1		Certificate of Common Stock of City Office REIT, Inc. (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-11/A filed with the Commission on February 18, 2014).

4.2		Form of certificate representing the 6.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Commission on September 30, 2016).

31.1		Certification by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †

31.2		Certification by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †

101.INS		INSTANCE DOCUMENT*

101.SCH		SCHEMA DOCUMENT*

101.CAL		CALCULATION LINKBASE DOCUMENT*

101.LAB		LABELS LINKBASE DOCUMENT*

101.PRE		PRESENTATION LINKBASE DOCUMENT*

101.DEF		DEFINITION LINKBASE DOCUMENT*

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*

†		Filed herewith.

*		Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CITY OFFICE REIT, INC.

Date: November 5, 2020


By:		/s/ James Farrar
		James Farrar

		Chief Executive Officer and Director
		(Principal Executive Officer)

Date: November 5, 2020


By:		/s/ Anthony Maretic
		Anthony Maretic

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