City Office REIT, Inc. - Quarter Report: 2023 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

10-Q

(Mark One)

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

For the quarterly period ended June 30, 2023

☐	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

July 31

, 2023 was 39,938,451.

Table of Contents

City Office REIT, Inc.

Quarterly Report on Form

10-Q

For the Quarter Ended June 30, 2023

Table of Contents


PART I. FINANCIAL INFORMATION			1

Item 1. Financial Statements			1

Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022			1

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022			2

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022			3

Condensed Consolidated Statements of Changes in Equity for the Three and Six Months Ended June 30, 2023 and 2022			4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022			5

Notes to Condensed Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16

Item 3. Quantitative and Qualitative Disclosures about Market Risk			26

Item 4. Controls and Procedures			26

PART II. OTHER INFORMATION			28

Item 1. Legal Proceedings			28

Item 1A. Risk Factors			28

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

Item 3. Defaults Upon Senior Securities			28

Item 4. Mine Safety Disclosures			28

Item 5. Other Information			28

Item 6. Exhibits			29

Signatures			30

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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)


	June 30, 2023			December 31, 2022
Assets
Real estate properties
Land	$	193,524		$	199,537
Building and improvement		1,189,789			1,215,000
Tenant improvement		146,633			139,365
Furniture, fixtures and equipment		689			689

		1,530,635			1,554,591
Accumulated depreciation		(197,062	)		(175,720	)

		1,333,573			1,378,871

Cash and cash equivalents		38,350			28,187
Restricted cash		14,307			16,075
Rents receivable, net		48,971			44,429
Deferred leasing costs, net		21,058			21,989
Acquired lease intangible assets, net		49,876			55,438
Other assets		31,313			29,450

Total Assets	$	1,537,448		$	1,574,439

Liabilities and Equity
Liabilities:
Debt	$	678,380		$	690,099
Accounts payable and accrued liabilities		30,625			35,753
Deferred rent		7,956			9,147
Tenant rent deposits		7,142			7,040
Acquired lease intangible liabilities, net		8,422			9,150
Other liabilities		16,035			20,076

Total Liabilities		748,560			771,265

Commitments and Contingencies (Note 9)
Equity:
6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares authorized, 4,480,000 issued and outstanding as of June 30, 2023 and December 31, 2022		112,000			112,000
Common stock, $0.01 par value, 100,000,000 shares authorized, 39,938,451 and 39,718,767 shares issued and outstanding as of June 30, 2023 and December 31, 2022		399			397
Additional paid-in capital		436,733			436,161
Retained earnings		235,705			251,542
Accumulated other comprehensive income		3,726			2,731

Total Stockholders’ Equity		788,563			802,831
Non-controlling interests in properties		325			343

Total Equity		788,888			803,174

Total Liabilities and Equity	$	1,537,448		$	1,574,439

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 June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Rental and other revenues	$	44,604		$	45,498		$	90,562		$	90,350
Operating expenses:
Property operating expenses		17,246			16,836			34,966			33,325
General and administrative		3,668			3,614			7,433			7,070
Depreciation and amortization		15,768			15,701			31,072			31,516

Total operating expenses		36,682			36,151			73,471			71,911

Operating income		7,922			9,347			17,091			18,439
Interest expense:
Contractual interest expense		(7,981	)		(5,982	)		(15,953	)		(11,729	)
Amortization of deferred financing costs and debt fair value		(323	)		(302	)		(647	)		(614	)

		(8,304	)		(6,284	)		(16,600	)		(12,343	)
Net (loss)/gain on disposition of real estate property		(134	)		—			(134	)		21,658

Net (loss)/income		(516	)		3,063			357			27,754
Less:
Net income attributable to non-controlling interests in properties		(164	)		(164	)		(333	)		(335	)

Net (loss)/income attributable to the Company		(680	)		2,899			24			27,419
Preferred stock distributions		(1,855	)		(1,855	)		(3,710	)		(3,710	)

Net (loss)/income attributable to common stockholders	$	(2,535	)	$	1,044		$	(3,686	)	$	23,709

Net (loss)/income per common share:
Basic	$	(0.06	)	$	0.02		$	(0.09	)	$	0.54

Diluted	$	(0.06	)	$	0.02		$	(0.09	)	$	0.53

Weighted average common shares outstanding:
Basic		39,938			43,632			39,906			43,593

Diluted		39,938			44,482			39,906			44,445

Dividend distributions declared per common share	$	0.10		$	0.20		$	0.30		$	0.40

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

(Unaudited)

(In thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Net (loss)/income	$	(516	)	$	3,063		$	357		$	27,754
Other comprehensive income:
Unrealized cash flow hedge gain		3,749			450			2,284			2,064
Amounts reclassified to interest expense		(812	)		63			(1,289	)		203

Other comprehensive income		2,937			513			995			2,267

Comprehensive income		2,421			3,576			1,352			30,021
Less:
Comprehensive income attributable to non-controlling interests in properties		(164	)		(164	)		(333	)		(335	)

Comprehensive income attributable to the Company	$	2,257		$	3,412		$	1,019		$	29,686

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			Retained earnings			Accumulated other comprehensive income			Total stockholders’ equity			Non-controlling interests in properties			Total equity
Balance—December 31, 2022		4,480	$	112,000		39,718	$	397	$	436,161		$	251,542		$	2,731		$	802,831		$	343		$	803,174
Restricted stock award grants and vesting		—		—		220		2		(535	)		(85	)		—			(618	)		—			(618	)
Common stock dividend distribution declared		—		—		—		—		—			(7,988	)		—			(7,988	)		—			(7,988	)
Preferred stock dividend distribution declared		—		—		—		—		—			(1,855	)		—			(1,855	)		—			(1,855	)
Contributions		—		—		—		—		—			—			—			—			110			110
Distributions		—		—		—		—		—			—			—			—			(235	)		(235	)
Net income		—		—		—		—		—			704			—			704			169			873
Other comprehensive loss		—		—		—		—		—			—			(1,942	)		(1,942	)		—			(1,942	)

Balance—March 31, 2023		4,480	$	112,000		39,938	$	399	$	435,626		$	242,318		$	789		$	791,132		$	387		$	791,519


Restricted stock award grants and vesting		—		—		—		—		1,107			(84	)		—			1,023			—			1,023
Common stock dividend distribution declared		—		—		—		—		—			(3,994	)		—			(3,994	)		—			(3,994	)
Preferred stock dividend distribution declared		—		—		—		—		—			(1,855	)		—			(1,855	)		—			(1,855	)
Distributions		—		—		—		—		—			—			—			—			(226	)		(226	)
Net (loss)/income		—		—		—		—		—			(680	)		—			(680	)		164			(516	)
Other comprehensive income		—		—		—		—		—			—			2,937			2,937			—			2,937

Balance—June 30, 2023		4,480	$	112,000		39,938	$	399	$	436,733		$	235,705		$	3,726		$	788,563		$	325		$	788,888


	Number of shares of preferred stock		Preferred stock		Number of shares of common stock			Common stock			Additional paid-in capital			Retained earnings			Accumulated other comprehensive (loss)/income			Total stockholders’ equity			Non-controlling interests in properties			Total equity
Balance—December 31, 2021		4,480	$	112,000		43,554		$	435		$	482,061		$	275,502		$	(382	)	$	869,616		$	979		$	870,595
Restricted stock award grants and vesting		—		—		—			—			972			(68	)		—			904			—			904
Common stock dividend distribution declared		—		—		—			—			—			(8,711	)		—			(8,711	)		—			(8,711	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855	)		—			(1,855	)		—			(1,855	)
Contributions		—		—		—			—			—			—			—			—			3			3
Distributions		—		—		—			—			—			—			—			—			(254	)		(254	)
Net income		—		—		—			—			—			24,520			—			24,520			171			24,691
Other comprehensive income		—		—		—			—			—			—			1,754			1,754			—			1,754

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


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

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

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)


	Six Months Ended June 30,
	2023			2022
Cash Flows from Operating Activities:
Net income	$	357		$	27,754
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		31,072			31,516
Amortization of deferred financing costs and debt fair value		647			614
Amortization of above and below market leases		34			80
Straight-line rent/expense		(4,795	)		(4,356	)
Non-cash stock compensation		2,048			1,895
Receipts from sales-type lease		—			43,549
Net loss/(gain) on disposition of real estate property		134			(21,658	)
Changes in non-cash working capital:
Rents receivable, net		534			(4,109	)
Other assets		(1,416	)		(764	)
Accounts payable and accrued liabilities		(141	)		1,268
Deferred rent		(1,032	)		(1,511	)
Tenant rent deposits		141			691

Net Cash Provided By Operating Activities		27,583			74,969

Cash Flows to Investing Activities:
Additions to real estate properties		(17,826	)		(16,462	)
Reduction of cash on disposition of real estate property		(4,051	)		—
Deferred leasing costs		(1,927	)		(4,786	)

Net Cash Used In Investing Activities		(23,804	)		(21,248	)

Cash Flows from/(to) Financing Activities:
Debt issuance and extinguishment costs		(236	)		—
Proceeds from borrowings		35,000			31,000
Repayment of borrowings		(8,513	)		(30,941	)
Dividend distributions paid to stockholders		(19,641	)		(21,132	)
Repurchases of common stock		—			(5,000	)
Distributions to non-controlling interests in properties		(461	)		(434	)
Shares withheld for payment of taxes on restricted stock unit vesting		(1,643	)		(87	)
Contributions from non-controlling interests in properties		110			3

Net Cash Provided By/(Used In) Financing Activities		4,616			(26,591	)

Net Increase in Cash, Cash Equivalents and Restricted Cash		8,395			27,130
Cash, Cash Equivalents and Restricted Cash, Beginning of Period		44,262			42,266

Cash, Cash Equivalents and Restricted Cash, End of Period	$	52,657		$	69,396

Reconciliation of Cash, Cash Equivalents and Restricted Cash:
Cash and Cash Equivalents, End of Period		38,350			26,352
Restricted Cash, End of Period		14,307			43,044

Cash, Cash Equivalents and Restricted Cash, End of Period	$	52,657		$	69,396

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	14,827		$	10,850
Purchase of additions in real estate properties included in accounts payable	$	8,753		$	10,301
Purchase of deferred leasing costs included in accounts payable	$	1,404		$	2,926

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 Marylan

d 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 years prior to 2018, any applicable alternative minimum tax.

2. Summary of Significant Accounting Policies

Basis of Preparation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with Securities and Exchange Commission (“SEC”) rules and regulations and generally accepted accounting principles in the United States of America (“US GAAP”) and in the opinion of management contain all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2022.

During the second quarter of 2023, the Company applied the below accounting policy for Variable Interest Entities (“VIE”) in relation to the deconsolidation of the 190 Office Center property. Refer to Note 3 – Real Estate Investments for additional information.

Variable Interest Entities

The Company consolidates a VIE if the Company determines that it is the primary beneficiary of the entity. When evaluating the accounting for a VIE, the Company considers the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance relative to other economic interest holders. The Company determines the rights, if any, to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE by considering the economic interest in the entity, regardless of form, which may include debt, equity, management and servicing fees, or other contractual arrangements. The Company considers other relevant factors including each entity’s capital structure, contractual rights to earnings (losses), subordination of the Company’s interests relative to those of other investors, contingent payments, and other contractual arrangements that may be economically significant.

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Recent Accounting Pronouncements

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

No. 2020-04

(“ASU

2020-04”).

ASU

2020-04

provides companies with optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. For contracts affected by reference rate reform, if certain criteria are met, companies can elect to not remeasure contracts at the modification date or reassess a previous accounting conclusion. Companies can also elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met. Further, in January 2021, the FASB issued ASU

No. 2021-01,

Reference Rate Reform (Topic 848) (“ASU

2021-01”).

ASU

2021-01

clarified the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848.

ASU

2020-04

and ASU

2021-01

can be applied as of the beginning of the interim period that includes March 12, 2020, however, the guidance will only be available for optional use through December 31, 2022. In December 2022, the FASB issued ASU

No. 2022-06,

Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 (“ASU

2022-06”).

ASU

2022-06

amends the date the guidance will be available to December 31, 2024. The new standard applies prospectively to contract modifications and hedging relationships and may be elected over time as reference rate reform activities occur. During the first quarter of 2023, the Company transitioned its LIBOR-based contracts to SOFR and elected to apply the practical expedients to modifications of qualifying debt contracts and hedging relationships as continuations of the existing contracts, rather than as new contracts. Application of the hedge accounting expedients preserves the presentation of derivatives consistent with past presentation and does not result in dedesignation of hedging relationships. Applying the expedients did not have a material impact on the consolidated financial statements. The Company has no remaining LIBOR-based contracts.

3. Real Estate Investments

Disposition of Real Estate Property

190 Office Center

On May 15, 2023, the Company consented to the appointment of a receiver to assume possession and control of the 190 Office Center property as a result of an event of default as defined in the property’s

non-recourse

loan agreement. Given the appointment of the receiver, the Company assessed whether the entity holding the property should be reassessed for consolidation as a VIE in accordance with ASC 810 – Consolidation.

Based on its analysis, the Company concluded that it is not the primary beneficiary of the VIE and therefore deconsolidated the property as of May 15, 2023. The Company deconsolidated the net carrying value of real estate assets of $

35.7

million, the mortgage loan of $

38.6

million, cash and restricted cash of $

4.0

million and net current liabilities of

1.0

million. For the three months ended June 30, 2023, the Company recognized a loss on deconsolidation of $

0.1

million, which has been included within net loss/gain on disposition of real estate property on the Company’s condensed consolidated statement of operations and statement of cash flows.

Lake Vista Pointe

During

the first quarter of 2022, the sole tenant at the Lake Vista Pointe property exercised its lease option to purchase the building and the Company signed a purchase and sale agreement with the tenant. At the time the tenant exercised the option, the Company reassessed the classification of the lease, in accordance with ASC 842 – Leases, and determined that the lease should be reclassified from an operating lease to a sales-type lease. This reclassification resulted in a gain on sale of $

21.7

million net of disposal-related costs. On June 15, 2022, the Company sold the Lake Vista Pointe property in Dallas, Texas for a gross sales price of $

43.8

million.

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4. Lease Intangible

Lease intangibles and the value of assumed lease obligations as of June 30, 2023 and December 31, 2022 were comprised of the following (in thousands):



	Lease Intangible Assets												Lease Intangible Liabilities
June 30, 2023	Above Market Leases			In Place Leases			Leasing Commissions			Total			Below Market Leases			Below Market Ground Lease			Total
Cost	$	18,786		$	77,066		$	33,491		$	129,343		$	(14,968	)	$	(138	)	$	(15,106	)
Accumulated amortization		(9,823	)		(51,444	)		(18,200	)		(79,467	)		6,630			54			6,684

	$	8,963		$	25,622		$	15,291		$	49,876		$	(8,338	)	$	(84	)	$	(8,422	)


	Lease Intangible Assets												Lease Intangible Liabilities
December 31, 2022	Above Market Leases			In Place Leases			Leasing Commissions			Total			Below Market Leases			Below Market Ground Lease			Total
Cost	$	18,793		$	78,720		$	34,123		$	131,636		$	(15,682	)	$	(138	)	$	(15,820	)
Accumulated amortization		(9,069	)		(49,772	)		(17,357	)		(76,198	)		6,618			52			6,670

	$	9,724		$	28,948		$	16,766		$	55,438		$	(9,064	)	$	(86	)	$	(9,150	)

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


2023	$	4,248
2024		6,687
2025		6,517
2026		6,204
2027		5,217
Thereafter		12,581

	$	41,454

5. Debt

On January 5, 2023, the Company transitioned the borrowing rate of its unsecured credit facility (the “Unsecured Credit Facility”) and $50 million term loan from LIBOR to daily-simple SOFR. The Company applied the practical expedients available under the reference rate reform guidance and accounted for the modifications as continuations of the existing contracts.

The following table summarizes the indebtedness as of June 30, 2023 and December 31, 2022 (dollars in thousands):


Property	June 30, 2023		December 31, 2022		Interest Rate as of June 30, 2023 (1)			Maturity
Unsecured Credit Facility (3)(5)	$	205,713	$	200,500		SOFR +1.40	% (2)		November 2025
Term Loan (4)		50,000		50,000		SOFR +1.35	% (2)		September 2024
Term Loan (5)		25,000		—		SOFR +2.10	% (2)		January 2026
Mission City		46,430		46,859		3.78	%		November 2027
Canyon Park (6)		39,306		39,673		4.30	%		March 2027
Circle Point		39,118		39,440		4.49	%		September 2028
SanTan (7)		31,794		32,140		4.56	%		March 2027
Intellicenter		30,991		31,297		4.65	%		October 2025
The Quad		30,600		30,600		4.20	%		September 2028
2525 McKinnon		27,000		27,000		4.24	%		April 2027
FRP Collection		26,401		26,784		3.10	%		September 2023
Greenwood Blvd		21,129		21,396		3.15	%		December 2025

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Property	June 30, 2023			December 31, 2022			Interest Rate as of June 30, 2023 (1)			Maturity
Cascade Station (8)		20,989			21,192			4.55	%		May 2024
5090 N. 40th St		20,592			20,810			3.92	%		January 2027
AmberGlen		20,000			20,000			3.69	%		May 2027
Central Fairwinds		16,051			16,273			3.15	%		June 2024
FRP Ingenuity Drive (9)		16,014			16,165			4.44	%		December 2024
Carillon Point		14,562			14,773			3.10	%		October 2023
190 Office Center (10)		—			38,894			4.79	%		October 2025
Total Principal		681,690			693,796
Deferred financing costs, net		(3,428	)		(3,887	)
Unamortized fair value adjustments		118			190

Total	$	678,380		$	690,099

(1)	All interest rates are fixed interest rates with the exception of the Unsecured Credit Facility and the term loans, as explained in footnotes 3, 4 and 5 below.

(2)	As of June 30, 2023, the daily-simple SOFR rate was 5.09%.

(3)

Borrowings under the Unsecured Credit Facility bear interest at a rate equal to the daily-simple SOFR rate plus a margin of between 135 to 235 basis points depending upon the Company’s consolidated leverage ratio. On February 9, 2023, the Company entered into a three-year interest rate swap for a notional amount of $140 million, effective March 8, 2023, effectively fixing the SOFR component of the borrowing rate for $140 million of the Unsecured Credit Facility. As of June 30, 2023, the Unsecured Credit Facility had $205.7 million drawn and a $4.2 million letter of credit to satisfy escrow requirements for a mortgage lender. The Unsecured Credit Facility matures in November 2025 and may be extended 12 months at the Company’s option upon meeting certain conditions. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.

(4)

Borrowings under the $50 million term loan bear interest at a rate equal to the daily-simple SOFR rate plus a margin of between 135 to 225 basis points depending upon the Company’s consolidated leverage ratio. The SOFR component of the borrowing rate is effectively fixed by a $50 million interest rate swap.

(5)

On January 5, 2023, the Company entered into a second amendment to

its amended and restated credit agreement,

dated November 16, 2021 (as amended, the “Amended and Restated Credit Agreement”) for the Unsecured Credit Facility and entered into a three-year $25 million term loan, increasing its total authorized borrowings from $350 million to $375 million. Borrowings under the $25 million term loan bear interest at a rate equal to the daily-simple SOFR rate plus a margin of 210 basis points. In conjunction with the term loan, the Company also entered into a three-year interest rate swap for a notional amount of $25 million, effectively fixing the SOFR component of the borrowing rate of the term loan.

(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, the loan’s interest rate shall be adjusted to the greater of (i) the initial interest rate plus 200 basis points or (ii) the yield on the five year “on the run” treasury reported by Bloomberg market data service plus 450 basis points.

(7)	In the second quarter of 2023, the Debt Service Coverage Ratio (“DSCR”) and d ebt y ield covenants for SanTan were not met, which triggered a ‘cash-sweep period’ that began in the second quarter of 2023. As of June 30, 2023, total restricted cash for the property was $4.7 million.

(8)	In the first quarter of 2023, a ‘cash-sweep period’ began for the Cascade Station loan due to the non-renewal of a major tenant’s leased space in the building. As of June 30, 2023, total restricted cash for the property was $1.5 million.

(9)

As of September 30, 2022, the DSCR covenant for FRP Ingenuity Drive was not met, which triggered a ‘cash-sweep period’ that began in the fourth quarter of 2022. As of June 30, 2023, the DSCR was still not met. As of June 30, 2023 and December 31, 2022, total restricted cash for the property was $3.0 million and $2.6 million, respectively.

(10)	In the second quarter of 2023, the non-recourse debt associated with the 190 Office Center property was deconsolidated as a result of the appointment of a receiver to assume possession and control of the property. The loan balance as of the date of deconsolidation was $38.6 million.

The scheduled principal repayments of debt as of June 30, 2023 are as follows (in thousands):


2023	$	43,835
2024		107,728
2025		260,288
2026		29,416
2027		176,303
Thereafter		64,120

	$	681,690

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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 January 2023, the Company amended the $50 million interest rate swap to transition from LIBOR to daily-simple SOFR. The Company applied the practical expedients available for hedging relationships under the reference rate reform guidance, which preserves the presentation of the derivative consistent with past presentation and does not result in dedesignation of the hedging relationship. Pursuant to the amended interest rate swap, the Company will pay a fixed rate of approximately 1.17% of the notional amount annually, payable monthly, and receive floating rate daily-simple SOFR payments.

In January 2023, the Company entered into an interest rate swap for a notional amount of $25 million. Pursuant to the interest rate swap, the Company will pay a fixed rate of approximately 3.90% of the notional amount annually, payable monthly, and receive floating rate daily-simple SOFR payments.

In February 2023, the Company entered into an interest rate swap for a notional amount of $140 million. Pursuant to the interest rate swap, the Company will pay a fixed rate of approximately 4.19% of the notional amount annually, payable quarterly, and receive floating rate daily-simple SOFR payments.

The fair value of the interest rate swaps have been classified as Level 2 fair value measurements.

The interest rate swaps have been designated and qualify as cash flow hedges and have been recognized on the condensed consolidated balance sheets at fair value, presented within other assets and other liabilities. 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.

The following table summarizes the Company’s derivative financial instruments as of June 30, 2023 and December 31, 2022 (in thousands):


	Notional Value		Effective Date		Maturity Date		Fair Value Assets/(Liabilities)
	Notional Value		Effective Date		Maturity Date		June 30, 2023		December 31, 2022
Interest Rate Swap	$	50,000		September 2019		September 2024	$	2,305	$	2,731
Interest Rate Swap		25,000		January 2023		January 2026		341		—
Interest Rate Swap		140,000		March 2023		November 2025		1,080		—

	$	215,000					$	3,726	$	2,731

For the six months ended June 30, 2023, approximately $1.3 million of realized gains were reclassified to interest expense due to payments received from the swap counterparty. For the six months ended June 30, 2022, approximately $0.2 million of realized losses were reclassified to interest expense due to payments made to the swap counterparty.

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 $380.3 million and $420.7 million (compared to a carrying value of $401.0 million and $443.3 million) as of June 30, 2023, and December 31, 2022, 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 six months ended June 30, 2023 and 2022, the Company earned $0.2 million and $0.3 million, respectively, in administrative services performed for Second City Real Estate II Corporation, Clarity Real Estate Ventures GP, Limited Partnership and their affiliates.

8. Leases

Lessor Accounting

The Company is focused on acquiring, owning and operating high-quality office properties for lease to a stable and diverse tenant base. Our properties have both full-service gross and net leases which are generally classified as operating leases. Rental income related to such leases is recognized on a straight-line basis over the remaining lease term. The Company’s total revenue includes fixed base rental payments provided under the lease and variable payments, which principally consist of tenant expense reimbursements for certain property operating expenses as provided under the lease.

The Company recognized fixed and variable lease payments for operating leases for the three and six months ended June 30, 2023 and 2022 as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Fixed payments	$	37,571	$	38,309	$	76,484	$	76,628
Variable payments		6,742		6,180		13,485		12,620

	$	44,313	$	44,489	$	89,969	$	89,248

The Company ceased recognizing rental lease income with respect to the 190 Office Center property on the deconsolidation of the entity on May 15, 2023 (refer to Note 3). The Company recognized interest income of

$0.6 million and variable lease payments of $0.2 million for the sales-type lease at the Lake Vista Pointe property for the three and six months ended June 30, 2022.

Future minimum lease payments to be received by the Company as of June 30, 2023 under

non-cancellable

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


2023	$	62,936
2024		124,703
2025		112,593
2026		101,868
2027		85,094
Thereafter		230,167

	$	717,361

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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 increases 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 June 30, 2023, these leases had remaining terms of

three

years and a weighted average remaining lease term of

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):


	June 30, 2023		December 31, 2022
Right-of-use asset – operating leases	$	12,720	$	12,935
Lease liability – operating leases	$	8,675	$	8,802
Right-of-use asset – financing leases	$	9,934	$	10,054
Lease liability – financing leases	$	1,511	$	1,475

Lease liabilities are measured at the commencement date based on the present value of future lease payments. One of the Company’s operating ground leases includes rental payment increases over the lease term based on increases in the Consumer Price Index (“CPI”). Changes in the CPI were not estimated as part of the measurement of the operating lease liability. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The Company used a weighted average discount rate of 6.2% in determining its lease liabilities. The discount rates were derived from the Company’s assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments.

Right-of-use

assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.

Operating lease expense for the three and six months ended June 30, 2023 w

s $0.2 million and $0.5 million, respectively. Operating lease expense for the three and six months ended June 30, 2022 w

s $0.3 million and $0.5 million, respectively. Financing lease expense for the three and six months ended June 30, 2023 w

s $0.1 million and $0.2 million, respectively. Financing lease expense for the three and six months ended June 30, 2022 w

s $0.1 million and $0.2 million, respectively.

Future minimum lease payments to be paid by the Company as a lessee for operating and financing leases as of June 30, 2023 for the next five years and thereafter are as follows (in thousands):


	Operating Leases			Financing Leases
2023	$	266		$	4
2024		770			7
2025		770			8
2026		724			8
2027		587			8
Thereafter		26,563			6,938

Total future minimum lease payments		29,680			6,973
Discount		(21,005	)		(5,462	)

Total	$	8,675		$	1,511

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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 June 30, 2023, 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 (the “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 Board of Directors approved an additional share repurchase plan authorizing the Company to repurchase up to an additional aggregate amount of $50 million of its outstanding shares of common stock. In September 2022, the Company completed the full August 2020 share repurchase plan. On May 4, 2023, the Board of Directors approved an additional share repurchase plan (“Repurchase Program”) authorizing the Company to repurchase up to $50 million of its outstanding shares of common stock or Series A Preferred 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 SEC and other applicable legal requirements.

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

paid-in

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

There were no shares repurchased during the six months ended June 30, 2023. During the six months ended June 30, 2022, the Company completed the repurchase of 394,833 shares of its common stock for approximately $5.0 million.

Common Stock and Common Unit Distributions

On May 5, 2023, the Board of Directors approved and the Company declared a cash dividend distribution of $0.10 per common share for the quarterly period ended June 30, 2023. The dividend was paid subsequent to quarter end on July 21, 2023 to common stockholders and common unitholders of record as of the close of business on July 7, 2023, resulting in an aggregate payment of $4.0 million.

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Preferred Stock Distributions

On May 5, 2023, the Board of Directors approved and the Company declared a cash dividend distribution of $0.4140625 per share of the Company’s 6.625% Series A Preferred Stock (“Series A Preferred Stock”) for an aggregate amount of $1.9 million for the quarterly period ended June 30, 2023. The dividend was paid subsequent to quarter end on July 21, 2023 to the holders of record of Series A Preferred Stock as of the close of business on July 7, 2023.

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 the grant of Operating Partnership long-term incentive plan 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 “Compensation Committee”). The Equity Incentive Plan provides for the issuance of up to 3,763,580 shares of common stock. 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 that will be used to grant performance-based restricted stock unit awards (“Performance RSU Awards”) pursuant to the Equity Incentive Plan.

The Performance RSU Awards are based upon the total stockholder return (“TSR”) of the Company’s common stock over a three-year measurement period beginning January 1 of the year of grant (the “Measurement Period”) relative to the TSR of a defined peer group list of other US Office REIT companies (the “Peer Group”) as of the first trading date in the year of grant. The payouts under the Performance RSU Awards are evaluated on a sliding scale as follows: TSR below the 30th percentile of the Peer Group would result in a 50% payout; TSR at the 50th percentile of the Peer Group would result in a 100% payout; and TSR at or above the 75th percentile of the Peer Group would result in a 150% payout. Payouts are mathematically interpolated between these stated percentile targets, subject to a 150% maximum. To the extent earned, the payouts of the Performance RSU Awards are intended to be settled in the form of shares of the Company’s common stock, pursuant to the Equity Incentive Plan. Upon satisfaction of the vesting conditions, dividend equivalents in an amount equal to all regular and special dividends declared with respect to the Company’s common stock during each annual measurement period during the Measurement Period are determined and paid on a cumulative, reinvested basis over the term of the applicable Performance RSU Award, at the time such award vests and based on the number of shares of the Company’s common stock that are earned.

During the first quarter of 2023, the Performance RSU Awards granted in January 2020, with a January 1, 2020 through December 31, 2022 Measurement Period, were earned at 150% of the target number of shares granted based on achievement of a TSR that was at or above the 75th percentile of the 2020 Peer Group.

The following table summarizes the activity of the awards under the Equity Incentive Plan for the three and six months ended June 30, 2023:


	Number of RSUs			Number of Performance RSUs
Outstanding at December 31, 2022		428,320			307,500
Granted		198,022			214,888
Issuance of dividend equivalents		9,485			—
Vested		(216,520	)		(97,500	)

Outstanding at March 31, 2023		419,307			424,888
Issuance of dividend equivalents		14,356			—

Outstanding at June 30, 2023		433,663			424,888

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


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

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

Outstanding at June 30, 2022		413,686			307,500

During the six months ended June 30, 2023 and June 30, 2022, the Company granted the following restricted stock units (“RSUs”) and Performance RSU Awards to directors, executive officers and certain

non-executive

employees:


	Units Granted				Fair Value (in thousands)		Weighted Average Grant Fair Value Per Share
	RSUs		Performance RSUs		Fair Value (in thousands)		Weighted Average Grant Fair Value Per Share
2023		198,022		214,888	$	3,729	$	9.03
2022		237,986		90,000		5,753		17.54

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

During the three months ended June 30, 2023 and June 30, 2022, the Company recognized net compensation expense for the RSUs and Performance RSU Awards as follows (in thousands):


	RSUs		Performance RSUs		Total
2023	$	633	$	390	$	1,023
2022		652		340		992

During the six months ended June 30, 2023 and June 30, 2022, the Company recognized net compensation expense for the RSUs and Performance RSU Awards as follows (in thousands):


	RSUs		Performance RSUs		Total
2023	$	1,276	$	771	$	2,047
2022		1,251		645		1,896

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

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

10-Q

(this “Report”).

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

Cautionary Statement Regarding Forward-Looking Statements

This Report, including “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains both historical and forward-looking statements. All statements, other than statements of historical fact are, or may be deemed to be, forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have used the words “approximately,” “anticipate,” “assume,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this Report. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including:

•

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

•

increased interest rates, any resulting increase in financing or operating costs, the impact of inflation and a stall in economic growth or an economic recession;

•

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

(“COVID-19”)

pandemic or any future epidemics or pandemics;

•

the extent to which “work from home” and hybrid work policies continue as a result of the

COVID-19

pandemic or any future epidemics or pandemics;

•

our inability to compete effectively;

•

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

•

demand for and market acceptance of our properties for rental purposes, including as a result of near-term market fluctuations or long-term trends that result in an overall decrease in the demand for office space;

•

decreased rental rates or increased vacancy rates, including as a result of the ongoing

COVID-19

pandemic or any future epidemics or pandemics;

•

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

•

changes in the availability of acquisition opportunities;

•

availability of qualified personnel;

•

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

•

our failure to successfully operate acquired properties and operations;

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•

changes in our business, financing or investment strategy or the markets in which we operate;

•

our failure to generate sufficient cash flows to service our outstanding indebtedness;

•

environmental uncertainties and risks related to adverse weather conditions and natural disasters;

•

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

•

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

•

outcome of claims and litigation involving or affecting us;

•

financial market fluctuations;

•

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

•

other factors described in our news releases and filings with the SEC, including but not limited to those described in our Annual Report on Form

10-K

for the year ended December 31, 2022 under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and in our subsequent reports filed with the SEC.

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

10-K

for the year ended December 31, 2022 under the heading “Risk Factors” and in our subsequent reports filed with the SEC, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Report speaks only as of the date of this Report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.

Overview

Company

We were formed as a Maryland corporation on November 26, 2013. On April 21, 2014, we completed our IPO of shares of common stock. We contributed the net proceeds of the IPO to our Operating Partnership in exchange for common units in our Operating Partnership. Both we and our Operating Partnership commenced operations upon completion of the IPO and certain related formation transactions.

Revenue Base

As of June 30, 2023, we owned 24 properties comprised of 58 office buildings with a total of approximately 5.7 million square feet of net rentable area (“NRA”). As of June 30, 2023, our properties were approximately 85.6% leased.

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Office Leases

Historically, most leases for our properties have been on a full-service gross or net lease basis, and we expect to continue to use such leases in the future. A full-service gross lease generally has a base year expense “stop,” whereby we pay a stated amount of expenses as part of the rent payment while future increases (above the base year stop) in property operating expenses are billed to the tenant based on such tenant’s proportionate square footage in the property. The property operating expenses are reflected in operating expenses; however, only the increased property operating expenses above the base year stop recovered from tenants are reflected as tenant recoveries within rental and other revenues on our condensed consolidated 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 as tenant recoveries. We are also a lessor for a fee simple ground lease at the AmberGlen property.

Factors That May Influence Our Operating Results and Financial Condition

Economic Environment and Inflation

Economic conditions in the U.S. and globally continue to be volatile, primarily due to rising inflation. As inflation continued to reach new highs, it set off a chain reaction of events, beginning with the U.S. Federal Reserve taking and signaling severe tightening measures, interest rates rising across the yield curve, volatility and losses in the public equity and debt markets, and now increasing concerns that the U.S. economy may experience a recession. The banking and lending sector in particular has been impacted by the interest rate environment. This evolving operating environment impacts our operating activities as:

•

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

•

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

•

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

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

in-person

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

COVID-19

Our business has been and will likely continue to be impacted by the

COVID-19

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

COVID-19

pandemic. While the usage of our assets in the second quarter of 2023 was still lower than

pre-pandemic

levels, usage has been increasing year over year. Usage of our assets in the near future depends on corporate and individual decisions regarding return to usage of office space, which is impossible to estimate.

Leasing activity has been and is expected to be impacted by the

COVID-19

pandemic until and unless tenants increase utilization of their spaces. We have experienced and we expect that we will continue to experience slower new leasing, and there remains uncertainty over existing tenants’ long-term space requirements. Overall, this could reduce our anticipated rental revenues. In addition, certain tenants in our markets have and may explore opportunities to sublease all or a portion of their leased square footage to other tenants or third parties. While subleasing generally does not impact the ability to collect payment from the original lessee and will not result in any decrease in the rental revenues expected to be received from the primary tenant, this trend could reduce our ability to lease incremental square footage to new tenants, could increase the square footage of our properties that “goes dark,” could reduce anticipated rental revenue should tenants determine their long-term needs for square footage are lower than originally anticipated and could impact the pricing and competitiveness for leasing office space in our markets.

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

Business and Strategy

We focus on owning and acquiring office properties in our footprint of growth markets predominantly in the Sun Belt. Our markets generally possess growing populations with above-average employment growth forecasts, a large number of government offices, large international, national and regional employers across diversified industries, generally

low-cost

centers for business operations and a high quality of life. We believe these characteristics have made our markets desirable, as evidenced by domestic net migration generally towards our geographic footprint. We utilize our management’s market-specific knowledge and relationships as well as the expertise of local real estate property and leasing managers to identify acquisition opportunities that we believe will offer cash flow stability and long-term value appreciation.

Rental Revenue and Tenant Recoveries

The amount of net rental revenue generated by our properties will depend principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space that becomes available from lease terminations. The amount of rental revenue generated also depends on our ability to maintain or increase rental rates at our properties. Negative trends in one or more of these factors could adversely affect our rental revenue in future periods. Future economic downturns or regional downturns affecting our markets or submarkets or downturns in our tenants’ industries, including as a result of rising interest rates and the increasing likelihood of a U.S. recession, that impair our ability to renew or

re-let

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

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Our Properties

As of June 30, 2023, we owned 24 properties comprised of 58 office buildings with a total of approximately 5.7 million square feet of NRA in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, Raleigh, San Diego, Seattle and Tampa. The following table presents an overview of our portfolio as of June 30, 2023.


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 (26.7% of NRA)	Block 23		100.0	%		307		94.5	%	$	30.08	$	32.37	$	8,725
	Pima Center		100.0	%		272		47.2	%	$	29.15	$	29.15	$	3,741
	SanTan		100.0	%		267		47.0	%	$	32.02	$	32.02	$	4,013
	5090 N. 40 th St		100.0	%		175		70.2	%	$	34.60	$	34.60	$	4,255
	Camelback Square		100.0	%		172		84.4	%	$	34.55	$	34.55	$	5,027
	The Quad		100.0	%		163		92.3	%	$	33.08	$	33.42	$	4,977
	Papago Tech		100.0	%		163		88.7	%	$	24.48	$	24.48	$	3,533
Tampa, FL (18.5%)	Park Tower		94.8	%		478		89.2	%	$	28.09	$	28.09	$	11,988
	City Center		95.0	%		244		91.6	%	$	30.00	$	30.00	$	6,706
	Intellicenter		100.0	%		204		100.0	%	$	26.21	$	26.21	$	5,333
	Carillon Point		100.0	%		124		100.0	%	$	30.25	$	30.25	$	3,757
Denver, CO (14.1%)	Denver Tech		100.0	%		381		85.6	%	$	24.48	$	28.93	$	7,799
	Circle Point		100.0	%		272		90.6	%	$	19.93	$	34.80	$	4,913
	Superior Pointe		100.0	%		152		71.7	%	$	18.62	$	31.62	$	2,033
Orlando, FL (12.7%)	Florida Research Park		96.6	%		397		86.1	%	$	26.03	$	27.83	$	8,802
	Central Fairwinds		97.0	%		168		88.6	%	$	28.21	$	28.21	$	4,206
	Greenwood Blvd		100.0	%		155		100.0	%	$	24.75	$	24.75	$	3,837
Raleigh, NC (8.7%)	Bloc 83		100.0	%		495		83.5	%	$	37.97	$	38.20	$	15,692
Portland, OR (5.8%)	AmberGlen		76.0	%		203		100.0	%	$	23.97	$	27.17	$	4,877
	Cascade Station		100.0	%		128		100.0	%	$	29.60	$	31.51	$	3,791
Dallas, TX (5.0%)	The Terraces		100.0	%		173		100.0	%	$	38.99	$	58.99	$	6,731
	2525 McKinnon		100.0	%		111		97.8	%	$	30.50	$	51.50	$	3,323
San Diego, CA (4.9%)	Mission City		100.0	%		281		80.1	%	$	39.57	$	39.57	$	8,916
Seattle, WA (3.6%)	Canyon Park		100.0	%		207		100.0	%	$	23.86	$	29.86	$	4,934

Total / Weighted Average – June 30, 2023 (3)						5,692		85.6	%	$	29.19	$	32.44	$	141,909

(1)	Annualized gross rent per square foot includes adjustment for estimated expense reimbursements of triple net leases.

(2)	Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month ended June 30, 2023 by (ii) 12.

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

COVID-19

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

Critical Accounting Policies and Estimates

The interim condensed consolidated financial statements follow the same policies and procedures as outlined in the audited consolidated financial statements for the year ended December 31, 2022 included in our Annual Report on Form

10-K

for the year ended December 31, 2022, except for our election to apply the practical expedients related to Reference Rate Reform (Topic 848) and the application of our VIE policy as outlined in Note 2 of the condensed consolidated financial statements.

Results of Operations

Comparison of Three Months Ended June 30, 2023 to Three Months Ended June 30, 2022

Rental and Other Revenues.

Rental and other revenues include 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 decreased $0.9 million, or 2%, to $44.6 million for the three months ended June 30, 2023 compared to $45.5 million for the three months ended June 30, 2022. Revenue decreased at SanTan by $1.4 million due to a termination fee recognized in the prior year and lower resulting occupancy in the current period associated with an early tenant departure. In addition, the dispositions of 190 Office Center in May 2023 and Lake Vista Pointe in June 2022 reduced revenue by $1.1 million and $0.8 million, respectively. Revenue also decreased at 5090, Mission City and Pima Center by $0.4 million, $0.3 million and $0.3 million, respectively, due to lower occupancy at the properties compared to the prior year. Offsetting these decreases, the December 2021 acquisition of Bloc 83, Block 23 and The Terraces, which were undergoing first generation

lease-up

in 2022, increased revenue by $1.2 million, $0.4 million and $0.2 million, respectively. In addition, higher occupancy at Park Tower, Circle Point, City Center and FRP Collection increased revenue by $0.6 million, $0.5 million, $0.3 million and $0.2 million, respectively. The remaining properties’ rental and other revenues were relatively unchanged in comparison to the prior period.

Operating Expenses

Total Operating Expenses.

Total operating expenses consist of property operating expenses, general and administrative expenses and depreciation and amortization. Total operating expenses increased $0.5 million, or 1%, to $36.7 million for the three months ended June 30, 2023, from $36.2 million for the three months ended June 30, 2022. Of the increase, the December 2021 acquisition of Bloc 83 and Block 23, which were undergoing first generation

lease-up

in 2022, contributed $0.8 million and $0.4 million, respectively. In addition, total operating expenses at Park Tower and City Center increased $0.4 million and $0.2 million, respectively, due to higher operating costs associated with higher occupancy over the prior year. Offsetting these increases, total operating expenses decreased at SanTan by $0.6 million due to lower occupancy at the property in comparison to the prior year. In addition, the dispositions of 190 Office Center in May 2023 and Lake Vista Pointe in June 2022 decreased total operating expenses by $0.5 million and $0.3 million, respectively. The remaining properties’ total operating expenses were relatively unchanged in comparison to the prior period.

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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 $0.4 million, or 2%, to $17.2 million for the three months ended June 30, 2023, from $16.8 million for the three months ended June 30, 2022. Of the increase, the December 2021 acquisition of Bloc 83, Block 23 and The Terraces, which were undergoing first generation

lease-up

in 2022, contributed $0.3 million, $0.3 million and $0.1 million, respectively. In addition, property operating expenses at Park Tower increased $0.3 million, due to higher operating costs associated with higher occupancy over the prior year. Offsetting these increases, the dispositions of 190 Office Center in May 2023 and Lake Vista Pointe in June 2022 decreased property operating expenses by $0.3 million and $0.3 million, respectively. The remaining properties’ property operating expenses were relatively unchanged in comparison to the prior period.

General and Administrative.

General and administrative expenses are comprised of public company reporting costs and the compensation of our management team and Board of Directors, as well as

non-cash

stock-based compensation expenses. General and administrative expenses increased $0.1 million, or 1%, to $3.7 million for the three months ended June 30, 2023, from $3.6 million reported in the prior period. General and administrative expenses increased primarily due to higher stock-based compensation expense.

Depreciation and Amortization.

Depreciation and amortization increased $0.1 million, or 0.4%, to $15.8 million for the three months ended June 30, 2023, from $15.7 million reported for the same period in 2022. Of the increase, Bloc 83 incurred higher depreciation and amortization expense of $0.5 million related to tenanting costs. Offsetting this increase, depreciation and amortization expense at our SanTan property decreased by $0.5 million mainly due to accelerated amortization of tenant-related assets recorded in the prior year associated with an early lease termination at the property. The remaining properties’ depreciation expenses were relatively unchanged in comparison to the prior year.

Other Expense (Income)

Interest Expense.

Interest expense increased $2.0 million, or 32%, to $8.3 million for the three months ended June 30, 2023, from $6.3 million for the three months ended June 30, 2022. The increase was primarily attributable to higher amounts drawn and higher interest rates on our floating rate debt.

Net Loss on the Disposition of Real Estate Property.

During the second quarter of 2023, the Company

consented

to the appointment of a receiver to assume possession and control of the 190 Office Center property as a result of an event of default as defined in the property’s loan agreement. Given the appointment of the receiver, the Company deconsolidated the entity holding the property and related assets and liabilities in May 2023. For the three months ended June 30, 2023, the Company recognized a loss on deconsolidation of $0.1 million.

Comparison of Six Months Ended June 30, 2023 to Six Months Ended June 30, 2022

Rental and Other Revenues.

lease-up

in 2022, increased revenue by $2.5 million, $1.0 million and $0.4 million, respectively. Higher occupancy at Park Tower, Circle Point, FRP Collection and City Center also increased revenue by $1.5 million, $0.9 million, $0.6 million and $0.4 million, respectively. Offsetting these increases, revenue decreased at SanTan by $2.9 million due to a termination fee recognized in the prior year and lower resulting occupancy in the current period associated with an early tenant departure. In addition, the dispositions of Lake Vista Pointe in June 2022 and 190 Office Center in May 2023 also decreased revenue by $1.9 million and $0.9 million, respectively. Revenue also decreased at Pima Center, Mission City and 5090 by $0.8 million, $0.5 million and $0.5 million, respectively, due to reduced occupancy at the property. The remaining properties’ rental and other revenues were marginally higher in comparison to the prior period.

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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 $1.6 million, or 2%, to $73.5 million for the six months ended June 30, 2023, from $71.9 million for the six months ended June 30, 2022. Of the increase, the December 2021 acquisition of Bloc 83, Block 23 and The Terraces, which were undergoing first generation

lease-up

in 2022, contributed $1.2 million, $0.9 million and $0.3 million, respectively. In addition, total operating expenses from Park Tower, FRP Collection, City Center and Circle Point increased $0.8 million, $0.4 million, $0.3 million and $0.3 million, respectively, due to higher operating costs associated with higher occupancy over the prior year. General and administrative expenses also increased $0.3 million primarily due to higher payroll and stock-based compensation expense. Offsetting these increases, total operating expenses decreased at SanTan by $1.2 million due to lower occupancy at the property in comparison to the prior year. The dispositions of Lake Vista Pointe in June 2022 and 190 Office Center in May 2023 also decreased total operating expenses by $0.8 million and $0.5 million, respectively. In addition, depreciation and amortization for Mission City and Papago Tech decreased by $0.5 million and $0.4 million, respectively, from the prior period as the amortization expense associated with acquired lease intangible assets has now been fully amortized. The remaining properties’ total operating expenses were marginally higher in comparison to the prior period.

Property Operating Expenses.

Property operating expenses are comprised

mainly

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

re-leasing

costs. Property operating expenses increased $1.7 million, or 5%, to $35.0 million for the six months ended June 30, 2023, from $33.3 million for the six months ended June 30, 2022. Of the increase, the December 2021 acquisition of Bloc 83, Block 23 and The Terraces, which were undergoing first generation

lease-up

in 2022, contributed $0.5 million, $0.5 million and $0.2 million, respectively. In addition, property operating expenses at Park Tower, FRP Collection, City Center and Mission City increased $0.6 million, $0.3 million, $0.1 million and $0.1 million, respectively, due to higher operating costs associated with higher occupancy over the prior year. Offsetting these increases, the dispositions of Lake Vista Pointe in June 2022 and 190 Office Center in May 2023 decreased property operating expenses by $0.6 million and $

0.4

million, respectively. The remaining properties’ property operating expenses were marginally higher in comparison to the prior period.

General and Administrative.

General and administrative expenses are comprised of public company reporting costs and the compensation of our management team and Board of Directors, as well as

non-cash

stock-based compensation expenses. General and

administrative

expenses increased $0.3 million, or 5%, to $7.4 million for the six months ended June 30, 2023, from $7.1 million reported for the

same

period in 2022. General and administrative expenses increased primarily due to higher payroll and stock-based compensation expense.

Depreciation and Amortization.

Depreciation and amortization decreased $0.4 million, or 1%, to $31.1 million for the six months ended June 30, 2023, from $31.5 million reported for the same period in 2022. Of this decrease, our SanTan property contributed $1.0 million to the decrease mainly due to accelerated amortization of tenant-related assets recorded in the prior year associated with an early lease termination at the property. Also contributing to the decrease, depreciation and amortization for Mission City and Papago Tech decreased by $

0.5

million and $0.4 million, respectively, from the prior period as the amortization expense associated with acquired lease intangible assets has now been fully amortized. Offsetting these decreases, Bloc 83, Block 23 and Circle Point incurred higher depreciation and amortization expense of $0.7 million, $0.3 million and $0.3 million, respectively, related to tenanting costs. The remaining properties’ depreciation expenses were relatively unchanged in comparison to the prior year.

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Other Expense (Income)

Interest Expense.

Interest expense increased $4.3 million, or 34%, to $16.6 million for the six months ended June 30, 2023, from $12.3 million for the six months ended June 30, 2022. The increase was primarily attributable to higher amounts drawn and higher interest rates on our floating rate debt.

Net Loss/Gain on the Disposition of Real Estate Property.

During the second quarter of 2023, the Company consented to the appointment of a receiver to assume possession and control of the 190 Office Center property as a result of an event of default as defined in the property’s loan agreement. Given the appointment of the receiver, the Company deconsolidated the entity holding the property and related assets and liabilities during the quarter. For the six months ended June 30, 2023, the Company recognized a loss on deconsolidation of $0.1 million. In the prior year, the sole tenant at the Lake Vista Pointe property exercised its lease option to purchase the building and we signed a purchase and sale agreement with the tenant. At the time the tenant exercised the option, we reassessed the lease classification of the lease, in accordance with ASC 842 – Leases, and determined that the lease should be reclassified from an operating lease to a sales-type lease. This reclassification resulted in a gain on sale of $21.7 million net of disposal related costs. The Lake Vista Pointe property was sold in June 2022.

Cash Flows

Comparison of Six Months Ended June 30, 2023 to Six Months Ended June 30, 2022

Cash, cash equivalents and restricted cash were $52.7 million and $69.4 million as of June 30, 2023, and June 30, 2022, respectively.

Cash flow from operating activities.

Net cash provided by operating activities decreased $47.4 million to $27.6 million for the six months ended June 30, 2023, compared to $75.0 million for the same period in 2022. The decrease was primarily attributable to receipts from the sales-type lease related to Lake Vista Pointe for the six months ended June 30, 2022.

Cash flow to investing activities.

Net cash used in investing activities increased $2.6 million to $23.8 million for the six months ended June 30, 2023, compared to $21.2 million for the same period in 2022. The increase in cash used in investing activities was primarily attributable to the reduction of cash on disposition of real estate property related to 190 Office Center for the six months ended June 30, 2023.

Cash flow from financing activities.

Net cash provided by financing activities increased $31.2 million to $4.6 million for the six months ended June 30, 2023, compared to $26.6 million used in financing activities for the same period in 2022. The increase in cash provided by financing activities was primarily attributable to higher net proceeds from borrowings for the six months ended June 30, 2023. Further, the repurchases of common stock for the six months ended June 30, 2022 increased cash used in financing activities in the prior period.

Liquidity and Capital Resources

Analysis of Liquidity and Capital Resources

We had approximately $38.4 million of cash and cash equivalents and $14.3 million of restricted cash as of June 30, 2023.

On March 15, 2018, the Company entered into a credit agreement for the Unsecured Credit Facility that provided for commitments of up to $250 million, which included an accordion feature that allowed the Company to borrow up to $500 million, subject to customary terms and conditions. On September 27, 2019, the Company entered into a five-year $50 million term loan, increasing its authorized borrowings under the Company’s Unsecured Credit Facility from $250 million to $300 million. On November 16, 2021, the Company entered into an Amended and Restated Credit Agreement that increased the total authorized borrowings from $300 million to $350 million. On January 5, 2023, the Company entered into a second amendment to the Amended and Restated Credit Agreement for the Unsecured Credit Facility and entered into a three-year $25 million term loan, increasing its total authorized borrowings from $350 million to $375 million. The Unsecured Credit Facility matures in November 2025 and may be extended 12 months at the Company’s option upon meeting certain conditions. As of June 30, 2023, we had approximately $205.7 million outstanding under our Unsecured Credit Facility and a $4.2 million letter of credit to satisfy escrow requirements for a mortgage lender.

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On February 26, 2020, the Company and the Operating Partnership entered into equity distribution agreements (collectively, the “Agreements”) with each of KeyBanc Capital Markets Inc., Raymond James & Associates, Inc., BMO Capital Markets Corp., RBC Capital Markets, LLC, B. Riley FBR, Inc., D.A. Davidson & Co. and Janney Montgomery Scott LLC (the “Sales Agents”) pursuant to which the Company may issue and sell from time to time up to 15,000,000 shares of common stock and up to 1,000,000 shares of Series A Preferred Stock through the Sales Agents, acting as agents or principals (the “ATM Program”). On May 7, 2021 the Company delivered to D.A. Davidson & Co. a notice of termination of the Agreement, effective May 7, 2021. The Company did not issue any shares of common stock or Series A Preferred Stock under the ATM Program during the six months ended June 30, 2023.

After considering the effect of the

COVID-19

pandemic on our consolidated operations, it is possible that we could fail certain financial covenants within certain property-level mortgage borrowings. For mortgages with financial covenants, the lenders’ remedy of a covenant failure would be a requirement to escrow funds for the purpose of meeting our future debt payment obligations.

As of June 30, 2023, the lenders for three of our mortgage borrowings have elected their right to direct property cash flows into lender-controlled restricted cash accounts to fund property operations until certain thresholds are met. For these three properties, the total restricted cash as of June 30, 2023 was $9.2 million.

Our short-term liquidity requirements primarily consist of operating expenses and other expenditures associated with our properties, distributions to our limited partners and distributions to our stockholders required to qualify for REIT status, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations and reserves established from existing cash. We have further sources such as proceeds from our public offerings, including under our ATM Program, and borrowings under our mortgage loans and our Unsecured Credit Facility.

Our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at maturity, property acquisitions and

non-recurring

capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness and the issuance of equity and debt securities. We also may fund property acquisitions and

non-recurring

capital improvements using our Unsecured Credit Facility pending longer term financing.

We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity securities. However, we cannot assure you that this is or will continue to be the case. Our ability to incur additional debt is dependent on a number of factors, including our degree of leverage, interest rates, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets is dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us.

Contractual Obligations and Other Long-Term Liabilities

The following table provides information with respect to our commitments as of June 30, 2023, 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		2023		2024-2025		2026-2027		More than 5 years
Principal payments on mortgage loans	$	681,690	$	43,835	$	368,016	$	205,719	$	64,120
Interest payments (1)		85,845		15,237		52,645		15,880		2,083
Tenant-related commitments		12,013		12,013		—		—		—
Lease obligations		36,653		270		1,555		1,327		33,501

Total	$	816,201	$	71,355	$	422,216	$	222,926	$	99,704

(1)

Contracted interest on the floating rate borrowings under our Unsecured Credit Facility was calculated based on the balance and interest rate at June 30, 2023. Contracted interest on our term loans and part of the Unsecured Credit Facility were calculated based on the interest rate swap rates fixing the SOFR component of the borrowing rates.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We use derivative financial instruments to manage or hedge interest rate risks related to borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based upon their credit rating and other factors. We have entered, and we will only enter into, contracts with major financial institutions based on their credit rating and other factors. See Note 6 to our condensed consolidated financial statements in Item 1 of this Report for more information regarding our derivatives.

We expect that all LIBOR settings relevant to us will cease to be published or will no longer be representative after June 30, 2023. The differences between LIBOR and the Secured Overnight Financing Rate (“SOFR”), plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available, which could have a material adverse effect on our results. Although SOFR is the recommended replacement rate by the Alternative Reference Rates Committee, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher borrowing costs for us. During the first quarter of 2023, our LIBOR-based borrowings and the $50 million interest rate swap were transitioned to SOFR.

We currently consider our interest rate exposure to be moderate because as of June 30, 2023, approximately $616.0 million, or 90.4%, of our debt had fixed interest rates, or effectively fixed rates when factoring in interest rate swaps, and $65.7 million, or 9.6%, had variable interest rates. The $616.0 million fixed rate debt includes a $50 million term loan, a $25 million term loan, and $140 million of the Unsecured Credit Facility against which we have applied interest rate swaps. The interest rate swaps effectively fix the SOFR component of the borrowing rates until maturity of the debt. A 1% increase in SOFR would result in a $0.7 million increase to our annual interest costs on debt outstanding as of June 30, 2023 and would decrease the fair value of our outstanding debt, as well as increase interest costs associated with future debt issuances or borrowings under our Unsecured Credit Facility. A 1% decrease in SOFR would result in a $0.7 million decrease to our annual interest costs on debt outstanding as of June 30, 2023 and would increase the fair value of our outstanding debt, as well as decrease interest costs associated with future debt issuances or borrowings under our Unsecured Credit Facility.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on the most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer determined that the Company’s disclosure controls and procedures (as defined in Rules

13a-15(e)

and

15d-15(e)

under the Securities and Exchange Act of 1934, as amended) were effective as of June 30, 2023.

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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 June 30, 2023, 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

None.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule

10b5-1

trading arrangement” or

“non-Rule

10b5-1

trading arrangement,” as each term is defined in Item 408(a) of Regulation

S-K.

On August 2, 2023, the Board of Directors approved and adopted the Third Amended and Restated Bylaws of the Company (the “Amended and Restated Bylaws”). The amendments address matters relating to Rule

14a-19

under the Exchange Act. Among other things, the Amended and Restated Bylaws:

•

Enhance disclosure and procedural requirements in connection with stockholder nominations of directors, including by (i) requiring any stockholder submitting a director nomination notice to represent as to whether such stockholder intends to solicit proxies in support of director nominees other than the Company’s nominees in accordance with Rule

14a-19

under the Exchange Act, (ii) requiring such nominating stockholder to provide reasonable evidence, at the Company’s request, that certain requirements of Rule

14a-19

have been satisfied, (iii) permitting the Company to disregard proxies or votes solicited for such stockholder’s nominees if such stockholder fails to comply with the requirements of Rule

14a-19

and (iv) incorporating other technical changes in light of the universal proxy rules adopted by the SEC;

•

Clarify that a stockholder is permitted to cast a vote by proxy filed in accordance with the procedures established by the Company, if that proxy is (i) executed by such stockholder or its agent in a manner permitted by applicable law, (ii) compliant with Maryland law and the Company’s Amended and Restated Bylaws and (iii) filed in accordance with the procedures established by the Company;

•

Clarify that the Board of Directors of the Company may determine that a meeting of stockholders may be held by means of remote communication;

•

Outline the procedures for announcing the date, time and place of a reconvened meeting of stockholders in the event a meeting of stockholders is adjourned; and

•

Other technical and administrative changes and enhancements, including as related to procedures for meetings of stockholders.

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The above description of the Amended and Restated Bylaws does not purport to be complete and is qualified in its entirety by reference to the full text of the Third Amended and Restated Bylaws, which is filed as Exhibit 3.2 hereto and incorporated herein reference.

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		Third Amended and Restated Bylaws of City Office REIT, Inc., effective as of August 2, 2023. †

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		INLINE XBRL INSTANCE DOCUMENT†

101.SCH		INLINE XBRL SCHEMA DOCUMENT†

101.CAL		INLINE XBRL CALCULATION LINKBASE DOCUMENT†

101.LAB		INLINE XBRL LABELS LINKBASE DOCUMENT†

101.PRE		INLINE XBRL PRESENTATION LINKBASE DOCUMENT†

101.DEF		INLINE XBRL DEFINITION LINKBASE DOCUMENT†

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

†		Filed herewith.

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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: August 3, 2023


		By:		/s/ James Farrar
				James Farrar

				Chief Executive Officer and Director
				(Principal Executive Officer)

Date: August 3, 2023


		By:		/s/ Anthony Maretic
				Anthony Maretic

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