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Edited Transcript of CIO earnings conference call or presentation 1-Nov-18 3:00pm GMT

Q3 2018 City Office REIT Inc Earnings Call

Vancouver Nov 9, 2018 (Thomson StreetEvents) -- Edited Transcript of City Office REIT Inc earnings conference call or presentation Thursday, November 1, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Maretic

City Office REIT, Inc. - CFO, Treasurer & Secretary

* James Thomas Farrar

City Office REIT, Inc. - CEO & Director

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Conference Call Participants

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* Barry Paul Oxford

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Craig Gerald Kucera

B. Riley FBR, Inc., Research Division - Analyst

* Jason R. Idoine

RBC Capital Markets, LLC, Research Division - Associate

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Robert Chapman Stevenson

Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the City Office REIT, Inc. Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. (Operator Instructions) It is now my pleasure to introduce you to Tony Maretic, the company's Chief Financial Officer, Treasurer and Corporate Secretary. Thank you, Mr. Maretic. You may begin.

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [2]

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Good morning. Before we begin, I would like to direct you to our website at cityofficereit.com, where you can download our third quarter earnings press release and the supplemental information package. The earnings release and supplemental package both include a reconciliation of non-GAAP measures that will be discussed today to their most directly comparable GAAP financial measures. Certain statements made today that discuss the company's beliefs or expectations, or that are not based on historical fact, may constitute forward-looking statements within the meaning of the federal securities laws. Although the company believes that these expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. Please see the forward-looking statements disclaimer in our third quarter earnings release and the company's filings with SEC for factors that could cause material differences between forward-looking statements and actual results.

The company undertakes no obligation to update any forward-looking statements that may be made in the course of this call.

I will review our financial results after Jamie Farrar, our Chief Executive Officer, discusses some of the quarter's operational highlights. I will now turn the call over to Jamie.

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [3]

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Good morning. As we draw closer to the year-end and the full picture of our 2018 performance comes into focus, we remain positive on both the underlying office real estate fundamentals in our markets and our financial performance relative to our expectations at the beginning of the year.

To begin, with a brief update on our markets. Through 3 quarters of the year, the 7 cities where we own property have seen approximately 7 million square feet of positive absorption of office space. Year-over-year rent growth continues to trend higher with approximately 4% growth on average in our markets, weighted for our portfolio concentration.

On the supply side, office buildings under construction in our cities remain below the long-term historical average. Strong absorption and employment fundamentals in Dallas, Denver and Phoenix have outpaced moderate new supply in those markets, while Orlando, Tampa, San Diego and Portland continue to experience limited new construction.

We believe our market selection has been excellent, and our targeted cities remain national leaders in employment and population growth. ULI, in its 2019 Emerging Trends in Real Estate, highlighted the emergence of these nongateway 18-hour cities, as highly attractive investment markets. In fact, 4 of our cities were ranked in the top 10 for overall real estate prospects in 2019.

We believe that these dynamics will continue to push rental rates higher at our properties and translate into demand for the larger, attractive blocks of space we have in our portfolio.

In addition, we have a number of renovation programs ongoing to enhance the competitive position of our properties within their submarkets. The most notable and largest renovation is at Park Tower in Tampa, where we expect the approximately $11 million renovation will be substantially completed by year-end. The upgraded façade, lobby and spec suites look fantastic and are driving tremendous interest for the vacant spaces.

At our DTC Crossroads property in Denver, renovations to add a fitness center and tenant lounge are underway and have transformed the previously unused space on the lower level into a desirable amenity set.

At Sorrento Mesa, San Diego, the outdoor common area amenity improvement plan is now underway, which will greatly enhance the campus feel and provide a catalyst for securing tenants in our 2 value-add buildings.

As an update on Plaza 25 in Denver, we are moving forward with vacancy conditioning, cosmetic and mechanical system upgrades and have brought on a new leasing team to drive results.

The largest blocks of available space on our portfolio remain at our DTC Crossroads and Plaza 25 properties in Denver, our Sorrento Mesa property in San Diego and our FRP Collection property in Orlando. With the renovations that I just described and the focus of our asset management and leasing teams, we continue to make leasing those spaces a priority going into the end of the year.

Turning to acquisitions, we've closed $167 million of properties year-to-date, inclusive of 2 properties in Phoenix and 1 in Denver, all of which were previously announced. Two of those acquisitions were completed within the third quarter and all are performing to expectations with strong traction on the small blocks of vacant space that remain.

Earlier in the year, we expressed the expectation that our remaining dry powder would be deployed at the end of the third quarter or shortly thereafter. Over the last several months, we have witnessed aggressive pricing on assets. We believe that sticking to our rigorous underwriting standards and finding an attractive basis in all of our acquisitions is essential to the long-term value of our portfolio.

This has resulted in a lower conversion rate from our pipeline. In the third quarter alone, we completed an underwriting of, and passed on, over $500 million of assets. Having said that, we currently have a number of strong prospects in our pipeline and have been awarded 2 separate deals with an aggregate purchase price of approximately $62 million.

These purchases are subject to negotiation of definitive purchase contracts, completion of due diligence and closing. With our existing capacity, and the ATM proceeds that Tony will discuss, we have approximately $170 million of acquisition capacity or an additional $110 million if we're successful in closing these 2 deals that have been awarded to us.

We're targeting to put that capital to work by the end of the first quarter of 2019.

In sum, we believe our markets are performing well, and that we have made strong progress towards our stated renovation, leasing and acquisition goals. With the last 2 months of the year, we will be focused on driving leasing activity towards our stated occupancy targets and prudently deploying the balance of our acquisition capital.

With that, I will turn the call over to Tony to discuss our financial results.

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [4]

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Thanks, Jamie. On a GAAP basis, our net operating income in the third quarter was $20.3 million. This represents a $1.8 million increase over the $18.5 million achieved in the second quarter. The increase from the prior quarter was primarily attributable to the acquisitions, which Jamie just referenced, Circle Point and The Quad, which were both acquired in July and contributed the majority of this increase.

The reported core FFO of $10.4 million or $0.28 per share, which was $1.1 million higher than the second quarter and was similarly impacted by the acquisitions, which occurred during the quarter. Our third quarter AFFO was $7.5 million or $0.20 per share. Our AFFO in 2018 continues to be affected by several planned value-enhancing capital and leasing costs, which have been incurred during the first 3 quarters.

All of our per share results were affected by equity capital raising activities during the quarter. In the third quarter, we made use of our ATM program for the first time in our history. Through the ATM, we issued approximately 3.4 million shares at an average price of $12.79 for gross proceeds of $43.6 million. With recent choppiness in the capital markets, we believe that efficiently raising proceeds through the ATM in the third quarter will benefit us by providing growth capital into 2019.

The use of net proceeds from the ATM was initially used to repay amounts outstanding on our line of credit, and we expect to redeploy the capital into accretive acquisitions on the timeline Jamie discussed.

Our in-place portfolio continues to track our budgets and previously issued guidance on a gross-dollar basis. However, our Q2 guidance update assumed that we would be fully deployed by the third quarter and would have no capital raising activity.

Though we have $62 million of transactions that have been awarded to us as Jamie mentioned, the potential timing of these acquisitions means that the income from these acquisitions is not likely to have a material impact on Q4. Due to the lag associated with the acquisition timing, and issuance of common stock through the ATM, we have adjusted our fourth quarter core FFO guidance range to $0.27 to $0.28 per share.

We continue to expect that our run rate core FFO will be in the range of $0.31 to $0.34 per share once we are fully deployed and have a full quarter of operations from those acquisitions.

The timing of the acquisition transaction, as Jamie mentioned, with its impact on 2019, and we will provide 2019 guidance on our next call.

As far as AFFO, the costs associated with the value-enhancing capital equities, that Jamie described at DTC Crossroads, will primarily be incurred in Q4 as will some costs associated with elevated leasing activity.

Due to the relative size of our portfolio and the impact of significant leasing in any one quarter, our AFFO numbers will continue to move around some from quarter-to-quarter. Our leasing activity and capital expenditures are provided on pages 18 and 20 of our supplemental package. Consistent with our definition of the AFFO, we have excluded some first-generation leasing costs and the repositioning activities at several of our properties, the largest of which continues to relate to the Park Tower repositioning. Further details are disclosed on Page 20 under nonrecurring capital expenditures.

Our same-store cash NOI increased 0.8% for the quarter. Of the 6 markets in our same-store pool, 4 markets contributed to positive same-store growth. Excluding Denver, where 3 properties have dragged on results, our same-store cash NOI growth was 3.3% for the quarter. At the beginning of the year, we provided guidance of negative 2% to 0% same-store cash NOI growth for the year, and we are tracking to be within that range at year-end.

We also continue to expect occupancy to tick higher through the balance of the year. However, a 34,000 square foot tenant ceased its operations at our DTC Crossroads property during the third quarter, ahead of the contracted lease term. The assets of the tenant, who was headquartered in DTC Crossroads, were acquired by a private equity firm earlier in the year, and we will legally repossess the space in October. We are pursuing the legal options available to us at this time and expect to have a further update in the fourth quarter.

At 0.6% of the square footage of the portfolio at quarter-end, the size of the tenant does not represent a significant impact to our overall portfolio, however, we do expect that this event will cause portfolio occupancy to track towards the lower end of the 90% to 93% guidance range at year-end, which we previously provided.

Moving on to our balance sheet. Our total debt net of deferred financing costs at September 30, was $546 million. Our net debt to enterprise value was 46.3%. At September 30, fixed-rate debt represented 90% of our total debt with a weighted average fixed rate of 4.2% and a weighted average maturity of 6.5 years.

We closed the Circle Point and Quad loan during the quarter, generating approximately $70 million in loan proceeds, walked in at a weighted average fixed rate of 4.36% on a 10-year basis. As we've talked about in the past, we believe our balance sheet strategy over the past 4 years to lock-in long-term fixed-rate debt has positioned us well in this environment.

That concludes our prepared remarks. And we'll open up the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And Our first question comes from Rob Stevenson of Janney.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [2]

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Did I just hear you right when you said that given the raise on the ATM during the quarter that you're not going to need any additional equity to close the remaining acquisitions that are under contract or letter of intent? Or did I get that wrong?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [3]

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Rob, this is Jamie. So you got that right. Effectively, when we look forward with the capital we have, we're targeting about $170 million of acquisitions from this point going forward. So the 2 we have under LOI represents about $62 million, so we're in good shape.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [4]

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Okay. Because that was the bigger question in terms of whether or not the earnings run rate lines up sort of staying down where the fourth quarter guidance is now or ramping back up if you guys need to continue to issue 3 million, 4 million shares a quarter to continue to do that, I guess. And then the other question winds up from me is that when you take a look at the portfolio today, how are -- under space that you have or negotiating, how are TIs and leasing commissions coming in there versus what you wind up seeing over the course of 2018 at this point? Are you having to give up more in order to get the tenants in? Is it less, same? How do you characterize the cost of acquisition of a lease these days?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [5]

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Sure. So speaking and looking forward kind of the next 12 months, I'd say, we are generally consistent in our underwriting, and where we think we're going to be coming in. As a whole, if you look over the last few years, TI costs have gone up kind of in line with construction costs. And the other factor is tenants are wanting more modern, creative build-outs. So we're seeing kind of a higher-base package. We're also seeing correspondingly, a little higher rents as a result.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [6]

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Okay. And then last one. In terms of the stuff that you guys are looking at today, any new markets or just more of the same at this point?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [7]

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We're still looking at a few new markets as well, Rob. But of the 2 deals we have, they are in existing markets.

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Operator [8]

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Our next question comes from Michael Carroll of RBC Capital Markets.

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Jason R. Idoine, RBC Capital Markets, LLC, Research Division - Associate [9]

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This is Jason on for Mike. I was just wondering if you guys could offer a little more color around the $62 million that you've been awarded or that you have under a letter of intent? Maybe a little bit on the timing and also where these assets are located? Specifically, are they in suburban or CBD markets, anything around that?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [10]

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Sure. So the $62 million is deals that have been awarded to us. So we've done extensive work. We've come to terms on pricing with the sellers. They are in Orlando and Phoenix. Both are in good areas that we know well. So think kind of in the leading submarkets. In terms of overall cap rates and valuations year-to-date, we've averaged about 7.4% cap rate. These are little higher than that, so it'll bring the overall average up.

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Jason R. Idoine, RBC Capital Markets, LLC, Research Division - Associate [11]

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Okay, great. And secondly, do any of the markets that you guys are currently in seem especially interesting at this time? Or has your opinion on any of the markets changed?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [12]

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So we still like all of the cities we're in. If you look at the ones that kind of have been leading the way, Tampa, Orlando, both have performed extremely well with kind of rising rental rate growth, declines in overall market vacancy, which is putting our buildings in a better position as we're negotiating leases. Dallas has been the same way, Phoenix, we've seen a lot of interesting opportunities there in really good submarkets that we think are well positioned long term and we're still buying well below replacement costs. And so as those markets continue to perform, we think, rental rates are really going to be driving at healthy levels.

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Operator [13]

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Our next question is from Bill Crow of Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [14]

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My question -- 2 questions, I guess. If you deploy the full $170 million as planned, where does that put net debt-to-EBITDA?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [15]

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Bill, it's Tony here. So on a net debt-to-EBITDA basis, if we do the full $170 million, which really represents probably the upper end of the range of acquisitions, it would put it just above 7.5.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [16]

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And you don't have -- you don't feel like you have to raise additional equity to do that $170 million, you are comfortable at 7.5?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [17]

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Correct.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [18]

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And that would kind of tap you out going forward, right? That would -- I don't think you want to push any further than that, is that right?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [19]

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Yes, that's kind of the target of the upper end of where it would be, if we were to do the full $170 million.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [20]

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Okay, great. And then the second question is just I wondered if you could give us a target quarter for dividend coverage, clearly not the fourth quarter as had been expected. I am just wondering if we should expect the first quarter or the second quarter, how do you think about that as you deploy, both the near-term and the longer-term investment dollars?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [21]

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Yes, that's a good question. I think the best way to think about it, Bill, is if you're going to take the average spread between our core FFO and our AFFO results on a per share basis over the past 3 years, you will see that it actually averages out to $0.075 per share. But that number has been as low as $0.03 in -- in some quarters and as high as almost $0.11 in others. So I guess, I'm trying to say is just given the size of our portfolio, it does bounce around a bit. But if you take the $0.075 long-term average -- we've consistently said, once we're fully deployed, our core FFO will be $0.31 to $0.34. So that means that equates to -- subtract $0.075, you see that there's dividend coverage there. In Jamie's prepared remarks, we said that we prepare -- we expect to be fully deployed by the end of the first quarter, which will then suggest that by the midpoint of next year, will be the dividend coverage. But effectively, we're saying as soon as we're fully deployed, we'll be at dividend coverage on the long-term basis.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [22]

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So that fully deployed is at $170 million, not the $60-some million that's already been committed, right?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [23]

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Correct.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [24]

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So, okay. That's great. That helps with timings, so the $170 million should be fully invested during -- by the second quarter. Is that what you're saying?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [25]

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Correct. That's our expectations.

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Operator [26]

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Our next question comes from Barry Oxford of D.A. Davidson.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [27]

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Just to get back to the same-store. Could I get a little color on Denver and what was driving that? Was that more of a one-time lease that was very high, they just kind of rolled down that caused that? Or are there other things going on in the Denver market?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [28]

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Good morning, Barry, it's Tony here. The largest contributor to the decrease was the known downsize by ProBuild at the Denver Tech Center. We talked about that quite a bit last year. That really sort of affected us this year. So that was a single biggest contributor in Denver. But similarly, the other properties being Plaza 25 and Logan Tower also had similarly smaller occupancy decreases. So that was the combined effect of those 3.

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [29]

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So, Barry, Jamie here. If you look across our portfolio, where we have big blocks of vacancy today, we're really focused. That's going to be one of the biggest drivers going forward, turning that and moving that to a much more positive number. So if you look at the big blocks, Park Tower in downtown Tampa, we've had great results leasing that. We're going to be in the low 90s here. The renovation looks great. FRP Collection in Orlando, we are at about 75% leased today. With deals we have in hand, we expect that to be in the 90s here, shortly. Superior Pointe in Denver, we're in 85% leased. We expect that's going to be moving into the low 90s here, shortly as well. So we're making great traction. The ones we're really focused on driving, Plaza 25, which -- it's about 60% leased. So our focus here is on getting the renovations now done there. Driving some leasing activity in DTC Crossroads, we're just finishing all of our renovation activity there. We think that's going to make a big difference on getting that leased. So focusing on those blocks is going to make a huge difference to our same-store, going forward.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [30]

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Is it fair to say that we should see it start to same-store NOI accelerate more in the back half of '19 and then the first half will be kind of leasing, but then once you get those leases in place, then if we look at the back half, we should see a little bit of acceleration?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [31]

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Yes. Barry, it's Tony. I think it's fair to say that say that. I think if I was to chart it out for you more specifically, what will happen is in Q4 -- part of the explanation is what's in the pool. And so Q4 -- part in Q4, we're going to be adding in the San Diego assets because it'll have been 4 quarters since we acquired that asset. That will initially be negative because of the Sorrento Mesa properties. If you recall, we had that big ROCA buyout last year, we received those significant termination fees, but it also led to higher vacancy this year. So net-net, year-over-year, that's going to be a driver to slightly negative in Q4. But thereafter, to your point, we'll start to see an acceleration beginning in Q1. So we expect to be positive beginning Q1 and accelerating throughout the year in 2019.

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Operator [32]

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Our next question comes from Craig Kucera of B. Riley FBR.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [33]

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I see that you have another 58,000 square feet of leases that haven't yet taken occupancy. Can you give us a sense of when those tenants will take occupancy and start paying rent?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [34]

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Yes, so there's a couple of large ones there. One is at our -- again, at Sorrento Mesa in San Diego, we talked about on our last call there was a tenant that we signed in the life science to replace a known vacate. And that expiry is December 31 with them taking occupancy almost immediately.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [35]

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Okay, and you mentioned that...

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [36]

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Yes, there are some other small ones that are going to increase occupancy in I think -- that you'll see those at Park Tower in particular, where there has been acceleration, and we'll see occupancy pick up in Park Tower as well.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [37]

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Okay. And you mentioned that pricing had gotten significantly stronger throughout this summer. Can you give us a sense of where deals are clearing versus where you think their fair value is? Is it a 25 basis points, 50 basis points? Any color there would be great.

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [38]

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Sure, Craig. So as far as what we've seen, particularly in the summer going into September, I think what we saw was a lot more buyers in our market. And sellers had the luxury of picking groups that might have bid at a higher level and seeing if they were going to pull a deal together and close. And we did see a number of those actually happen. In our own portfolio, we had 2 transactions, both above $100 million. One, we came in second place and we were close. But ultimately, the group we are competing with was prepared to go nonrefundable immediately before doing due diligence. And we're not going to do that. The other one, we were awarded the deal and as we dug into it, we discovered a major tenant had secured land and was planning on doing a build-to-suit for themselves and that changed the risk profile. And so we weren't prepared to transact on the terms we had and somebody else did. So what we saw was a lot more activity and how we've kind of internally refocused is really zeroing in on sellers that want certainty of close. And if you look at the 2 deals we have right now, it's exactly that situation where we've done a lot of work, we know the area extremely well, we have a seller who is an institution that wants certainty of closing and we put forward a quick time frame based on the work that we've done. And I think internally, that's how we're really kind of focused on differentiating ourselves. And so I'd say, generally, the cap rates have been stable over the last little while. There's more buyers, some willing to pay a little bit more than where we were. But it's a lot of the other terms such as going nonrefundable without doing due diligence that have really kind of caused some challenges, I would say, for us in the quarter to get some of these deals done.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [39]

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And are these -- this increased amount of new buyers, are these more syndicates of smaller players? Or are you seeing increased institutional interest in some of these markets?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [40]

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I'd say, increased institutional interest.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [41]

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And I may have missed this, but as far as the incremental assets that you're looking to potentially acquire by the end of the first quarter, what is the existing pipeline that you're looking at today to potentially pull those out?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [42]

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We've got a healthy pipeline. We're north of $500 million. There's a couple of deals above the $62 million that were pretty advanced on. I think we're going to have better visibility over the next month, whether those come together. So internally, we're targeting on trying to accelerate the closing time frame. We'd love to have a lot of it done kind of early Q1. But it's really going to come down to us being very comfortable with the real estate we're buying at the prices we're paying, right. We want to be positioned at -- as we go into 2019 and beyond, we're extremely comfortable that we're going to create a lot of value long term. And that comes down to buying good real estate at good pricing.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [43]

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Got it. And one more for me and I'll jump back. As far as next year, has there been any change as far as expected move-outs from your perspective of potentially larger tenants?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [44]

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Craig, it's Tony here. Effectively, in 2019, we only have a single tenant that's above 30,000 square feet that's set to expire. And that's at our FRP Collection, that's a tenant that's been there forever. It's actually the U.S. Army Corps and they have these ongoing one-year renewals. So we actually expect them to renew. Beyond that, it's a bunch of smaller and medium-size tenants. And we expect to renew them at our kind of historical average, which is north of 2/3.

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Operator [45]

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(Operator Instructions) And our next question will come from Mitch Germain of JMP Securities.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [46]

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Just to that point with regards to -- it seems like you've seen as little more institutional capital. Has that shifted in terms of what types of assets you're looking at as it may be kind of skewing towards more value-add or maybe smaller deals, even kind of versus what your typical sizes are? Is there anything kind of shifting in the way you're approaching acquisitions here?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [47]

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I think that's actually a great question, Mitch. So if you look at the $62 million, 2 deals and you divide it in half, that's in the $30 million range on average, which is a little smaller than our historic average, which has been closer to $50 million. So we are pursuing deals that are in great locations with solid credit tenants. We are still looking for the stabilized properties that we can buy that we see long-term growth and value. We will, over time, continue to add a little bit of value-add to our portfolio when the opportunities arise. But the bulk of our acquisitions are ones that are going to generate healthy cash flow and are bought at a price where we're comfortable long term, our cash flow's going to grow and the value of our asset's going to grow. So to answer your question, we are looking at little smaller deals. In our pipeline, there are some that are little larger as well. But as far as being able to compete on the $100-plus million deals, I'd say those ones are a lot tougher today.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [48]

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Great. And then, I guess, you mentioned pricing on the 2 deals and LOI a little bit higher than kind of what you've averaged. Is that a function of kind of the shift in rate environment or whatever? Or is it just kind of the asset and the deal itself and nothing to really kind of attribute to what we're seeing in the broader market?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [49]

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Yes, I'd say, it's more of a function of asset-specific for both of those. One of the 2 deals is a little higher. It's -- one is a little lower and they blend to kind of the high 7s. We have looked in our portfolio with a couple of ground lease assets that have great long-term institutional ground leases in place. Those are typically a little higher cap rate. And so we continue to look at a few of those in our pipeline as well.

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Operator [50]

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As there are no additional questions, I will turn the call back over to Mr. Farrar to conclude.

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [51]

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We want to thank everybody for joining today. And we look forward to reporting our year-end results and moving into 2019. Have a great day.

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Operator [52]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.