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Edited Transcript of CIO earnings conference call or presentation 1-Nov-19 3:00pm GMT

Q3 2019 City Office REIT Inc Earnings Call

Vancouver Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of City Office REIT Inc earnings conference call or presentation Friday, November 1, 2019 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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* Craig Gerald Kucera

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

* Jason R. Idoine

RBC Capital Markets, 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 day, and welcome to the City Office REIT, Inc. Third Quarter 2019 Earnings Call and Webcast. (Operator Instructions) As a reminder, this conference call is being recorded. (Operator Instructions) It is now my pleasure to introduce to you Mr. Anthony Maretic, the company's Chief Financial Officer, Treasurer and Corporate Secretary. Thank you, Mr. Maretic. You may begin, sir.

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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 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. While 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 press release and the company's filings with the 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. Since our last earnings call in August, we've been actively taking steps to position City Office for long-term success. During the quarter, we capitalized on strong equity and debt capital market conditions to significantly improve our balance sheet. We've also continued to source attractive acquisition opportunities which will drive long-term performance. In addition, leasing momentum and healthy same-store results have continued across our portfolio.

With my comments today, I'd like to speak to each of these major components of our results this quarter. Starting with our recent capital raising activity, the combination of strong equity market conditions and outperformance of our common stock year-to-date allowed us to access equity capital at our highest pricing to date. Between shares issued through our ATM program during the third quarter and a follow-on offering in early October, we raised just over $200 million at an average gross issuance price of $13.56 per share. This was an important step as it allowed us to secure capital for portfolio growth and diversification, but it also will reduce our fully deployed leverage levels.

Separately, we took advantage of the drop in interest rates over the summer to renegotiate loan terms on approximately $88 million of property-level debt. Tony will provide more detail shortly, but these steps will generate meaningful savings over time.

Moving to our recent acquisitions and pipeline. We closed a $49 million acquisition in Denver during the quarter called 7601 Tech. This 6-storey building is located in the Denver Tech center submarket of Southeast Denver, adjacent to our existing property, 7595 Tech, which we previously called DTC Crossroads. We've combined the 2 properties into a 380,000-square-foot amenitized campus that features a full suite of attractive and recently built-out amenities. This enhances the profile of both buildings and provides us leasing flexibility as tenants grow or contract within the 2 buildings.

In addition, we will be further amenitizing the properties and have consolidated the leasing execution with one of the best leasing teams in Denver. 7601 Tech was 95% leased at the time of acquisition, with a weighted average lease term remaining of 7.5 years when including committed leases. The building has had strong recent leasing success, and the tenancy is anchored by Jackson National Life Insurance company and a well-capitalized public company. Our third quarter occupancy for 7601 Tech shows as 80% as one of the tenants signed a lease to expand into new space, and they are expected to physically occupy the space late in the fourth quarter of 2019 or early 2020. We acquired the property at a 7.1% cap rate and expect it will produce solid long-term results. Behind 7601 Tech, we continue to evaluate a broad pipeline in excess of $750 million.

Given the typical time line of a closing process, we don't expect to have any further acquisitions in 2019. We're focused on executing on the pipeline and are targeting between $320 million and $360 million of new acquisitions. On a related note, we have 2 smaller dispositions in process in Denver, one of which is a land parcel adjacent to our Circle Point property and the other is our Logan Tower property. The buyer's deposit on the Circle Point land parcel is nonrefundable. We will provide further details on our next earnings call.

Turning to our operating performance during the quarter. We continued the trend of robust same-store cash NOI growth with 5.8% growth for the quarter year-over-year. This brings our year-to-date same-store cash NOI growth to an impressive 4.5%. Our occupancy decreased from 93.4% to 91.2% during the quarter, which is a little bit misleading as far as our actual performance. I mentioned earlier that our new acquisition, 7601 Tech, is 95% leased, but one significant tenant has not technically occupied the space yet. This brought down the reported occupancy at this property to 80% and lowered the combined portfolio occupancy by about 0.5% at quarter end despite 7601 Tech being leased long term.

Further, we had approximately 119,000 square feet of vacates during the quarter. These were known vacates that we mentioned on previous earnings calls or were necessary as part of our Camelback Square repositioning at higher market rents. These move-outs in Q3 will be offset by the 114,000 square feet of new leases that are signed and committed but not yet in occupancy. The vast majority of these committed leases are expected to commence in Q4, although the timing of the construction of tenant suites could straddle year-end.

Notably, during the quarter, we signed a 30,000-square-foot lease at our 7595 Tech property, which is a significant step in leasing the attractive blocks of vacancy at that property. We therefore expect portfolio occupancy to tick back up in Q4, and we've provided updated guidance of over 92% at year-end.

In conclusion, the net effect of the transactions that I discussed and the impactful balance sheet enhancements that Tony will detail have positioned City Office to take advantage of opportunities in our thriving markets. Management's focus continues to be on intelligently investing our capital, enhancing our balance sheet and driving NOI growth. We believe these steps will increase net asset value for our investors and increase our share price over the long term.

And with that, I'll turn the call over to Tony to provide further details on 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 $24.6 million. This represents a $2 million decrease relative to the $26.6 million reported in the second quarter. The decrease was primarily attributable to a $2.6 million onetime assignment fee income reported in the previous quarter. Without the onetime fee in the previous quarter, NOI would have increased by approximately $600,000, which was driven by the acquisition of 7601 Tech late in the third quarter and NOI growth from our same-store portfolio.

The gross assignment fee income received of $2.6 million was recorded within rental and other revenue in the second quarter. For accounting purposes, the outlays and expenses were classified in G&A as onetime costs. Those costs were approximately $1.1 million, resulting in a net $1.5 million benefit in the previous quarter. Overall, we reported core FFO of $12.4 million or $0.29 per share, which was $1.3 million lower than the second quarter. As I mentioned, the second quarter included a $1.5 million benefit from the net assignment fee income, with an offsetting increase attributable to the year-to-date acquisitions.

G&A was also slightly higher in the quarter, partly due to higher costs related to our first year being subject to auditor attestation under Sarbanes-Oxley. Our third quarter AFFO was $9.3 million or $0.22 per share. Excluding the impact of the higher share count from our capital raising activity, our AFFO would have been right on top of our $0.235 dividend. Our third quarter AFFO was affected by the tenant improvements and leasing commissions associated with our leasing activity in the quarter. Due to relative size of our portfolio and the impact of significant leasing in any 1 quarter, our AFFO numbers will continue to move around some from quarter to quarter.

Our leasing activity and capital expenditures are provided on Pages 17 and 19 of the supplemental package. Consistent with our definition of AFFO, we have excluded some first-generation leasing costs, the largest of which relate to our recently acquired Canyon Park property. Further details are disclosed on Page 19 under Non-reoccurring Capital Expenditures.

Our third quarter same-store cash NOI grew 5.8% year-over-year or 4.5% for the first 9 months of the year as compared to the same period in the prior year. Orlando, Portland and San Diego were our best-performing markets in the third quarter, each with double-digit same-store cash NOI growth, which was primarily driven by a combination of occupancy gains in those markets, free rent burn-off and mark-to-market or step-up in rents. With a slight decrease in occupancy we experienced at the end of Q3, we expect same-store growth to remain positive but moderate in the fourth quarter.

Moving on to our balance sheet. Our total debt, net of deferred financing costs at September 30, was $652 million. Our net debt-to-enterprise value ratio was reported as 43.5%, but that figure does not include the additional 6.9 million shares issued in early October. Including the proceeds from that offering, net of underwriting discounts, our net debt-to-enterprise value is closer to 37% today.

During the quarter, we also took advantage of a drop in interest rates to renegotiate loan agreements on 4 of our properties. The annual savings from those renegotiations will result in initial annualized interest expense savings of approximately $800,000, and this was achieved without incurring any prepayment penalties. We also expanded our unsecured credit facility to $300 million by entering into a $50 million 5-year term loan. Simultaneously, we entered into a $50 million 5-year swap arrangement. The term loan is priced off of LIBOR, so the swap fixes of 30-day LIBOR component of the borrowing rate at 1.27% for the 5-year term of the term loan. At quarter end, the LIBOR swap effectively fixed our term loan interest rate at 2.67%.

Given the positive differential in rates, the unrealized gain from this hedge is reflected in our 10-Q in comprehensive income. As a result of those balance sheet transactions, we lowered our overall weighted average interest rate on our total debt portfolio to 3.99% at quarter end versus 4.22% at the end of the prior quarter. At quarter end and including the swap agreement I discussed, 93.4% of our debt was effectively fixed and had a weighted average maturity of 5.6 years.

Finally, in our third quarter earnings release, we provided updates to our previously issued 2019 guidance. The updated full year guidance primarily reflects the higher share count from our share issuances and interest savings through to the end of the year. Based on these assumptions, we are anticipating core FFO between $1.17 and $1.19 per share for the full year ending December 31, 2019.

Excluding the impact of share issuances, the updated range would have been between $1.24 and $1.26, which is at the higher end of our previous guidance. Further, we continue to expect same-store cash NOI growth between 4% and 5%. A full set of revised guidance estimates and underlying assumptions is provided in our third quarter press release.

That concludes our prepared remarks and we will 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) Our first question today will come from Michael Carroll of RBC Capital Markets.

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Jason R. Idoine, RBC Capital Markets, Research Division - Associate [2]

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This is Jason on for Mike. Wondering about the 7601 Tech acquisition. Just curious what other type of capital is chasing that asset? And also, if that was a marketed deal?

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

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Thanks for the question. Yes, it was a marketed deal. It was fairly competitive. I think we had a good advantage, given that we own next door and clearly knew the market well. And it was a pretty large private REIT that sold it but it was a very competitive process.

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Jason R. Idoine, RBC Capital Markets, Research Division - Associate [4]

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Got you. And then are you expecting any leasing synergies now that you guys have kind of built out a little cluster there?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [5]

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As part of what we're doing, it really was helpful to put together an amenitized campus. So we're taking a few steps there: one, the building we acquired had a great food offering. We have recently built out in our other building fitness, shared amenities, conference, so combining the mall provides a much better package. And so as part of that, we've re-awarded the leasing on that to the team that was leasing 7601, who've done a fabulous job. So we do think there's going to be some synergies and advantages there. Particularly as some of the tenants in that building are rapidly growing, it might be a good candidate to grow into our buildings.

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Jason R. Idoine, RBC Capital Markets, Research Division - Associate [6]

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Okay, great. And then moving away from DTC, could you provide an update on leasing at FRP and Sorrento Mesa? And then any trends that you're seeing in those markets?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [7]

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Sure. So this is Tony here. So FRP Collection, we effectively have backfilled the space that was vacated by Metters some time ago and the tenants are moving in, so occupancy at quarter end at FRP Collection was effectively 89%, and we have another tenant moving in, in Q4.

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [8]

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In terms of Sorrento Mesa, we still do have 1 building, life sciences, that is vacant, a few prospects looking at that. We've completed the majority of our cosmetic work. We've built kind of a centralized amenity campus so we're in good shape there. The market is extremely strong there as well as far as rents, so that value of the vacancy is very significant to us.

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Operator [9]

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The next question today will come 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 [10]

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Jamie, how are you thinking about market concentrations these days when you're evaluating the $750 million of deals? Phoenix and Denver are now over 20% of rent if you get Camelback in Denver Tech lease and Tampa isn't far behind. Is that about where you sort of want to keep things in those markets and maybe you'll trade in and out of assets? Are you comfortable going to 25%, even 30% exposure in the market these days?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [11]

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It's a good question, Rob. So if you look at a few of our markets, we've got a lower weighting towards Seattle and Portland. But generally, we're very comfortable with what we have. We're just slightly over 20% in both Denver and Phoenix. Would we be comfortable going a little higher based on getting some great quality assets? Yes. But that's right around where we want to be long term, on the upper end. So our focus is continuing to find great acquisitions in some of our other markets. We continue to look at a couple of similar markets we've discussed in the past as well and build out a broader portfolio.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [12]

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Okay. And any incremental known or likely move-outs that have come to life this quarter?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [13]

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Rob, it's Tony here. So in Q4, we do expect approximately another 50,000 of known vacates that will take place during the quarter. Now some of that's actually already been backfilled but there are 50,000 square feet of known vacates in Q4.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [14]

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Okay. But is the large -- is much -- is there -- looking into 2020, is there anybody who's like giving you notification in the last 90 days or 100 days or so that -- of note?

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

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Yes. No real change in the last 90 days, I'd actually say that. On previous calls, we've talked about we have 7 tenants that are greater than 30,000 square feet that are rolling next year. And on previous calls, we talked about having high confidence in renewals on at least 4 of them. We'd probably bump that number up to 5 based on recent positive discussions. And then we do have a couple of known or expected vacates in 2020. They're both in the back half of the year and both of them may be -- may do short-term extensions. So looking pretty good for 2020.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [16]

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Okay. And then lastly, Tony, any known difference between NAREIT and core FFO in fourth quarter at this point?

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

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So known and NAREIT, so you're talking about our -- our only adjustment for FFO is, as you know, we use core FFO definition which backfilled our other stock-based compensation, which is a noncash item. So that's really basic -- the only adjustment we have. Did I understand your question, Rob or...

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [18]

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Yes, I just wanted to make sure that there wasn't anything, either from some of the debt refinancings or anything else, that's like a onetime thing that we need to be cognizant of that would be in core FFO -- that would be added back for core FFO that wouldn't be for NAREIT.

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

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Fair question. That's actually a good point worth mentioning because I did talk about the refinancings. We did manage to do all of those refinancings without actually incurring any prepayment penalties. So no prepayment penalties are expected.

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Operator [20]

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Our next question today will come from Bill Crow of Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [21]

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Guys, any updated thoughts towards co-working exposure and maybe your thoughts going forward on that sector?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [22]

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It's something we've been looking at a lot, Bill. So we have no exposure to WeWork. We do have a few Regus offices that are very well occupied. There's nothing really significant across our portfolio. Then we have a couple smaller regional. Again, when you look at the occupancy levels they have they're high and the space build-out is great so we have no concerns within our portfolio.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [23]

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All right. And then I guess, a home court advantage here. I saw that your Tampa partner in the Downtown building just acquired an office asset in Carillon, which you also own in. And I'm just wondering whether they reached out to you for a potential partnership in that building?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [24]

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That was on the table early on. Given the vacancy in that particular building, it was not something that we wanted to partner in within CIO. So that was not something we explored.

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Operator [25]

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Our next question today will come from Craig Kucera of B. Riley FBR.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [26]

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Given that you still have a handful of loans that are priced kind of in the mid-4%, are there any other opportunities to maybe work on those as well to bring them down to what you achieved in the third quarter?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [27]

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Yes, it's a good question, Craig. Just to give you a little bit more color. So when interest rates kind of started to fall and there was that opportunity, we looked at our entire portfolio. We focused on and we had a couple of loans that had no prepayment penalty. And a couple of them were actually with the same bank that has some prepayment penalties but we managed to negotiate reductions and a waiver of those prepayment penalties.

The other loans within our portfolio that do have a little bit of higher rate have substantial prepayment penalties. We made some inquiries but were unsuccessful in sort of moving the dial on that. So that's a long way of saying, I think we've taken advantage of the opportunity as best we can, and the remaining ones, the prepayment penalty is probably too prohibitive for it to make sense.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [28]

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Got it. And just going back to your commentary on sort of your acquisition pipeline and what you're looking to do with the equity that was raised. Is it fair to say, are you guys going to shoot to do something on the order of $320 million to $360 million next year? Or is that sort of over time, that's where you see putting that money to work?

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

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Yes. Based on where we are, it's beginning of November timing of transactions, we don't see anything meaningfully impacting Q4. So our own internal plan is to start taking advantage of closings early 2020 with full deployment on the back half of 2020.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [30]

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Got it. And just as we think about leverage in general going forward, I guess, just sort of the back-of-the-envelope math is about 40% leverage on this round of capital. Is that sort of how we should think about the company moving forward as far as sort of a target leverage on new acquisitions and sort of gradually bringing down leverage?

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

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Craig, I think you're about right. I've talked about that in the past. I used the term low 40s. So as we're penciling it out, our own math was kind of between 40% and 45% on this acquisition capital. It will depend a little bit on the chunkiness of the acquisitions. We can't time it or size it perfectly, and a little bit may be determined by the cap rate so that we're ensuring we're getting sufficient NOI. So low 40s, certainly, we would agree that's the right number to use.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [32]

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Got it. And I think you mentioned this in your commentary but it sounds like there was a lease that got picked up at 7595. What was that number and kind of where were the rents?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [33]

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So 30,000 feet so it's a full floor. Now there is a tenant that's about half of the floor that's there that's going to roll that Tony mentioned in the fourth quarter. So we've backfilled that and taken up the rest of the space on that floor. The rate we negotiated was $26.50 starting rental rate.

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Craig Gerald Kucera, B. Riley FBR, Inc., Research Division - Analyst [34]

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Okay. And I know that market, for quite a while, has been a little slow and I think you've even alluded to the Denver Tech Center being a little slow. Are you seeing better activity there now? And was that sort of what led you to maybe double down in that submarket?

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [35]

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Yes, it was something we looked a lot, Craig. So we think by having the campus, it really positions our buildings well, so high-quality food amenities, fitness, conference, large outdoor integrated space. If you look at who was winning a lot of the major leasing activity over the last little while, it was this particular building that we bought. And so they basically fully backfilled it, and they did that by having really built-out space that was move-in ready. So that's something we're probably going to explore going into next year is advancing the quality of the vacancy that we have, building some spec suites, bringing that same leasing team that had a lot of success moving them over on to our property. And so we think there's a lot of synergies there. But for sure, that submarket has strengthened a lot.

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Operator [36]

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(Operator Instructions) Our next question today 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 [37]

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Portland, 6%; Seattle, 3%. When you talk about a deal pipeline of $750 million, is there a concerted effort to possibly grow further in some of those markets where you have less scale?

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

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Absolutely. The challenge we have in some of those markets is the valuations are just at a point where you're hitting a lower percentage. It's harder to buy well and make the math work. If you look at our pipeline, really, there's a mixture of some smaller transactions, a couple larger and then a couple of portfolio that are substantial sized that would give us significant scale in some markets that we don't have exposure to or minimal exposure. So I think there's a way for us to, hopefully, accelerate the growth in a few of those particular markets that we're feeling really good about.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [39]

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And then Jamie, just on that point, when you talk about your pipeline and your underwriting, have you made any real shifts in the way that you're underwriting to maybe account for kind of later cycle or anything that -- or is it really market-by-market that you're kind of looking at these assets?

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

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We've made a lot of shifts over the last year or 2, I would say, as far as how we underwrite assets. So generally, we've been seeing a lot of growth in rents and over long-term holds, we're not expecting that, that's going to be there every year. It has been but we're pricing accordingly that there are going to be setbacks. You are later in the cycle, there's going to be some pullback in rents, and we're making sure we're pricing assets accordingly, so that if that happens, we're still hitting our business plan. And if it doesn't happen for a long time, we're going to exceed our business plan. But we want to make sure we're comfortable in any market for the defensive underwriting that we're doing.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [41]

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Great. Last one for me. Tony, just to understand the leverage. I know you've talked about, I guess, it was debt-to-EV and what that is post equity raise. Is it just assuming kind of back-of-the-envelope post-equity raise that your net debt-to-EBITDA that gets shaved by about a full turn? Is that the way to think about it?

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Anthony Maretic, City Office REIT, Inc. - CFO, Treasurer & Secretary [42]

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I think somewhere between half a turn and full turn. So even before, we were kind of high 7s, I'm now kind of guiding to low 7s in terms of the adjustment post-deployment. But again, a lot of that will depend on the acquisitions and what the initial cap rate is going into those acquisitions are. But it should move down significantly.

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Operator [43]

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Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Jamie Farrar for any closing remarks.

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James Thomas Farrar, City Office REIT, Inc. - CEO & Director [44]

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Thanks for joining us today. We look forward to updating you further on our next call. Goodbye.

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Operator [45]

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The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.