Yahoo Finance City Office REIT, Inc. (NYSE:CIO) Q1 2024 Earnings Call Transcript
City Office REIT, Inc. (NYSE:CIO) Q1 2024 Earnings Call Transcript May 3, 2024
City Office REIT, Inc. misses on earnings expectations. Reported EPS is $-0.06095 EPS, expectations were $0.31. City Office REIT, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the City Office REIT, Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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.
Anthony Maretic: Good morning. Before we begin, I would like to direct you to our website at cioreit.com, where you can view our first 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 first 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.
James Farrar: Good morning. I'd like to start with some observations on the office sector fundamentals and then move to the highlights since our last call. Overall, the office sector is trending more towards equilibrium. Both our own tracking and national data reflects an increase in tenant demand. For the first quarter of 2024, JLL reported that 70% of U.S. office markets experienced an increase in tenant demand as compared to the prior quarter. Well, leasing has not recovered to pre-pandemic levels. Active office requirements have increased 28% nationally year-over-year according to JLL. On the supply side, the sublease vacancy rate has continued to decline and new sublease additions have dropped off from a year-ago. New construction has also essentially ground to a halt, with the lowest quarterly volume of new projects breaking ground on record.
Also, there has been an increase in conversions or demolition of obsolete buildings and 2023 had the highest volume of buildings converted on record. This dynamic appears to indicate a long runway of net improvements to the supply-demand equation although we expect the pace of improvement to be gradual. We see these trends playing out within our own portfolio. During the quarter, we executed 191,000 square feet of new and renewal leases. Within the 110,000 square feet of new leasing, we executed on two larger leases. At Block 83 in Raleigh, we completed an 11-year, 29,000 square foot lease with a strong financial tenant for the last full floor vacancy. Block 83s best-in-class amenity package and high-end suites continue to attract strong demand.
At our FRP Ingenuity Drive property in Orlando, we signed a 10.5-year, 43,000 square foot lease with a health care-related tenant. As a result of this and prior new leasing, a healthy 172,000 square feet or 3% of our portfolio has signed leases that will commence in subsequent quarters. Our leasing pipeline continues to be strong with a number of larger potential new tenants evaluating spaces across our portfolio. The trend of shorter-term lease renewals in place seems to be gravitating to longer-term solutions, which is a positive for the industry. Tony will discuss our revised estimates for our 2024 guidance momentarily. These reflect current discussions with WeWork who are tenants at two of our properties at quarter end. After engaging in extensive negotiations with the management team at WeWork, we believe we have an agreement in principle that would have them continue in both of our buildings, but with a smaller footprint when they emerge from bankruptcy.
This expected outcome has not yet been finalized in a lease. If completed, we would get back one floor at the terraces in Dallas' Preston Center submarket early in the third quarter and one floor back at Block 83 in Raleigh in the fourth quarter. The terraces in Dallas is currently 100% leased, and we expect high demand for the 25,000 square foot premium full floor. Similarly, with the recently signed leases at Block 83, 98% of the office component is now leased and therefore, we expect high demand for this 28,000 square foot full floor space. The conclusion of these discussions would put an end to the WeWork uncertainty and reduced them to just over 1% of our portfolio. Ultimately, when we have backfilled these spaces, our rent rolls will be further diversified and we expect that would result in a net increase in overall property value.
Going forward, as we look to best position ourselves in this environment, we've commenced certain investments that will elevate key assets and help us to grow net operating income. We're fortunate to have the bulk of our overall value invested in leading cities that are primed for continued employment growth. While many of our assets are newer to vintage or recently renovated, we have a handful of quality properties that required a refresh to optimally position them. This opportunity aligns with tenant demands, and we've already are well underway making these improvements. The first phase of our Pima Center renovation in North Scottsdale is done, and we're now constructing the lobby amenity upgrade at the second building, which we expect will conclude by the end of the summer.
Our well-located 5090 property in Phoenix's Camelback Corridor has kicked off its renovation construction, and we anticipate it will be completed by the Fall. Further, we have now completed the renovation plan for our Waterfront City Center property in Downtown St. Petersburg and initiated construction, which is starting in May and is expected to conclude by early 2025. And last, we're finalizing plans for an enhancement of 2525 McKinnon and Uptown Dallas, which is scheduled to commence later this year. We anticipate investing approximately $9 million into these four projects, of which we've already spent approximately $2 million at quarter end. At the conclusion of this renovation program, the vast majority of City Office's portfolio value will reside in new or fully renovated properties that are positioned for long-term leasing success and cash flow maximization.
We anticipate that leasing execution will be enhanced by these moves, and we are setting ourselves up for a strong 2025 and beyond. With that, I'll hand the call over to Tony to discuss our financial results in more detail.
Anthony Maretic: Thanks, Jamie. Our net operating income in the first quarter was $26.7 million, which is $200,000 lower than the amount we reported in the fourth quarter of 2023. NOI was marginally lower in the quarter as a result of lower occupancy. We reported core FFO of $13.5 million or $0.33 per share for the first quarter. This was the same amount as in the fourth quarter. Our first quarter AFFO was $9.1 million or $0.22 per share, which resulted in a well-covered dividend this quarter. The largest impact to AFFO was $600,000 of tenant improvement costs at Park Tower in Tampa. We also continue to invest in our spec suite and vacancy conditioning program, although at a slower pace than in 2023. The total investment in spec suites and vacancy conditioning in the first quarter was $400,000.
Moving on to some of our operational metrics. Our first quarter same-store cash NOI change was negative 1.0% or $200,000 lower as compared to the first quarter of 2023. Excluding Cascade Station in Portland, the rest of our same-store portfolio was a positive 0.8%. Our portfolio occupancy ended the quarter at 83%, including 172,000 square feet of signed leases that have not yet commenced, our occupancy was 86% as of quarter end. Our total debt as of March 31 was $668 million. Our net debt, including restricted cash to EBITDA, was 6.6x. As of March 31, we had approximately $97 million undrawn and authorized on our credit facility. We also had cash and restricted cash of $43 million as of quarter end. As far as our debt maturities in 2024, we have four scheduled maturities for a total of $102 million principal balance.
The liquidity in debt markets for new office loans remains challenged. And as such, the priority is working with existing lenders. The first maturity we have discussed on prior calls. The $21 million nonrecourse property loan at our Cascade Station property in Portland matured earlier this week on May 1. In December 2022, we recorded an impairment in that asset's value that effectively rolled off our equity value at that time. We are negotiating the terms of a deal and new transfer and continue to expect that we will dispose of the property to the lender during the second quarter, which would reduce our total debt by $21 million. This assumption has already been reflected in our prior guidance. At Central Fairwinds in Orlando, we have a property loan with a $16 million principal balance that matures in June.
We have come to terms with the lender on a five-year loan extension. We intend to enter into a swap agreement at closing that will effectively fix the rate. We expect closing to occur in May. Based on today's interest rates, the fixed rate on the loan is expected to be in the high 7% range. At FRP Ingenuity Drive in Orlando, there is a property loan with a balance of $16 million that matures in December. As Jamie mentioned, we signed a 43,000 square foot lease at this property in the first quarter, which will take the occupancy back to 100% at that property when the lease commences. That lease execution is very positive for the prospects of a loan extension, and we continue to advance discussions. Finally, we have a $50 million corporate term loan that matures in September, which is part of our $375 million credit facility.
We continue to have discussions with our lending group and expect to be able to provide an update on our next call. Lastly, we are reducing guidance to reflect the impact of the WeWork expected downsizing that Jamie described. The impact of the WeWork downsize on core FFO guidance is approximately $1.8 million or $0.04 per share in 2024. Approximately $0.02 of this reduction relates to the noncash write-off of this tenant's straight-line rent. We have updated the respective ranges of our net operating income, core FFO, same-store and occupancy to reflect the impact of this change in assumption. That concludes our prepared remarks and we'll open the line for questions. Operator?
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