Q1 2021 City Office REIT Inc Earnings Call
Good morning, and welcome to the City office REIT incorporated first quarter 2021 earnings conference call at.
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It is now my pleasure to introduce you to Tony Marotic, The company's Chief Financial Officer, Treasurer, and corporate Secretary. Thank you. Mr. Marotta you may begin.
Yeah.
Good morning, before we begin I would like to direct you to our web site at C. I O REIT Dot 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.
We discussed today to the most directly comparable GAAP financial measures.
Certain statements made today, the discuss the companys beliefs or expectations or that are not based on historical fact may constitute forward looking statements within the meaning of the federal Securities laws. All of the company believes that these expectations reflected in such forward looking statements are based upon the reasonable assumptions, we can give no assurance that these expectations.
James 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 the forward looking statements and actual results.
The company undertakes no obligation to update any forward looking statements that maybe made in the course of this call.
I'll review, our financial results after Jamie Farrar, our Chief Executive Officer discusses some of the quarters operational highlights I will now turn the call over to Jamie.
Good morning, Thanks for joining today I'm pleased to report that our results for the first quarter and our expectations for the balance of 2021 are trending positively.
For the first quarter, we reported strong core F O and <unk> growth.
Our dividend was well covered by these metrics and we continue to expect to generate cash in excess of our dividend over the long term.
Our rent collections were solid once again with almost 100% collection.
We've exceeded 99% collection of contractual base rent in every quarter since the start of the pandemic.
Further of the $331000 of rent deferrals that we granted in 2020, we have been repaid 84% to date and expect to receive the balance before the end of the third quarter.
Bottom line, the health of our tendency of strong and collections continued to be excellent.
We also achieved 5% same store cash NOI growth compared to the first quarter last year.
This was driven primarily by prior leasing at our Denver Tech property and the substantial mark to market renewal at one of our life science properties in San Diego.
Other highlights of the quarter include the sale of our Cherry Creek property in Denver, and the 93000 square foot renewal and expansion at our Carolyn point property in Tampa.
We announced both of these events on our last earnings call, but the execution of its worth noting again.
The 95 million sale of Cherry Creek represented five 8% cap rate and generated a $47 million gain the largest gain on sale in our company's history.
The Lisa Carolyn point was with Paychex, our largest tenant at the property, we secured an eight year renewal on 78000 square feet and of 15000 square foot expansion commencing early in 2022.
To touch on some other leasing metrics.
Over the last 12 months, we have achieved a healthy lease renewal rate of 77%.
Of note. The first quarter of 2021 was also our strongest quarter for new leasing since the start of the pandemic.
We signed 72000 square feet of new leases, including five expansions and three leases of over 10000 square feet. We see this is of great start to the recovery.
Overall, we are feeling increasingly more optimistic about the timing of a major return to the office based on our tenant discussions the combination of vaccination levels on a full return to school for kids is giving us confidence that we will see higher utilization levels post labor day, we anticipate this will.
Further stimulate new leasing activity.
Further we continue to believe that the strength of our sunbelt cities will position us well over the long term. However, we do expect an element of tenant turnover and some companies will elect to reduce their space needs.
As detailed in our press release, Toyota Motor Credit Corporation, who leased a 133000 square foot building at Santana property in Phoenix accelerated their lease maturity by two years to August 31 2022.
Toyota will continue to pay full rent until then and of paid a $3 8 million dollar termination fee representing approximately half of the red that would've been due over the accelerated two year period.
Well, we had of course hope the Toyota would remain the tenant long term, we are well positioned with over 16 months of lead time to secure of replacement tenants in our great City Chandler.
Chandler is one of the most desirable submarkets of Phoenix for large corporate and technology tenants due to the abundance of professionals that live there the strong demographics and the high quality of life.
Turning to acquisitions transaction volumes in our markets continues to be slow. However, corn stabilized buildings are still trading at strong valuations with a lot of private capital looking for investment opportunities.
We are actively searching for potential acquisitions, but the options for attractive entry points have been limited.
However, we secured on off market acquisition opportunity to purchase two properties adjacent to our existing Sorrento Mesa holdings in San Diego for $43 million.
We've waived our due diligence conditions on this transaction and expect that the close later this month.
We're very excited about the incremental value that this purchase creates for our portfolio.
To provide investors with a better perspective, we've included a slide in our May investor presentation on our website that includes a map of our holdings of.
Effectively we were buying to smaller office buildings located on highly valuable infill development land contiguous with our own properties.
The combination with our properties produce two solid development sites that generate holding income as we progressed strategic options.
In total these two sites, including our own land or zone for over 1 million square feet of life Science development.
Of note when you look at the map in our presentation you will see that both of these development sites have a fantastic location directly across the street from Qualcomm's World headquarters campus.
As we've mentioned in the past the life science sector continues to be very attractive San Diego is one of the top three life science markets across the United States and vacancy hit a record low of four 3% at the end of the first quarter.
At the same time rents continue to grow to new highs Cbre's Twenty-twenty data showed that San Diego's life science rental rates grew by 7% in 2020, and an impressive 96 per cent over the last 10 years.
Upon closing of this purchase we intend to operate the existing buildings to maximize cash flow and are holding income.
We're considering all of our options, including participating in a phase development with an experienced partner.
In the meantime, we're excited to further build one of the dominant holdings in Sorrento Mesa.
And lastly for me as we head into our busy spring and summer management is focused on driving cash flow growth and completing strategic leasing across our portfolio. We are of a number of exciting opportunities that we're working on and we look forward to providing updates on the future I'll now turn the call over to Tony to provide further.
Tail on our financial results. Thanks, Jamie.
I'll address the first quarter's results and then provide an update to our guidance for the balance of 2021.
Our net operating income in the first quarter was $25 4 million, which was 200000 higher than the $25 2 million, we reported last quarter.
The increase was the result of a combination of factors we.
We had an increase in NOI at our Carolyn point property as a result of the straight line rent increase from the major lease we signed in the quarter, which Jamie described.
We had lower operating expenses in the first quarter at a number of our properties and we recorded slightly higher termination fee income.
In the aggregate these positive variances more than offset the reduction in income from the Cherry Creek sale midway through the quarter.
As Jamie discussed Toyota paid us a termination fee of $3 8 million related to the Santana property.
We recorded just 57000 of this amount during the first quarter of.
Total of 2 million will be recorded in the remaining three quarters of 2021, and 1.75 million will be recorded in 2022.
We reported core of F O of $14 5 million or 33 cents per share, which was 400000 higher than in the fourth quarter for the same reasons. The NOI was higher.
Our first quarter of <unk> was $11 2 million or 26 cents per share the.
The largest impact of F. O was a 1.3 million leasing commission paid on the paychex eight year renewal and expansion at her Carolyn point property.
Our first quarter same store cash NOI growth was a positive five point O per cent as compared to the first quarter last year.
The leases, we signed in 2020, particularly those of Denver Tech property and our life Sciences portfolio.
Are the biggest drivers to these results combine the slightly lower property operating expenses over the prior year.
Our total debt at March 31st with $573 million, which was 104 million decrease over our year end figure.
That decrease was primarily a result of the repayment of an 83 million loan with the proceeds from the sale of Cherry Creek during the quarter.
Our net debt, including restricted cash to EBITDA was the healthy 6.0 times.
At quarter end, our total debt had a weighted average maturity of four seven years and 91% of our debt was effectively fixed our weighted average interest rate is now three 7% and we have no property debt maturities until 'twenty two 'twenty three.
Last we have provided updated full year 2021 guidance in our press release. The primary drivers of the guidance changes are the termination fee income a reduction to our general provision due to strong rental collections and the acceleration of our acquisition timing the.
These operational updates positively impacted our forecasted net operating income core of <unk> and same store cash NOI growth.
We refer you to the material assumptions and considerations set forth on our earnings press release.
That concludes our prepared remarks, and we'll open up the line for questions operator.
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Our first question comes from Rob Stevenson with Janney. Please go ahead.
Good morning, guys, Jamie what's the plan for Sorrento Mesa post closing of this acquisition do you lease up the current vacancy do you know with the incremental development capability of the ability to put larger.
Office, there do you market, there's two of large user with the build to suit element here and keep the vacancy and hope that back for somebody who's going to occupy.
Half of million square feet or something like that how are you guys thinking about that at this point.
Sure Rob So there's a there's a couple of elements there one in our existing portfolio. We have one building 59000 square feet. That's that's vegan and action on that it's starting to pick up as far as prospects are and where we're feeling pretty good about that so that's one we want to get leased up that's a pretty sizable increase in our.
Overall cash flow by doing that when you look at the development land where were you know early days I'd say, where.
Looking at all of our options there what we know is by adding these two other properties. We've created two really solid development sites that have a lot of value in the potential and you know kind of all options are on the table and including participating in a phase development with an experienced the experience.
Developer.
Okay.
And then the Tony in terms of the comments earlier about you know potential downsizings et cetera.
The incremental move outs that are known at this point or downsizings of note that we should be aware of.
You know this year or early next.
Yeah, Hey, Rob.
The address that question. The the first one to make note of is our in Q2 coming up here, we have 65000 square feet, that's coming up for renewal in Florida Research Park, we've talked about this on previous calls we're expecting to sign a lease in a very short order here.
For approximately half the space, which means we'll be getting back just over 30000 square feet, that's an immediate hum.
The space, that's coming back to us in Q2 beyond that there really isn't anything too significant for the balance of this year at the end of the year on December 31st we're expecting to get back of 46000 square feet.
Also on the Florida Research Park, the field ingenuity drive property that we referred to.
You have some time yet to go there.
But just sort of if you recall that 155000 square foot building, we signed a direct deal with a subtenant for 79000 square feet and the 46000 square feet is coming back to us on December 31st.
On the second quarter give back is the current tenant staying in is that a new tenant that's taking half the space and is there any material of improvements that we need to be aware of.
Yeah. So that's a it's a GSA tenant that's in there now and they're giving back half. So we're renewing the existing tenant on reasonable terms okay.
Okay.
And then last one for me.
When you when you wind up closing the the acquisition you've got the the disposition proceeds what is the capital position look like I mean, how much capital or how much capital you have essentially do you have to invest in the remainder of the year without going to the upper ends of your leverage levels et cetera.
So maybe I'll start on that one Rob So we've got another call it the 57 million.
From our guidance of the top end at 100.
We're still comfortable that we could go a little bit above that.
As far as timing the way we've modeled it internally was kind of mid Q4 as far as a follow on acquisition of bear a number of things. We're looking at right now could be sooner. It could be later, it's really hard to say so I think as far as best guess on timing I wouldn't change what we've put there.
Okay. Thanks, guys I appreciate the time thanks, Rob.
The next question comes from Jason <unk> with RBC.
Please go ahead.
Hey, guys just touching on the San Tan Toyota lease. So I guess my first question is why does the kind of looking to lead that space. If you have any idea on that but could you tell us a little bit about the prospects for that space.
I think you guys have two buildings there. So just wondering if theres anything creative there that you could do maybe you bring in one time net to lease both of those buildings or are.
Are you planning on multi tenant of any of our Toyota one or kind of what's the plan there.
Sure so Jason as far as the there's two buildings Youre correct Toyota occupy one.
They put a lot of money into their space.
What we were advised by Toyota is they were taking three buildings they have across the country and shifting the bulk of those workers to remote and so they are they moved in that direction on three different locations one in Phoenix two in other parts of the country.
So it was disappointing from our standpoint, it's early days, we still have a lot of time, you know almost 16 months here before we get the space back and so we fired up our leasing team. We are starting to spend time on looking at what we can do.
With that particular building as far as enhancing amenities. It could be you know, we're thinking of multi tenant building, but at the same time there are some large users in Chandler looking per space.
If you follow the Intel are making a huge investment and commitment in the area and there could be some ancillary benefit from that so we're feeling really good about the time, we have on the prospects of the rate we're gonna get obviously, we'd love to have kept the Toyota but.
You know I think we're in a good spot there.
Okay.
Yes on the redevelopment opportunities in Sorrento Mesa. So I think that those are going to be conversions from traditional office to lab. Some of your other peers, who are on the life science space of noted that it's exceptionally difficult to kind.
Kind of bring some of those traditional office.
Spaces of pushback.
For lab tenant users sort of just kind of curious to hear your thoughts around that or.
I guess, what the ultimate development plan on Sir.
So we're in a bit of of different position, where the five buildings we have.
Four of them are already life science with lab one of them is a.
At least the intelligence on R&D building with a lot of infrastructure that could be easily grab sorry Qualcomm.
It could be easily converted to two lab. So when you look at the two buildings that are on the sites that we're buying are argue there is we're going to maximize holding income it's likely would be of phase development that would happen over time so.
<unk> of years before those ones would be ultimately taken down and then wrapped into a larger overall development.
Okay got it and then I guess my last one on the FRP GSA lease I know I think last quarter. It was you guys gave an update that you were confident.
On the one space.
The second space you guys are still working through some discussions, but I guess the just how did those discussions on why did they end up deciding to give back of the one space on I guess, what are the prospects of leasing the.
The remaining 30000, that's gonna be vacant.
Yeah. So in terms of all of the discussion so the discussions we're revolving around whether another department could utilize the space ultimately what they decided to do and is that they needed one floor and the second floor. There were there at the end of the.
The day, we werent able to come to terms with another department to take it over ultimately we're going to do a very short term extension for two months on half of the space and then they will vacate.
In terms of in terms of prospects for that for that space. You know again. This is just a reminder of Florida Research Park is around the military base there, there's a number of contractors.
And so the demand has remained steady and we feel good about our prospects.
Time, probably through the balance of this year and then hopefully to have a replacement tenant paying rent in the new year.
Alright. Thanks.
The next question comes from Craig Kucera with B Riley Securities. Please go ahead.
Hey, good morning, guys. We're hearing more from office REIT this earning season about leasing and traffic coming back the pre pandemic levels are you clearly sound optimistic, but I'd be curious as to any color on which markets, you're seeing which are maybe showing greatest strength versus those that might be lagging on that regard.
So Greg I think that's a fair comment so when you look at actual starting with the utilization it's picked up a little bit, but it's still kind of in the mid 20%, but we're we're feeling a lot more optimistic is hearing directly from tenants as far as their plans on coming back and the timing, which is starting to circle around summer fall labor.
The day and so we're feeling good about that and then when you translate into a tour activity, it's come up a lot and really the the markets like Phoenix, Dallas, Tampa Orlando I would say are kind of at the forefront San Diego on life Sciences is absolutely white Hot.
So those would be kind of the leaders across our portfolio. The other thing we're spending some time on is.
Looking at a few of our larger blocks of space, where utilization hasn't been as high or you know on the case of a merger or something spaces and being used and we're getting some good action around bringing.
Bringing in replacement tenants that could potentially really extend the the overall.
<unk> terms that we have in those assets and so that activity is picking up as well and that would be in space that we couldn't otherwise accommodate and of our vacancy. So we're feeling pretty good about what we're seeing I think it's going to be back end of the year before that really starts translating to seeing leases done in a meaningful way.
Okay I appreciate that.
Tony will the remainder of the Toyota motor credit lease termination fee be recognized ratably until they vacate or is there any sort of lumpiness in there.
No. It's really straight line between now and the end of August 2022, They signed Okay. We got the information noticed that Brent it really at the end of March which is why you only see 57000 recognized in Q1, but it'll be a straight line until the departure.
Okay, Great and then one more for me.
You know Jamie you mentioned that you really have the find any attractive entry points in the acquisition market is that because there's just not of lot of product to evaluate now or are you actually seeing cap rate compression relative to the to maybe we were.
Year to year and a half ago.
You know theres, both Craig there's there's just not of lot of transactions that really fit in and the ones that.
We are interested in there's been a lot of competitors and pricing has moved in and some of the cases of transactions. We were working on move well beyond what they were initially asking.
So I think there is a lot of capital on the sidelines for good quality assets and Thats, making you a little bit more difficult and then we kind of known that and that's why we timed and our own acquisition model. The back end of the year and so we're going to be disciplined and make sure what we buy and where we put our capital.
They're gonna be good value for us.
Okay, great. Thanks.
Thanks, Greg.
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As there are no additional questions I would like to turn the conference back over to Mr. Farrar for any closing remarks.
Thanks for joining the call today, please don't hesitate to reach out to us at anytime if you have any further questions goodbye.
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