Q4 2023 City Office REIT Inc Earnings Call
Good morning, and welcome to the City Office REIT, Inc. First quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
A question answer session will follow the formal presentation to ask a question you May Press Star then one on your Touchtone fine if youre using a speakerphone. Please pick up your handset before pressing the keys. So withdraw your question. Please press Star then two as a reminder, this conference call is being recorded if you require operator assistance throughout.
Please press Star then zero right. It is now my pleasure to introduce you to Tony Marecic, The company's Chief Financial Officer, Treasurer, and corporate Secretary. Thank you. Mr. <unk> you may begin.
Good morning, before we begin I would like to direct you to our website at <unk> Dot Com, where you can view, our fourth 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.
<unk> measures.
Certain statements made today that 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 law.
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.
Please see the forward looking statements disclaimer in our fourth 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 quarters operational highlights I will now turn the call over to Jamie.
Good morning, and thanks for joining us today on this call I'd like to touch on several topics.
First a look back at our performance in 2023.
Then an overview on the state of the office market and last updates on our progress and focus areas for 2024.
Overall 2023 was in line with our expectations are.
Our core <unk> per share ended the year at $1 39, which was within the guidance range. We set at the beginning of 2023.
Our performance led to dividend coverage for the year with a total <unk> payout ratio of 66%.
Operationally, we executed 599000 square feet of new and renewal leasing throughout the year.
Our pipeline of leasing prospects gained considerable momentum as the year progressed.
In the fourth quarter, we executed 109000 square feet of new leases, which was the highest level of any quarter in 2023.
The average term of those leases was a healthy eight years.
Our occupancy also ended the year, approximately where we expected it to land and we achieved 3% same store cash NOI growth for 2023 as compared to the prior year.
Lastly, during 2023, we renewed two property loans for five years, each which was a success in an otherwise challenging financing market.
I'll use this as a transition to provide an update on the state of the office market.
There continue to be headwinds in certain areas and promising green shoots and others.
On the challenging side the investment sales market continues to be very slow.
Across the office market in 2023 sales volumes was down 57% year over year.
Within the limited transactions that closed many were aided by seller financing or assumable debt.
That capital also continues to be effectively frozen for new originations with lenders seeking to reduce their office sector exposure.
We're closely monitoring these trends and remain in active dialogue with our own lending relationships.
On the side of positive trends the corporate pressure unemployed to return to the office continues to gather momentum.
Major companies, including employers such as Google Meta Salesforce and Amazon to name a few have all shifted their policies towards more consistent in office collaboration.
Having employees attending the office a minimum of three days, a week, which appears to be a common current policy should bolster overall space needs and benefit high quality office assets.
We believe these trends will further strengthen throughout 2024.
Another helpful change is the rapid slowdown in new construction.
Q4, 2023 had the least amount of ground broken for new office buildings in over 20 years. According to <unk> the <unk>.
Projects that are breaking ground are generally build to suit or pre leased with almost no new spec projects underway.
This will help shift the supply demand balance is obsolete buildings get removed from inventory without being replaced.
Sub leasing is also moderating with Q4, starting to indicate an equilibrium or decrease of sublease availability across many office markets.
$3 million year over year due to higher rates on property level debt renewals and a higher average balance on our credit facility.
Cascade station occupancy declines year over year and assume disposition.
Lower leverage, but also result in a $2 million reduction to <unk> in 2024 as compared to 2023.
Last approximately $1 million of that reduction relates to the assumption on the former we work space at our block 23 property. We have assumed no income in 2024 with this operation, but forecast returned to a similar monthly revenue stream beginning in 2025, if we complete the pending transaction with a replacement.
Co working operator, we will revisit these assumptions in the quarters ahead as a result, solidify we refer you to the mirror <unk> assumptions and considerations set forth in our earnings release for further details that concludes our prepared remarks, and we will open up the line for questions operator.
Thank you we will now start the Q&A portion of today's call at this time I would like to remind everyone in order to ask a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by <unk>.
First question today comes from Apollo <unk> from Keybanc capital markets. Your line is now open. Please go ahead with your question.
Great. Thank you.
Good morning out there.
My question. Thanks.
Thanks for all the detail from the debt maturities and the and the assets and you provided.
I was just curious on Cascade station How's the.
Marketability of the asset.
Any conversation you have with potential buyers.
Or is it just really like it.
Probably get the asset back to the lender.
Thanks for the question. So we did launch a marketing process kind of mid last year in Portland is just been probably the most challenging market, we have and one of the tougher.
The entire country. So we did not have any prospects that were close to where the debt level is and that hasnt changed so I think absent any sort of.
Material concessions from the lender that make it logical for us to put more money in that will be one that transitions back to the lender and we canceled our debt.
Okay got it.
<unk>.
How is that going to be impacting your occupancy. This year you just given the trajectory of where you expect occupancy to be some somewhat up by the end of next year of this year and.
Im assuming thats going to have some sort of impact in driving a little bit of the occupancy.
Guidance.
It's a fairly small impact because the asset is really small to 128000 feet. So it in our own forecasting.
We think it'll it'll exit our results kind of mid this year. So at the end of the year, there would be a slight uptick from that but that's not the real driver of the improvement it really is from getting leasing done.
Okay got it and then from your same store cash NOI, you're expected to be flat this year compared to 3% last year.
Could you walk us through some of the moving pieces that's impacting the growth.
Yes, so we're showing effectively flat.
For 2024.
So the drivers are.
Our same store number is a cash number and so we are.
Cascade, we talked about there are some departures there that will impact the results in Q1 and Q2.
Until if we do transfer to the lender so that'll have a negative impact on results.
And then offsetting that would be the new leasing we have 114000 square foot.
Leases that haven't taken occupancy they will take occupancy in 2020 for some of them have free rent periods will have no impact by later parts of the year. It will start factoring into the numbers to offset the negatives.
Kind of in the year effectively flat.
David again, so the one thing and I can't stress enough is the leasing pipeline really has improved and our own views. When you look at free rent and buildup periods is not going to be much impact to our cash flow in 2024 from that but we see that really established.
<unk> and pushing 2025 and beyond.
Okay got it and then just one last one for me is you mentioned the you're seeing some momentum on the leasing side and I want to I want to curious where is that really coming from in terms of size industry or location.
So it's a mixture one market that was quite slow last year was Phoenix.
It's a great city, but on the leasing side it really did slow down in any discussions we're having in 2023 were really usually in the small suite size that's changed in that as I mentioned kind of for discussions that we're having right now above 40000 feet. Each two of those are in feeney.
<unk>.
We are in lease negotiations on both and we're advancing and so we feel pretty good about that so it's really diverse but I'd say your best markets right of those four that were in negotiation tour in Phoenix one's in Orlando, one is enrolling and so our top markets continue to perform.
<unk> really well.
Okay got it thanks for all the answers.
Our pleasure Thank you Paul.
Just as a reminder, if you would like to ask a question on todays call. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by chain.
Our next question today comes from Barry Oxford from <unk>. Your line is now open. Please go ahead.
Great. Thanks, guys Jay.
We work space out in Phoenix does it have to be.
Another we work like Canada.
Because of the way the specialty space is built out but if somebody wanted the space or was it just costs too much money to to rehab it to a normal tenant.
So we've explored both Barry and again, we just got the space back a couple of weeks ago.
Again as I get a nominally.
Yes. It is phenomenally built out so theres logic to transitioning that into a co working operation.
Because the monies predominantly already been spent.
But could you transitioned to a corporate tenant absolutely.
We just think the logical thing to do in this particular case is to continue as a co working.
Right, Okay that makes sense that makes sense.
And then.
From a big picture.
Jamie give it you.
You guys are carrying somewhat high debt.
Does it make sense or look Barry I can't make the math work selling into this environment to sell some assets to reduce your leverage but.
Are you just saying look I can't get the prices that I need to make that a viable game plan at this particular juncture.
So we've had a lot of success.
Our recycling assets in the past.
Yes, what I'd say is there are very few buyers and one of the toughest part is it's almost impossible to get new debt financing. So the transaction that you are seeing in the market right now.
<unk> of them are lenders, who are foreclosing and trying to get some recovery and the other is sellers, who are able to carry vendor take back financing at a low rate and so if one of those two isn't there really isn't a lot of buyers. So.
It's an option Barry and I guess I'd say in my prepared remarks, I made a comment about.
We're trying to explore ways of creating value. We do have a few conversations going on they are very early stage with unique buyers, whether they're strategic buyers owner users who are going to owner occupier. It's early stage, but if we can find something that works for everyone. We're absolutely open to that but it's got to work for us too.
And so yes.
That will flush out we haven't assumed any of those in our guidance. This year, but it's not lost on us that that could be a good source of liquidity if values are compelling.
Right and Jim and we would imagine if somebody's going to assume the mortgage there has to be mortgage with term. If you don't have really enough term on it then.
They're going to recognize pretty quickly you're transferring your problem to me.
I think Thats fair, yes, and in all cases, our mortgages assumable. So it just it becomes very complex and I think thats why until the debt markets open up a bit more youre going to see very muted activity, which means from our standpoint, where do we focus to drive value we focus on getting leasing.
That's going to drive cash flow, which enhances your ability to.
Borrow against it and that enhances your ability to drive your cash flow back to the mothership.
Right right that makes sense, okay, guys I appreciate the time.
Thanks, Greg.
Yep Yep.
That concludes the Q&A portion of today's call I'll now hand, the call back over to Jamie Farrar for any final remarks.
Thanks for joining today and as always please feel free to reach out if you have any follow up questions Goodbye.
That concludes today's city office key for 2020 earnings Conference call. You May now disconnect your lines.
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