Q3 2024 City Office REIT Inc Earnings Call
Good morning and welcome to the City of History in 3rd quarter 2020 for our next conference car.
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It is now my pleasure to introduce you to Tony Maretic, the company's chief financial officer, Treasurer and called Prosecutory. Thank you, Mr. Maretic, you may begin.
Good morning. Before we begin, I would like to direct you to our website at cioreq.com where you can view our third quarter earnings, press release and supplemental information package.
Learning's release and supplemental package both include a reconciliation of non-gap measures that will be discussed today to their most directly comparable gas financial measures.
Sir, in statements made today that discuss the company's beliefs or expectations or that are not based on historical fact. May constitute four looking statements within the meaning of a federal securities law.
Well, the company believes that these expectations reflect in such four-looking statements are based upon reasonable assumptions.
We can give no assurance that these expectations will be achieved. We see the floor-looking statements disclaimer in a third quarter earnings press release and the company's filing for the SEC for factors like a cause, material differences between floor-looking statements and actual results.
and the company undertakes no obligations update any forlooking statements that may be made in the course of this call. I'll review our financial results after Jamie Farrar, our chief executive officer discussed some of the quarters operational highlights. I'll now turn the call over to Jamie.
Good morning. Throughout 2024 we've been highlighting the improving sentiment and leasing dynamics for the office industry.
These trends continue together momentum in the third quarter.
The total amount of office space available nationally declined in the third quarter. This was the first quarterly decline in available space since 2019.
One of the significant drivers is the sharp reduction in new supply of office buildings.
Speaker Change: This has been coupled with four years of record setting office building conversions, demolitions and redevelopment.
Over the four-year period since 2021, over 100 million square feet of office buildings have been removed from inventory according to JLO.
Well, more is ultimately needed. These are favorable trips.
Lee's in conditions also continues to improve.
The leasing activity nationally remains approximately 20% below pre-pandemic levels.
2nd and 3rd quarters of 2024 were two of the best leasing quarters over the last five years.
This has been aided by executives focusing on bringing employees back to the office on a more consistent basis.
In J.L.s third quarter office market report, they highlighted that the Sunbelt has experienced an outside leasing recovery. This has been driven by corporate relocations and the lower cost and higher quality of life that Sunbelt markets offer.
Office Capital Markets Activity continues to be suppressed largely driven by limited debt availability for the sector.
However, we've started to see signs of improvement for quality and well-eased properties.
Turning to our portfolio, we achieved healthy leasing activity during the quarter with 141,000 square feet of total leasing.
of this amount, 78,000 square feet represented new leases.
After quarter-end, we completed a full floor lease extension at our Block EV3 property in Raleigh that was set to expire on November 1st of this year.
We previously communicated that we were taking back one of we worked full floor spaces at Block A D3 representing 28,000 square feet.
A high profile enterprise plan of we work that has been using the space requested to continue their occupancy through the end of calendar 2026.
Results, then we were in this floor for 26 months and increased the starting rent by approximately 6% to 42.50 cents.
We see this as a positive outcome and will result in the office component of Block 83 being 98% least, when including signed leases that commenced later in 2024.
At Pima Center in Phoenix, we also signed two new leases for 26,000 square feet during the quarter, which will increase occupancy by 10% upon commencement.
The renovations at steam are now complete. The property has been transformed and it is resulting in very good leasing traction on our remaining vacancies.
Beyond Pima, we are also completing Redovation Projects at three other properties.
These projects at 5090 in Phoenix, City Center in St. Petersburg and 2525 McKinnon in Dallas should be concluded over the next few months.
In total, we expect to spend approximately $10 million on these four renovations.
with approximately $6.4 million spent through September 30.
In addition to the renovations, we're evaluating a few other value enhancing opportunities within our portfolio.
One opportunity we touched on last quarter is the potential redevelopment of our parking garage at city center in downtown St. Petersburg into a residential and mixed use condo tower.
Speaker Change: Interactor and Vester presentation, we've included some renderings of the condo building design from our recent site plan application.
This potential redevelopment continues to advance through an approval process with the city of St. Petersburg.
We are also advancing agreements with a very experienced developer to lead the project's execution.
A redevelopment of city center remains subject to a number of conditions, some of which are beyond our control. We'll provide further updates on our progress on future calls.
We are also pleased to report that our Florida portfolio, whether the two recent hurricanes, extremely well. We have incredible operators on the ground in Florida, and they quickly had our buildings back online after the stores.
We sincerely thank them for their dedication and how well they look after our test.
Speaker Change: Lastly, we updated our guidance expectation ranges.
Specifically, we narrowed several ranges and increased both our expected year end occupancy and same store cash and a wide change due to strong leasing result year to day.
The East Development will not only benefit, or 2024 results, but our favorable tailwinds for 2025 and beyond.
Speaker Change: with that. We'll turn the call over to Tony to discuss our financial results in more detail.
Tony: Thanks, James. Our net-opening income in the third quarter was 24.6 million, which is 300,000 lower than the amount we reported in the second quarter.
N.O.I. was marginally lower in Q3 than in Q2 primarily result of the disposition of cascade station during the second quarter.
We reported chlorophyll of 11.1 million or 27 cents per share for the third quarter.
Coral FFO was 400,000 lower than the amount we reported in the second quarter driven primarily by the net operating income decrease and marginally higher interest expense.
3rd quarter AFFO was 4.8 million or 12 cents per share which resulted in continued given coverage this quarter. The largest impact AFFO was a $700,000 tenant improvement reduction related to a new week.
at the September 24th. The four significant property renovations which Jamie described, resulted in a $1 million reduction to ASFO this quarter. We also spent $200,000 on spec sweetens and
Moving on to some of our operational metrics, our same store cash and a wide change returned to positive territory in the third quarter. There was an increase of 0.2% or $55,000 as compared to the third quarter of 2023. We expect further improvement of this metric in the fourth quarter.
Our portfolio occupancy ends at a 3.4% in increase from the prior quarter, including the 211,000 square feet of sign leases that have not yet commenced, our occupancy increase of these leases with 87.0% as a quarter-end.
are total debt as of September 30 with 648 million.
Our net debts including restricted cash, divita with seven times.
As a September 30th, we had approximately 42 million undrawn and authorized on our cut of facility. We also had cash and registered to cash, a 43 million as a core length.
During the quarter-as planned, we drew $50 million on our line of credit to repay the $50 million term loan, the matured and sub-temp.
We have no further debt maturity than till October of 2025.
We also have two properties of the significant value, block 83 in Raleigh and citizen in Tampa, that are unencumbered and we are exploring potential financing alternative block 83.
and last week for me as Junioritioned we have made upward revisions to several guidance categories.
The significant number of sign leases that have or expect to commence in the fourth quarter 2024 are driving these revisions. That concludes our prepared remarks and we will open up the line for questions. Operators.
Thank you very much Mr. Maretic, everyone if you would like to ask a question, please press star then one on your touchtone phone now. If you change your mind, please press star then two. When preparing to ask your question, please ensure your devices are muted locally.
We have our first question from Opol Raina with Key Bank Capital Market.
You're lying to so can please go ahead.
Great, thank you, good morning out there. Jeremy, could you walk us through how the renewal would we work at Block A 3 game to fruition? And you have plans or expectations up to the least expires in 2026?
Tony: So...
We were to get back one of our three floors in Raleigh as of November 1st and there is an enterprise tenant that had been using that space and quite happy and they decided they wanted to push out their usage until the end of 2026
So we had a dialogue with them and we were happy to keep them there in the project and we were happy with the economics of effectively no TI and moving to starting rent about 6%.
Okay great. And then we're very occupancy. What are some of the moving pieces that get you to that 85.5% midpoint of your guidance? And I know I'm sure we work as is a big driver of that but is there anything else there that's included in the research?
Tony: I'm sure so I will start here at Jamie.
Jamie: The sign leases that haven't commenced, you know, significant portion of the movie commencing in Q4. So when you look at where some of our impactful...
Keren Bacon-C is, and we've got about 74,000 feet of Lisa's Edel Comenzian Phoenix, 33,000 in Riley, about 50,000 in Orlando.
Tony: and so those are signs that are being completed as we speak and we'll start before. I have a single biggest tenant that's moving in and Q4, who Paul is at our ingenuity drive property, which is part of the FRP collection. Complex, that property had a vacancy, it'll go to 100%.
the tenant has moved in on October, 42,000 square feet. So that's the thing that's big it's component to that. With we work renewing, obviously there's less to drag from that. And then the rest of the kind of tenants are kind of smaller to medium size.
Tony: Gregory, that was helpful. And then, last time for me, you mentioned on prior call that you started to see interest from relative loggy tenants. Is that still the case? Or what sort of ten of demographics are you seeing in regards to even demand today?
So that is probably one of the most favorable things that we're seeing is, you know, this time last year.
Speaker Change: You were starting to see some larger tenants explore and I'd say that's picked up significantly and it's tied back to more of a trend of
I'm fully yours, wanting the employees back in the office and what used to be kind of short-term extensions and larger tenants
You know trying to avoid doing longer leases, that's really turt. The other trend that kind of ties to that.
Tony: is the best base, you know, the newest, the most modern, amenetized.
Tony: as well as renovated spaces in the same submarkets or what is in demand. And we're seeing that in our only Seen Pipeline. So, you know, bigger users wanting to commit willing to commit longer term, which is fantastic for our industry.
Okay, great, thank you.
Thank you, thanks for the question.
Thank you, the next question is from Barry Roach Funt with Collius
Tony: Your life is so can place your head.
Great, thanks guys. Jamie, when you're looking and signing leases, what are you seeing today like maybe verses a year ago when it comes to concessions and free rent? Are you having to kind of give more to get deals done or are you holding the line and actually doing better?
Speaker Change: So it's a good question, very a year ago construction costs were moving very rapidly.
I'd say that has come in check. It's still at a high cost but we're not seeing the inflation that we were. Rents, the actual face rents, we're signing a very healthy, continue to grow again for good properties.
and the concessions on free rent I'd say are about the same as where they were. A new lease is typically one month per year of term so that's kind of stabilized as well. So all in all I'd say we're much happier than where we were a year ago.
Speaker Change: Great, great, great.
and Tony, I know you don't have a lot of explorations but as you work into 25 and a later half of 25
and do you anticipate the banks giving you a lot of pushback on refinancing or book? I mean conversations with them very and right now I don't think we're going to have difficulty.
Hey, hey, Barry. This is a good question. You know, you, you highlight the fact that, you know, we do not have any pending that maturities on the next four quarters. We do have two demeaturities and two four twenty-five.
and to be honest, you know, with those conversations really have not begun in Earth, I expect those discussions will really gain traction as it is.
Speaker Change: Starting soon and then they've been certainly by early 2025. So it's a little too early to tell, it'll obviously depend.
on the state of those properties and where that will go. So I expect those conversations to begin in early 2025 and it's probably too early to tell as I said here today but we have some time.
Great, thanks for the color gosh.
Speaker Change: Thanks for it
Speaker Change: Thank you. As a reminder everyone, if you would like to ask a question you may press thought and one on your touchstone phone now.
The next question is from Craig Crueckton with Lucitt Capital Market. Your line is open, please go ahead.
Yeah, hey, good morning guys. It looks like the bulk of occupancy gains are occurring here in the fourth quarter. Can you give us some color on one of the remaining called 100 to 100 to be basis points are expected to take occupancy start paying rent in 2015?
Good morning Craig. We have a number of move-ins in Q4. The rest of the balance will happen early in 2025. The construction schedules will dictate exactly when that falls in. But early 2025 is 25 for the fall.
Great. You know, changing gears I'd like to talk about the city center redevelopment. How would city office monetize that? Most likely I would think maybe a sale to the developer might make sense or it could be a ground lease or maybe some sort of revenue sharing agreement. Any color there would be appreciated.
Speaker Change: Sure so we can't get into too many details right now where we're at is we submitted a cycline application with the city of Saint Peter'sburg that's ongoing.
Speaker Change: is expected to conclude the public elements over the next 30-ish days and by early 2025, if all goes well, have our approvals in place. The way we've been approaching it is...
Speaker Change: You know, we're huge believers in that market. We'd like to stay involved in that market. You know, the way we've approached is contributing the significant land value that we have into a partnership with a very experienced developer.
and ideally aren't contributing additional cash beyond that but we benefit as the project is developed and the condos are sold off.
Speaker Change: God, okay. And just one more for me.
Speaker Change: I know they're all on the fourth quarter of next year, but you know are you given some thoughts on how you anticipate handling them after using a lot of liquidity here in the third quarter with a line of credit, you know maybe exploring using blockity for use of source of liquidity or other sources.
Speaker Change: Yeah, it's a good question Craig, as I mentioned in my earlier remarks we are exploring financing options for Block 83 We need to see the MBS market appears to be improving and is open.
Speaker Change: you know block 803 in the type of trophy asset that appears to be getting done. So it's a little too early to speculate but certainly.
Located E3 is our most valuable property. There's two separate towers there And city center is also on in comforts with some unaccompanied assets. We have some chest pieces. We can move around the board And we've got a little bit of time before we decide what move we're going to make. And just for clarity we have two property loans that mature in the fourth quarter. We also have our operating line. We do have a one year extension option, which we believe we're going to be able to trigger. So
It really is the two property loans that were discussed earlier.
Speaker Change: Okay great appreciate telegraph thanks
Speaker Change: Great, thank you.
Thank you. I stare at no additional questions. I would turn the call back over to Mr. Farrar to conclude.
Thank you for joining today. Please reach out if you have any further questions. Goodbye.
Thank you, this concludes today's call. Thank you all for joining. You may now disconnect your lights.
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