Block 23, Phoenix, AZ
2
2
0
2
FORWARD LOOKING STATEMENTS
Certain statements contained in this presentation, including those that express a belief, expectation or intention,
as well as those that are not statements of historical fact, are forward-looking statements within the meaning of
the federal securities laws and as such are based upon City Office REIT, Inc. (or the “Company”) and its current
beliefs as to the outcome and timing of future events. There can be no assurance that actual future developments
affecting the Company will be those anticipated by the Company. Examples of forward-looking statements
include projected capital resources, projected profitability and portfolio performance, estimates of market rental
rates, projected capital improvements, expected sources of financing, expectations as to the timing of closing
of acquisitions, dispositions, or other transactions, the expected operating performance of anticipated
near-term acquisitions and descriptions relating to these expectations. Forward-looking statements presented
in this presentation are based on management’s beliefs and assumptions made by, and information currently
available to, management.
When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,”
“should,” “will,” “result” and similar expressions that do not relate solely to historical matters are intended to
identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy,
plans or intentions. Forward-looking statements involve risks and uncertainties (some of which are beyond the
Company’s control) and are subject to change based upon various factors, including but not limited to the
following risks and uncertainties: changes in the real estate industry and in performance of the financial markets;
competition in the leasing market; the demand for and market acceptance of our properties for rental purposes;
the amount and growth of our expenses; tenant financial difficulties and general economic conditions, including
interest rates, as well as economic conditions in our geographic markets; changes in regulations or laws,
including tax laws, in the markets in which we operate; defaults or non-renewal of leases; risks associated with
joint venture partners; the risks associated with the ownership and development of real property, including risks
related to natural disasters; risks associated with property acquisitions, including our entry into new markets with
which we are unfamiliar; the failure to acquire or sell properties as and when anticipated; the outcome of claims
and litigation involving or affecting the Company; the ability to satisfy conditions necessary to close pending
transactions; our failure to maintain our status as a real estate investment trust, or REIT; and other risks and
uncertainties detailed in the Company’s filings with the Securities and Exchange Commission, or SEC, including
but not limited to the Company’s reports on Form 10-K, Form 10-Q and Form 8-K and in the Company’s other
SEC filings from time to time.
Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, the
Company’s business, financial condition, liquidity, cash flows and results could differ materially from those
expressed in any forward-looking statement. While forward-looking statements reflect our good faith beliefs as of
the date of this presentation, they are not guarantees or indications of future performance. Any forward-looking
statements speak only as of the date of this presentation. New risks and uncertainties arise over time, and it is not
possible for us to predict the occurrence of those matters or the manner in which they may affect us. We disclaim
any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying
assumptions or factors, of new information, data or methods, future events or other changes. Use caution in
relying on past forward-looking statements, which were based on results and trends at the time they were made,
before anticipating future results or trends.
LETTER TO OUR SHAREHOLDERS
Dear Fellow Shareholders,
2022 was a challenging year with rising interest rates and headwinds across the industry. Despite this difficult environment,
our portfolio continued to perform well and we achieved strong operating results. During the year we also focused on taking
active steps to drive long-term growth and value across our portfolio.
Sun Belt Markets
We continue to benefit from the outperformance and growth of our cities, which are predominantly located in the Sun Belt.
Attractive Sun Belt markets are capitalizing on labor force migration and corporate relocations, which is helping to sustain
rental rate growth. We expect this trend to benefit us over the long term.
High-Quality Portfolio Enhanced Through Strategic Upgrades
Premium properties with amenities are producing the strongest leasing results. We believe we are well-positioned in this regard
with the vast majority of our asset value concentrated in high-quality and amenitized buildings. As an example, the 975,000
square feet of best-in-class office properties that we acquired in late 2021 in Raleigh, Dallas and Phoenix continue to be among
the most desirable buildings in their respective markets. Throughout 2022, we continued to strategically invest in our properties
and elevate their market position by enhancing select tenant spaces and common areas. We expect these investments will
generate further leasing results for our shareholders.
Operations
From an operating perspective, we continued to make strong progress. The revenue we achieved in 2022 was the highest
annual revenue in the Company’s history and was an increase of 10% as compared to the prior year. From a leasing
perspective, in 2022 we completed over 750,000 square feet of new and renewal leasing. We also generated a
$21.7 million gain from a property sale in Dallas, Texas.
2023 and Beyond
Throughout our Company’s history we have been proactive in evaluating market conditions and thoughtfully deploying our
resources and capital where we can create the most value for shareholders. We believe that our focus on Sun Belt
markets combined with the active steps we have taken to enhance our portfolio will position us favorably to outperform
in 2023 and beyond.
We look forward to communicating our future progress with you.
Sincerely,
Jamie Farrar, CEO
Bloc 83, Raleigh, NC
CI T Y OFFICE REIT ( NYSE: CIO )
Cor p or at e Over view
City Office REIT owns a diversified portfolio of premium office
properties predominantly in high-growth Sun Belt markets
› City Office REIT owned 6.0 million square feet of office properties as of December 31, 2022. Our properties
are generally:
› Located in vibrant, growing markets
› Situated in both CBD and key amenity-rich locations
› Occupied by a diversified and high-quality tenant base
› Value creation strategy concentrated on thriving Sun Belt cities with leading economic fundamentals
› Focus on driving leasing and executing strategic transactions
› Strategic investments in property upgrades and spec suites
› Experienced management team; strong alignment of shareholder interests with those of management and
Board of Directors
SEATTLE, WA
PORTL AND, OR
DENVER, CO
PHOENIX, AZ
SAN DIEGO, CA
DALL AS, TX
RALEIGH, NC
TAMPA , FL
ORLANDO, FL
2525 McKinnon, Dallas, TX
The Terraces, Dallas, TX
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file no: 001-36409
CITY OFFICE REIT, INC.
Maryland
(State or other jurisdiction
of incorporation or organization)
98-1141883
(IRS Employer
Identification No.)
666 Burrard Street
Suite 3210
Vancouver, BC
V6C 2X8
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (604) 806-3366
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
Title of Each Class
Name of each Exchange on Which Registered
Common Stock, $0.01 par value
6.625% Series A Cumulative Redeemable
Preferred Stock, $0.01 par value per share
“CIO”
“CIO.PrA”
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘ No È
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes È No ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ‘
‘
Non-accelerated filer
È
Accelerated filer
Smaller reporting company ‘
Emerging Growth Company ‘
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. Yes È No ‘
If securities are registered pursuant to Section 12(b) of the Exchange Act, indicate by check mark whether financial statements of the
registrant included in the filing reflect the correction of an error to previously issued financial statements. ‘
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È
As of June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of
the registrant’s common stock held by non-affiliates of the registrant was approximately $545.5 million, based on the closing sales price of
$12.95 per share as reported on the New York Stock Exchange.
As of February 16, 2023, the registrant had 39,926,764 shares of common stock outstanding.
Documents incorporated by reference: Portions of the registrant’s Definitive Proxy Statement for the 2023 Annual Meeting of
Shareholders (to be filed with the United States Securities and Exchange Commission no later than 120 days after the end of the registrant’s
fiscal year end) are incorporated by reference in this Annual Report on Form 10-K in response to Part II, Item 5 and Part III, Items 10, 11, 12,
13 and 14.
CITY OFFICE REIT, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2022
Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . .
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1.
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2.
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3.
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4. MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . .
ITEM 6.
[RESERVED] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . .
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . .
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . .
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . .
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 16.
FORM 10-K SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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94
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the federal
securities laws. These forward-looking statements are included throughout this Annual Report on Form 10-K,
including in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” “Business” and “Certain Relationships and Related Person Transactions,” and relate
to matters such as our industry, business strategy, goals and expectations concerning our market position, future
operations, margins, profitability, capital expenditures, financial condition, liquidity, capital resources, cash
flows, results of operations and other financial and operating information. We have used the words
“approximately,” “anticipate,” “assume,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,”
“expect,” “future,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,”
“target,” “will” and similar terms and phrases to identify forward-looking statements in this Annual Report on
Form 10-K. All of our forward-looking statements are subject to risks and uncertainties that may cause actual
results to differ materially from those that we are expecting, including:
•
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•
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•
•
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•
•
•
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adverse economic or real estate developments in the office sector or the markets in which we operate;
increased interest rates, any resulting increase in financing or operating costs, the impact of inflation
and a stall in economic growth or an economic recession;
changes in local, regional, national and international economic conditions, including as a result of the
coronavirus disease (“COVID-19”) pandemic;
the extent to which “work from home” policies continue as a result of the COVID-19 pandemic;
our inability to compete effectively;
our inability to collect rent from tenants or renew tenants’ leases on attractive terms if at all;
demand for and market acceptance of our properties for rental purposes, including as a result of near-
term market fluctuations or long-term trends that result in an overall decrease in the demand for office
space;
decreased rental rates or increased vacancy rates, including as a result of the COVID-19 pandemic;
our failure to obtain necessary financing or access the capital markets on favorable terms or at all;
changes in the availability of acquisition opportunities;
availability of qualified personnel;
our inability to successfully complete real estate acquisitions or dispositions on the terms and timing
we expect, or at all;
our failure to successfully operate acquired properties and operations;
changes in our business, financing or investment strategy or the markets in which we operate;
our failure to generate sufficient cash flows to service our outstanding indebtedness;
environmental uncertainties and risks related to adverse weather conditions and natural disasters;
our failure to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal
income tax purposes;
government approvals, actions and initiatives, including the need for compliance with environmental
requirements;
outcome of claims and litigation involving or affecting us;
financial market fluctuations;
3
•
•
changes in real estate, taxation and zoning laws and other legislation and government activity and
changes to real property tax rates and the taxation of REITs in general; and
additional factors discussed under the sections captioned “Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Business.”
The forward-looking statements contained in this Annual Report on Form 10-K are based on historical
performance and management’s current plans, estimates and expectations in light of information currently
available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future
developments affecting us will be those that we have anticipated. Actual results may differ materially from these
expectations due to the factors, risks and uncertainties described above, changes in global, regional or local
political, economic, business, competitive, market, regulatory and other factors described in “Risk Factors,”
many of which are beyond our control. We believe that these factors include those described in “Risk Factors.”
Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be
incorrect, our actual results may vary in material respects from what we may have expressed or implied by these
forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking
statements. Any forward-looking statement made by us in this Annual Report on Form 10-K speaks only as of
the date of this Annual Report on Form 10-K. Factors or events that could cause our actual results to differ may
emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to
publicly update any forward-looking statement, whether as a result of new information, future developments or
otherwise, except as may be required by applicable securities laws.
4
ITEM 1. BUSINESS
Overview
PART I
We are an internally-managed corporation organized in the state of Maryland on November 26, 2013
focused on owning, operating and acquiring high-quality office properties located predominantly in Sun Belt
markets. Our markets possess a number of attractive demographic and employment characteristics that we
believe will lead to capital appreciation and growth in rental income at our properties over time. Our senior
management team has extensive industry relationships and a proven track record in executing this strategy, which
we believe provides a competitive advantage to our stockholders. We have elected to be taxed, and intend to
continue to qualify, as a REIT for U.S. federal income tax purposes.
We believe that the vibrant characteristics of our markets and the quality of our portfolio positions us for
attractive, long-term risk-adjusted returns. The cities in which we operate provide a high-quality standard of
living, strong population and employment growth trends and a depth and diversity of local economies. Within
our markets, we focus on acquiring properties that are well located, highly amenitized and positioned for long-
term leasing success and value creation. We believe that we have a competitive advantage across our markets due
to the strength of our existing portfolio holdings, our local relationships and our proven track record of execution.
Our senior management team has extensive experience in real estate markets and is made up of James
Farrar, our Chief Executive Officer, Gregory Tylee, our President and Chief Operating Officer, and Anthony
Maretic, our Chief Financial Officer, each with over 20 years of experience. We internally asset manage our
properties but use local firms for property management and leasing in our markets to benefit from their local
market knowledge, efficient operations and existing infrastructure.
As of December 31, 2022, we owned 60 office buildings with a total of approximately 6.0 million square
feet of net rentable area (“NRA”) in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland,
Raleigh, San Diego, Seattle and Tampa. We believe that our properties are high-quality assets that provide
excellent access to transportation options, are located near affluent neighborhoods, contain extensive amenities
and are well-maintained. We also believe that our properties have a stable and diverse tenant profile, including
federal and state governmental agencies and national and regional businesses. As of December 31, 2022, our
portfolio was approximately 86.2% occupied. Our occupied leases have staggered expirations and a weighted
average remaining lease term to maturity of 4.9 years as of December 31, 2022. Our leases typically include rent
escalation provisions designed to provide annual growth in our rental income as well as an ability to pass through
cost escalations to our tenants.
For further information on our target markets and the composition of our tenant base, see “Item 2—
Properties.”
Business Objectives and Growth Strategies
Our principal business objective is to provide attractive risk-adjusted returns to our investors over the long-
term through a combination of dividends and capital appreciation. We believe the following strategies will help
us achieve our business objective and continue to distinguish us from other owners and operators of office
properties in our markets:
Drive Value Creation and Earnings per Share Growth: We evaluate a range of strategies to create per share
growth, including at the property level and through prudent capital allocation. In addition to driving rental
revenue through strategic leasing, we also evaluate the opportunity to harvest value through dispositions and
accretive redeployment of capital. We also evaluate and have executed prior share repurchase programs to buy
back our shares at what we believe are significant discounts to their inherent value.
5
Drive Cash Flow Increases through Rent Growth: Our leases typically provide for contractual increases in
base rental rates. These rental escalations are expected to result in predictable increases in rental revenues for us
over time. We will continue to seek to include contractual rent escalators in future leases to further facilitate
predictable growth in rental income. In circumstances where in-place rental rates are below market rental rates,
we will aim to capture increases in cash flow by increasing rents to market.
Lease Currently Vacant Space and Complete Strategic Lease Renewals: As of December 31, 2022, our
portfolio was approximately 86.2% occupied, and we believe that there is potential to generate additional rental
income by leasing space in these properties that is currently unoccupied. We believe we have been successful in
enhancing the appeal of vacant spaces by completing improvements to vacant leasable space, creating or
improving building amenities and renovating common areas. We also seek to create stable, long-term cash flow
through strategic lease renewals at market rental rates.
Acquire Properties in Our Target Markets: We seek to expand our portfolio through acquisitions of office
properties located predominantly in vibrant Sun Belt markets. We believe that expanding the depth of our
portfolio in our markets and adding new strategic markets with similar characteristics creates economies of scale
and builds a more desirable portfolio. We use our management team’s market-specific knowledge to identify
acquisitions that we believe offer cash flow stability and long-term value creation opportunities.
Leverage Strong Relationships of Our Management Team: Our senior management team has extensive
relationships within our markets, including with real estate owners, developers, operators and brokers. We have
strong relationships with our local third-party property and leasing managers who typically operate a large
number of properties in the submarkets and markets where our properties are located, providing economies of
scale and local market insight. In addition, our management team has strong lending relationships with various
banks and insurance companies.
Implement Property Enhancements and Cost-Saving Initiatives: We actively pursue opportunities to
enhance our properties through capital improvements initiatives to position them optimally within their
competitive set. We also pursue cost reduction initiatives and use our scale to generate operating synergies.
2022 Highlights
• Completed approximately 777,000 square feet of new and renewal leasing;
•
Integrated and stabilized the 975,000 square feet of premier office buildings in Raleigh, Phoenix and
Dallas that we acquired in December 2021;
• Closed the disposition of Lake Vista Pointe property in Dallas, Texas for a gross sales price of
$43.8 million, generating a gain on sale of $21.7 million; and
• Completed the repurchase of 4,006,897 shares of common stock at an average gross price of $12.48 per
share for a total cost of approximately $50.0 million.
Competition
We compete with other REITs (both public and private), public and private real estate companies, private
real estate investors and lenders, both domestic and foreign, in acquiring properties. We also face competition in
leasing or subleasing available properties to prospective tenants.
We believe that our management’s experience and relationships in, and local knowledge of, the markets in
which we operate put us at a competitive advantage when seeking acquisitions. However, some of our
competitors have greater resources than we do, or may have a more flexible capital structure when seeking to
finance acquisitions. We also face competition in leasing or subleasing available properties to prospective
6
tenants. Some real estate operators may be willing to enter into leases at lower contractual rental rates. However,
we believe that the quality of our properties, the high caliber of our local management teams and our active
property reinvestment strategy are attractive to tenants and serve as a competitive advantage.
Segment and Geographic Financial Information
During 2022, we had one reportable segment, our office properties segment. For information about our
office property revenues and long-lived assets and other financial information, see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” in this
Annual Report on Form 10-K.
Environmental Matters
A wide variety of environmental and occupational health and safety laws and regulations affect our
properties. These complex laws, and their enforcement, involve a myriad of regulations, many of which involve
strict liability on the part of the potential offender. Some of these laws may directly impact us. Under various
local environmental laws, ordinances and regulations, an owner of real property, such as us, may be liable for the
costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such
property, as well as other potential costs relating to hazardous or toxic substances (including government fines
and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines
or personal or property damages and the owner’s liability therefore could exceed or impair the value of the
property, and/or the assets of the owner. In addition, the presence of such substances, or the failure to properly
dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or
to borrow using such property as collateral which, in turn, could reduce our revenues.
We believe that our properties are in compliance in all material respects with all federal, state and local
environmental laws and regulations regarding hazardous or toxic substances and other environmental matters.
We have not been notified by any governmental authority of any material non-compliance, liability or claim
relating to hazardous or toxic substances or other environmental matter in connection with any of our properties.
Human Capital Resources
As of December 31, 2022, the Company employed 23 full-time employees. The Company believes that
corporate social responsibility goes hand-in-hand with business growth and maximizing returns for our investors.
Social responsibility furthers our mission to be an upstanding corporate citizen within the real estate community.
We take pride in our work culture and strive to create an environment where our employees feel valued and are
compensated fairly. Our reputation for acting with integrity, discipline and transparency is essential to the
successful execution of our business goals. Key areas of focus for the Company include:
Diversity and Equality: Equal employment opportunity has been, and will continue to be, a fundamental
principle of our business success, where employment is based upon personal capabilities and qualifications
without discrimination.
Employee Development: We recognize that having an engaging and rewarding work environment allows us
to attract and retain the highest caliber personnel. We also encourage professional growth, which is why we
invest in employee development and ensure that onboarding and ongoing training are pillars of our workplace.
We achieve this through ongoing training and continuing education opportunities for every employee within the
company. In addition, employees are encouraged to further their own unique development through
reimbursement for approved courses and training.
Safe, active and healthy environment: We offer modern, open and amenitized office space to our employees,
which creates a positive and collaborative work environment. To promote health and wellness within our offices,
we provide an annual employee fitness allowance, which allows all employees to be reimbursed for gym
7
memberships, sports lessons or similar fitness-oriented expenses as well as a variety of other initiatives. To
encourage intra-company team building, we hold team events regularly throughout the year and participate in
community and charitable events.
Fair and Equitable Compensation: We offer competitive employment compensation packages that strive to
equitably reward employees’ contributions. We believe that recognizing special employee contributions creates
an environment where team members are driven to achieve exceptional performance.
Availability of Reports Filed with the Securities and Exchange Commission
A copy of this Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q, current
reports on Form 8-K and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available, free of charge, on our
Internet website (www.cioreit.com). All of these reports are made available on our website as soon as reasonably
practicable after they are electronically filed with or furnished to the United States Securities and Exchange
Commission (the “SEC”). Our Governance Guidelines and Code of Business Conduct and Ethics and the charters
of the Audit, Compensation, Investment, and Nominating and Corporate Governance Committees of our Board
of Directors are also available on our website at www.cioreit.com, and are available in print to any stockholder
upon written request to City Office REIT, Inc., c/o Investor Relations, Suite 3210 – 666 Burrard Street,
Vancouver, British Columbia, V6C 2X8. The Company may, from time to time, amend these charters and
policies, and such amended charters and policies will be posted on the Company’s website. Our telephone
number is +1 (604) 806-3366. The information on or accessible through our website is not, and shall not be
deemed to be, a part of this report or incorporated into any other filing we make with the SEC.
8
ITEM 1A. RISK FACTORS
SUMMARY
Risks Related to Our Business and Our Properties
• There are inherent risks associated with real estate investments and with the real estate industry, each of
which could have an adverse impact on our financial performance and the value of our properties.
•
Significant competition may decrease or prevent increases in our properties’ occupancy and rental rates and
may reduce our investment opportunities.
• We may be unable to renew expiring leases or re-lease vacant space on a timely basis or on attractive terms.
• We are dependent on our key personnel and the loss of such key personnel could materially adversely affect
our business.
• A decrease in demand for office space in our markets may have a material adverse effect on our financial
condition and results of operations.
•
Failure by any major tenant to make rental payments to us, because of a deterioration of its financial
condition, a termination of its lease, a non-renewal of its lease or otherwise, could have a material adverse
effect our results of operations.
• The COVID-19 pandemic has caused severe disruptions in the United States and global economies,
including disruptions in the financial and labor markets, which could materially and adversely affect our
financial condition, results of operations, cash flow, liquidity and performance and that of our tenants.
• We may be unable to secure funds for future tenant or other capital improvements or payment of leasing
commissions.
• We may be required to make rent or other concessions and significant capital expenditures to improve our
properties in order to retain and attract tenants.
• We depend on external sources of capital that are outside of our control, which may affect our ability to
seize strategic opportunities, satisfy our debt obligations and make distributions to our stockholders.
• We have a substantial amount of indebtedness outstanding which may affect our ability to pay distributions
to our stockholders, may expose us to interest rate fluctuation risk and may expose us to the risk of default
under our debt obligations.
• Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our
ability to make distributions to our stockholders.
• The impact of the Russian invasion of Ukraine on the global economy is uncertain.
•
Failure of the U.S. federal government to manage its fiscal matters or to raise or further suspend the debt
ceiling, and changes in the amount of federal debt, may negatively impact the economic environment and
adversely impact our results of operations.
• We may engage in hedging transactions, which can limit our gains and increase exposure to losses.
• Economic conditions may adversely affect the real estate market and our financial condition, results of
operations and cash flow.
•
Inflation and price volatility in the global economy could negatively impact our tenants and our results of
operations.
• Our joint venture investments could be adversely affected by the capital markets, our lack of sole decision-
making authority, our reliance on joint venture partners’ financial condition and any disputes that may arise
between us and our joint venture partners.
9
• We could incur significant costs related to government regulation and private litigation over environmental
matters involving the presence, discharge or threat of discharge of hazardous or toxic substances.
• Existing conditions at some of our properties may expose us to liability related to environmental matters.
• Our properties may contain asbestos or develop harmful mold, which could lead to liability for adverse
health effects and costs of remediating the problem.
•
Potential losses, including from adverse weather conditions, natural disasters and title claims, may not be
covered by insurance.
• We may be limited in our ability to diversify our investments making us more vulnerable economically than
if our investments were diversified.
•
•
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in
the performance of our properties and harm our financial condition.
If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.
• We may be unable to collect balances due on our leases from any tenants in bankruptcy.
• We may face additional risks and costs associated with owning properties occupied by government tenants.
•
Some of the leases at our properties contain “early termination” provisions which, if triggered, may allow
tenants to terminate their leases without further payment to us.
• The federal government’s “green lease” policies may adversely affect us.
• We may be unable to complete acquisitions and, even if acquisitions are completed, we may fail to
successfully operate acquired properties.
• Acquired properties may be located in new markets where we may face risks associated with investing in an
unfamiliar market.
• Adverse market and economic conditions could cause us to recognize impairment charges or otherwise
impact our performance.
• Our property taxes could increase due to property tax rate changes or reassessment, which may adversely
impact our cash flows.
• Our commitments to Second City Real Estate II Corporation (“Second City”), Clarity Real Estate III GP,
Limited Partnership (“Clarity RE”), Clarity Real Estate Ventures GP, Limited Partnership (together with
Clarity RE, “Clarity”), and their respective affiliates may give rise to various conflicts of interest.
Risks Related to Our Status as a REIT
• Our failure to maintain our qualification as a REIT would result in significant adverse tax consequences to
us and would adversely affect our business and the value of our stock.
• To maintain our qualification as a REIT, we may be forced to borrow funds during unfavorable market
conditions to make distributions to our stockholders.
• Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
• The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in
transactions which would be treated as sales for U.S. federal income tax purposes.
• We may face risks in connection with like-kind exchanges pursuant to section 1031 of the Code
(“Section 1031 Exchanges”).
• To maintain our qualification as a REIT, we may be forced to forego otherwise attractive opportunities.
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• We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability,
reduce our operating flexibility and reduce the market price of our shares of capital stock.
Risks Related to Our Organizational Structure
• Conflicts of interest exist or could arise in the future between the interests of our stockholders and the
interests of holders of units in City Office REIT Operating Partnership, L.P. (our “Operating Partnership”),
which may impede business decisions that could benefit our stockholders.
• The consideration that we pay for the properties and assets we own may exceed their aggregate fair market
value.
• We are a holding company with no direct operations and, as such, we rely on funds received from our
Operating Partnership to pay liabilities, and the interests of our stockholders are structurally subordinated to
all liabilities and obligations of our Operating Partnership and its subsidiaries.
• We may have assumed unknown liabilities in connection with our acquisition of properties and any
properties we may acquire in the future may expose us to unknown liabilities.
• Our charter, our amended and restated bylaws and Maryland law contain provisions that may delay, defer or
prevent a change of control transaction and may prevent our stockholders from receiving a premium for
their shares.
• The ability of our board of directors to revoke our REIT status without stockholder approval may cause
adverse consequences to our stockholders.
• Our board of directors may amend our investing and financing guidelines without stockholder approval,
and, accordingly, you would have limited control over changes in our policies that could increase the risk
that we default under our debt obligations.
• Our rights and the rights of our stockholders to take action against our directors and officers are limited.
General Risk Factors
• We may incur significant costs complying with various federal, state and local laws, regulations and
covenants that are applicable to our properties.
• Climate change may adversely affect our business.
• Litigation may result in unfavorable outcomes.
• Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures
or internal control over financial reporting.
• Our business and operations would suffer in the event of system failures.
• We face risks associated with security breaches through cyber-attacks, cyber intrusions or otherwise, as well
as other significant disruptions of our information technology (“IT”) networks and related systems.
The following risk factors may adversely affect our overall business, financial condition, results of
operations, and cash flows; our ability to make distributions to our stockholders; our access to capital; or the
market price of our common stock or preferred stock, as further described in each risk factor below. In addition
to the information set forth herein, one should carefully review and consider the information contained in our
other reports and filings that we make with the SEC from time to time. The risks that we describe in our public
filings are not the only risks that we face. Additional risks and uncertainties not presently known to us or are out
of our control, or that we currently consider immaterial, also may materially adversely affect our business,
financial condition, and results of operations. Additional information regarding forward-looking statements is
included herein.
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Risks Related to Our Business and Our Properties
There are inherent risks associated with real estate investments and with the real estate industry, each of
which could have an adverse impact on our financial performance and the value of our properties.
Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many
of which are beyond our control. Our financial performance and the value of our properties can be affected by
many of these factors, including the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
adverse changes in financial conditions of buyers, sellers and tenants of our properties, including
bankruptcies, financial difficulties or lease defaults by our tenants;
the national, regional and local economy, which may be negatively impacted by concerns about
inflation, government deficits or government budgets, unemployment rates, decreased consumer
confidence, industry slowdowns, reduced corporate profits, liquidity concerns in our markets and other
adverse business concerns;
local real estate conditions, such as an oversupply of, or a reduction in, demand for office space and the
availability and creditworthiness of current and prospective tenants;
vacancies or ability to rent space on favorable terms, including possible market pressures to offer
tenants rent abatements, tenant improvements, early termination rights or below-market renewal
options;
changes in operating costs and expenses, including, without limitation, increasing labor and material
costs, insurance costs, energy prices, water and sewer costs, environmental restrictions, real estate taxes
and costs of compliance with laws, regulations and government policies, which we may be restricted
from passing on to our tenants;
fluctuations in interest rates, which could adversely affect our ability, or the ability of buyers and
tenants of our properties, to obtain financing on favorable terms or at all, or impact the market price of
our properties we own or target for investment;
competition from other real estate investors with significant capital, including other real estate
operating companies, other publicly traded REITs and institutional investment funds;
inability to refinance our indebtedness or secure financing on terms favorable to us, which could result
in a default on our obligation and trigger cross default provisions that could result in a default on other
indebtedness;
the convenience and quality of competing office properties;
inability to collect rent from tenants;
our ability to secure adequate insurance;
our ability to secure adequate management services and to maintain our properties;
changes in, and changes in enforcement of, laws, regulations and governmental policies, including,
without limitation, health, safety, environmental, zoning, immigration and tax laws, government fiscal,
monetary and trade policies and the Americans with Disabilities Act of 1990 (the “ADA”); and
civil unrest, acts of war, cyber-attacks, terrorist attacks and natural disasters, including earthquakes,
wind damage and floods, which may result in uninsured and underinsured losses.
In addition, because the yields available from equity investments in real estate depend in large part on the
amount of rental income earned, as well as property operating expenses and other costs incurred, a period of
economic slowdown or recession, or declining demand for real estate, or the public perception that any of these
events may occur, could result in a general decline in rents or an increased incidence of defaults among our
12
existing leases, and, consequently, our properties, including any held by joint ventures, may fail to generate
revenues sufficient to meet operating, debt service and other expenses. As a result, we may have to borrow
amounts to cover fixed costs, and our financial condition, results of operations, cash flow, per share market price
of our common stock or preferred stock, and ability to satisfy our principal and interest obligations and to make
distributions to our stockholders may be adversely affected.
Significant competition may decrease or prevent increases in our properties’ occupancy and rental rates
and may reduce our investment opportunities.
We compete with numerous owners, operators, and developers of office properties, many of which own
properties similar to ours in the same submarkets in which our properties are located. Furthermore, undeveloped
land in many of the markets in which we operate is generally more readily available and less expensive than in
gateway markets, which are commonly defined as New York, Los Angeles, Washington, D.C., Boston, Chicago,
and San Francisco. If our competitors offer space from existing or new buildings at rental rates below current
market rates, or below the rental rates that we currently charge our tenants, we may lose existing or potential
tenants and we may be pressured to reduce our rental rates below those that we currently charge or to offer more
substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in
order to retain or attract tenants when our tenants’ leases expire. Our competitors may have substantially greater
financial resources than we do and may be able to accept more risk than we can prudently manage. In the future,
competition from these entities may reduce the number of suitable investment opportunities offered to us or
increase the bargaining power of property owners seeking to sell. As a result, our financial condition, results of
operations, cash flows, and market price of our common stock or preferred stock could be adversely affected.
We may be unable to renew expiring leases or re-lease vacant space on a timely basis or on attractive
terms, which could have a material adverse effect on our results of operations and cash flow.
At December 31, 2022, approximately 14.9%, 9.3% and 8.5% of our annualized base rent is scheduled to
expire in 2023, 2024, and 2025, respectively, excluding month-to-month leases. Current tenants may not renew
their leases upon the expiration of their terms and may attempt to terminate their leases prior to the expiration of
their current terms. This risk has been increased by tenants working from home during the pandemic which has
resulted in certain tenants re-evaluating the size and/or lay-out of their existing leased premises. If non-renewals
or terminations occur, we may not be able to locate qualified replacement tenants and, as a result, we could lose a
significant source of revenue while remaining responsible for the payment of our financial obligations.
Moreover, the terms of a renewal or new lease, including the amount of rent, may be less favorable to us than the
current lease terms, or we may be forced to provide tenant improvements at our expense or provide other
concessions or additional services to maintain or attract tenants. Any of these factors could cause a decline in
lease revenue or an increase in operating expenses, which would have a material adverse effect on our financial
condition, results of operations, cash flows, or the market price of our common stock or preferred stock.
We are dependent on our key personnel and the loss of such key personnel could materially adversely
affect our business, financial condition and results of operations and our ability to pay distributions to our
stockholders.
We are dependent on the efforts of our key officers and employees, including James Farrar, our Chief
Executive Officer, Gregory Tylee, our President and Chief Operating Officer, and Anthony Maretic, our Chief
Financial Officer, Secretary and Treasurer. The loss of Mr. Farrar’s, Mr. Tylee’s and/or Mr. Maretic’s services
could have a material adverse effect on our business, financial condition and results of operations and our ability
to pay distributions to our stockholders. Although we have employment agreements with them, we cannot assure
you they will remain employed with us.
13
A decrease in demand for office space in our markets may have a material adverse effect on our financial
condition and results of operations.
Our portfolio of properties consists of office properties and because we seek to acquire similar properties, a
decrease in the demand for office space may have a greater adverse effect on our business and financial condition
than if we owned a more diversified real estate portfolio. If parts of our properties are leased within a particular
sector, a significant downturn in that sector in which the tenants’ businesses operate would adversely affect our
results of operations. In addition, where a government agency is a tenant, which is the case for a number of our
properties, austerity measures, the inability of the federal, state, or local government to approve a budget, and
governmental deficit reduction programs may lead government agencies to stop paying rent, consolidate and
reduce their office space, terminate their lease or decrease their workforce, which may reduce demand for office
space in the government sector. In addition, the ongoing COVID-19 pandemic has resulted in lower than normal
utilization levels for our properties and it is uncertain how utilization levels will be impacted as the pandemic
continues and after the pandemic ends. In the event that our tenants implement full or partial “work from home”
or other remote work policies after the pandemic ends, the overall demand for office space in the markets in
which we own properties or seek to acquire properties may be materially adversely affected, which may impact
our leasing activity and ability to enter into leases favorable to the Company and result in a material adverse
effect on our results of operations, cash flow and market price of our common stock or preferred stock.
Failure by any major tenant to make rental payments to us, because of a deterioration of its financial
condition, a termination of its lease, a non-renewal of its lease or otherwise, could have a material adverse
effect on our results of operations.
As of December 31, 2022, approximately 25.7% of the base rental revenue of our properties was derived
from our ten largest tenants. At any time, our tenants may experience a downturn in their businesses that may
significantly weaken their financial condition, whether as a result of general economic conditions, changes in the
severity or duration of the COVID-19 pandemic or otherwise. As a result, our tenants may fail to make rental
payments when due, delay lease commencements, decline to extend or renew leases upon expiration or declare
bankruptcy or be subject to involuntary insolvency proceedings. Any of these actions could result in the
termination of the tenants’ leases or the failure to renew a lease and the loss of rental income attributable to the
terminated leases. The occurrence of any of the situations described above could have a material adverse effect
on our financial condition, results of operations, cash flows, or the market price of our common stock or
preferred stock.
The COVID-19 pandemic has caused severe disruptions in the United States and global economies,
including disruptions in the financial and labor markets, which could materially and adversely affect our
financial condition, results of operations, cash flow, liquidity and performance and that of our tenants.
There remains uncertainty regarding the duration and breadth of the COVID-19 pandemic. The outbreak of
COVID-19 in many countries, including the United States, has contributed to significant volatility in economic
activity and financial markets. The degree to which the COVID-19 pandemic will continue to adversely impact
our business, financial condition, results of operation, cash flows, liquidity and performance, and that of our
tenants, will be driven primarily by the emergence of additional variants, the effectiveness, availability and
distribution of vaccines, including their efficacy against new variant strains and the willingness of individuals to
be vaccinated, the severity and duration of indirect economic and social impacts such as recession, supply chain
disruptions, labor market disruptions, inflation, dislocation and volatility in capital markets, job losses, potential
longer-term changes in consumer and tenant behavior, as well as current and possible future governmental
responses. These uncertainties make it impossible for us to predict with certainty the overall impact that
COVID-19 will have on us and our tenants prospectively. Factors related to COVID-19 that have had, or could
have, a material adverse effect on our results of operations and financial condition, include:
•
a decrease in the usage of our properties or the demand for office space as a result of our tenants’
implementation of full or partial “work from home” or other remote work policies during or after the
14
pandemic ends, or the Company’s ability to maintain or increase rents, which may have an adverse
effect on our financial condition, results of operations and cash flow than if we owned a more
diversified real estate portfolio;
difficulty accessing sources of capital on attractive terms, or at all, impacts to our credit ratings, and a
severe disruption and instability in the global financial markets or deteriorations in credit and financing
conditions may affect our access to debt or equity capital necessary to fund future capital needs
(including redevelopment, acquisition, expansion and renovation activities, payments of principal and
interest on and the refinancing of our existing debt, tenant improvements and leasing costs, and our
operations) or refinancings on a timely basis and our tenants’ ability to fund their business operations
and meet their obligations to us;
a reduction in economic activity that severely impacts our tenants’ businesses, financial condition,
liquidity and creditworthiness, which may cause one or more of our tenants to be unable to meet their
obligations to us in full, or at all, seek modifications of such obligations or exercise early termination
rights;
the financial impact of the COVID-19 pandemic could negatively impact our future compliance with
financial covenants of our unsecured credit facility (“Unsecured Credit Facility”), including the
Company’s five-year $50 million term loan thereunder (the “Term Loan”), and other debt agreements,
including mortgage debt, and result in a default and potentially an acceleration of indebtedness, which
non-compliance could negatively impact our ability to make additional borrowings and pay dividends
on our common stock or preferred stock, or foreclosure on one or more our properties secured by
mortgage debt;
any impairment in value of our tangible or intangible assets which could be recorded as a result of
weaker economic conditions;
a general decline in business activity and demand for real estate transactions could adversely affect our
ability or desire to grow our portfolio of properties due to a lack of suitable acquisition opportunities;
and
a general decline in the attractiveness of our properties due to changes in the demand for office space,
which may adversely impact our ability to consummate pending or future dispositions on terms that
allow us to recover expected carrying values of a real estate investment.
•
•
•
•
•
•
The extent to which the COVID-19 pandemic impacts our financial condition, results of operations and cash
flow, and those of our tenants, will depend on future developments, which continue to be highly uncertain and
are not reasonably estimable, including the scope, severity and duration of the pandemic, the actions taken to
contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and
containment measures, among others. In addition, non-payment of rent or early lease terminations by our tenants
could reduce our cash flows, which could impact our ability to pay dividends to the holders of our common stock
or preferred stock.
We may be unable to secure funds for future tenant or other capital improvements or payment of leasing
commissions, which could limit our ability to attract or replace tenants and adversely impact our ability to
make cash distributions to our stockholders.
When tenants do not renew their leases or otherwise vacate their space, it is common that, in order to attract
replacement tenants, we will be required to expend funds for tenant improvements, payment of leasing
commissions and other concessions related to the vacated space. Such tenant improvements may require us to
incur substantial capital expenditures. We may not be able to fund capital expenditures solely from cash provided
from our operating activities because we must distribute at least 90% of our REIT taxable income, determined
without regard to the deduction for dividends paid and excluding net capital gains, each year to qualify as a
REIT. As a result, our ability to fund tenant and other capital improvements or payment of leasing commissions
15
through retained earnings may be limited. If we have insufficient capital reserves, we will have to obtain
financing from other sources. We may also have future financing needs for other capital improvements to
refurbish or renovate our properties. If we are unable to secure financing on terms that we believe are acceptable
or at all, we may be unable to make tenant and other capital improvements or payment of leasing commissions or
we may be required to defer such improvements. If this happens, it may cause one or more of our properties to
suffer from a greater risk of obsolescence or a decline in value, as a result of fewer potential tenants being
attracted to the property or existing tenants not renewing their leases. If we do not have access to sufficient
funding in the future, we may not be able to make necessary capital improvements to our properties, pay leasing
commissions or other expenses or pay distributions to our stockholders.
We may be required to make rent or other concessions and significant capital expenditures to improve our
properties in order to retain and attract tenants, which could adversely affect our financial condition,
results of operations and cash flow.
In order to retain existing tenants and attract new tenants, we may be required to offer more substantial rent
abatements, tenant improvements and early termination rights, provide options to purchase our properties within
the lease term or accommodate requests for renovations, build-to-suit remodeling and other improvements or
provide additional services to our tenants. As a result, we may have to make significant capital or other
expenditures in order to retain tenants whose leases expire and to attract new tenants in sufficient numbers, which
could adversely affect our results of operations and cash flow. Additionally, if we need to raise capital to make
such expenditures and are unable to do so, or such capital is otherwise unavailable, we may be unable to make
the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which
could adversely affect our financial condition, results of operations, cash flows, or the market price of our
common stock or preferred stock.
We depend on external sources of capital that are outside of our control, which may affect our ability to
seize strategic opportunities, satisfy our debt obligations and make distributions to our stockholders.
In order to maintain our qualification as a REIT, we are generally required under the U.S. Internal Revenue
Code of 1986, as amended (the “Code”) to annually distribute at least 90% of our REIT taxable income,
determined without regard to the deduction for dividends paid and excluding any net capital gain. In addition, as
a REIT, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100%
of our REIT taxable income, including any net capital gains. Because of these distribution requirements, we may
not be able to fund future capital needs (including redevelopment, acquisition, expansion and renovation
activities, payments of principal and interest on and the refinancing of our existing debt, tenant improvements
and leasing costs), from operating cash flow. Consequently, we may rely on third-party sources to fund our
capital needs. We may not be able to obtain the necessary financing on favorable terms, in the time period that
we desire or at all. Any additional debt we incur will increase our leverage, expose us to the risk of default and
may impose operating restrictions on us, and any additional equity we raise could be dilutive to existing
stockholders. Our access to third-party sources of capital depends, in part, on:
•
•
•
•
•
•
•
general market conditions and interest rates;
the market’s view of the quality of our assets and our leasing activity;
the market’s perception of our growth potential;
our current debt levels;
our current and expected future earnings;
our cash flow and cash distributions; and
the market price of securities we may issue from time to time.
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If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties
when strategic opportunities exist, satisfy our principal and interest obligations or make the cash distributions to
our stockholders necessary to maintain our qualification as a REIT.
Covenants in the Credit Agreement governing our Unsecured Credit Facility may cause us to fail to
qualify as a REIT.
In order to maintain our qualification as a REIT, we are generally required under the Code to distribute
annually at least 90% of our net taxable income, determined without regard to the deduction for dividends paid
and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the
extent that we distribute less than 100% of our net taxable income, including any net capital gains. Under the
credit agreement governing our Unsecured Credit Facility (the “Credit Agreement”), we are subject to various
financial covenants that may inhibit our ability to make distributions to our stockholders. If we are unable to
make distributions to our stockholders, we will not be able to make sufficient distributions to maintain our REIT
status.
We have a substantial amount of indebtedness outstanding which may affect our ability to pay
distributions to our stockholders, may expose us to interest rate fluctuation risk and may expose us to the
risk of default under our debt obligations.
Our total consolidated principal indebtedness, as of December 31, 2022, was approximately $693.8 million.
We do not anticipate that our internally generated cash flows will be adequate to repay our existing indebtedness
upon maturity, and, therefore, we expect to repay our indebtedness through refinancings and future offerings of
equity and debt securities, either of which we may be unable to secure on favorable terms or at all. Our
substantial outstanding indebtedness, and the limitations imposed on us by our debt agreements, could have other
significant adverse consequences, including the following:
•
our cash flow may be insufficient to meet our required principal and interest payments;
• we may be unable to borrow additional funds as needed or on favorable terms, which could, among
other things, adversely affect our ability to capitalize upon emerging acquisition opportunities or meet
operational needs;
• we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less
favorable than the terms of our original indebtedness;
• we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms, or
terminate pending acquisitions that may require us to forfeit amounts paid into escrow or pay
termination fees;
• we may be forced to enter into financing arrangements with particularly burdensome collateral
requirements or restrictive covenants;
• we may violate restrictive covenants in our loan documents, which would entitle the lenders to
accelerate our debt obligations or require us to retain cash for reserves;
• we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under
our hedge agreements and these agreements may not effectively hedge interest rate fluctuation risk;
• we may default on our obligations and the lenders or mortgagees may foreclose on our properties that
secure their loans;
•
•
our default under any of our indebtedness with cross default provisions could result in a default on
other indebtedness; and
cross default provisions on properties with minority parties could trigger indemnity obligations.
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If any one of these events were to occur, our financial condition, results of operations, cash flows, or the
market price of our common stock or preferred stock and ability to satisfy our debt service obligations and to pay
distributions to you could be adversely affected. In addition, any foreclosure on our properties could create
taxable income without accompanying cash proceeds, which could adversely affect our ability to meet the
distribution requirements necessary to maintain our qualification as a REIT.
We could become highly leveraged in the future because our organizational documents contain no
limitations on the amount of debt that we may incur.
As of December 31, 2022, our principal indebtedness represented approximately 44.1% of our total assets.
However, our organizational documents contain no limitations on the amount of indebtedness that we or our
Operating Partnership may incur. We could alter the balance between our total outstanding indebtedness and the
value of our properties at any time. If we become more highly leveraged, the resulting increase in outstanding
debt could adversely affect our ability to make debt service payments, to pay our anticipated distributions and to
make the distributions required to maintain our qualification as a REIT. The occurrence of any of the foregoing
risks could adversely affect our business, financial condition and results of operations, our ability to make
distributions to our stockholders and the trading price of our common stock or preferred stock.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our
ability to make distributions to our stockholders.
In providing financing to us, a lender may impose restrictions on us that would affect our ability to incur
additional debt, make certain investments, reduce liquidity below certain levels, make distributions to our
stockholders and otherwise affect our distribution and operating policies. In general, we expect that our loan
agreements will restrict our ability to encumber or otherwise transfer our interest in the respective property
without the prior consent of the lender. Such loan documents may contain other negative covenants that may
limit our ability to discontinue insurance coverage or impose other limitations. Any such restriction or limitation
may limit our ability to make distributions to you. Further, such restrictions could make it difficult for us to
satisfy the requirements necessary to maintain our qualification as a REIT.
During the second half of 2022, the lenders for two of our mortgage borrowings have elected their right to
escrow property level cash flow for the purpose of meeting future payment, tenant improvement and capital
obligations. It is possible that we could fail certain financial covenants within certain property-level mortgage
borrowings or under our Credit Agreement. For mortgages with financial covenants, the lenders’ remedy of a
covenant failure would be a requirement to escrow funds for the purpose of meeting our future debt payment
obligations.
The impact of the Russian invasion of Ukraine on the global economy is uncertain, but may prove to
negatively impact our business and operations.
While the Company does not have any material business, operations or assets in Russia, Belarus or Ukraine,
and has not been materially impacted by the actions of the Russian government at this time, the short and long-
term implications of Russia’s invasion of Ukraine are difficult to predict. We continue to monitor any adverse
impact that the outbreak of war in Ukraine and the subsequent institution of sanctions against Russia by the
United States and several European and Asian countries may have on the global economy in general, on our
business and operations and on the businesses and operations of our suppliers and customers. To the extent the
war in Ukraine may adversely affect our business, it may also have the effect of heightening many of the other
risks described in this “Risk Factors” section, such as those relating to information technology and market
conditions, any of which could negatively affect our business and financial condition.
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Failure of the U.S. federal government to manage its fiscal matters or to raise or further suspend the debt
ceiling, and changes in the amount of federal debt, may negatively impact the economic environment and
adversely impact our results of operations.
The U.S. federal government has established a limit on the level of federal debt that the U.S. federal
government can have outstanding, often referred to as the debt ceiling. The U.S. Congress has authority to raise
or suspend the debt ceiling and to approve the funding of U.S. federal government operations within the debt
ceiling, and has done both frequently in the past, often on a relatively short-term basis. On January 19, 2023, the
U.S. reached its borrowing limit and currently faces risk of defaulting on its debt. Generally, if effective
legislation to manage the level of federal debt is not enacted and the debt ceiling is reached in any given year, the
federal government may suspend its investments for certain government accounts, among other available options,
in order to prioritize payments on its obligations. It is anticipated that the U.S. federal government will be able to
fund its operations through approximately mid-2023. However, contention among policymakers, among other
factors, may hinder the enactment of policies to further increase the borrowing limit or address its debt balance
timely. A failure by the U.S. Congress to raise the debt limit would increase the risk of default by the U.S. on its
obligations, the risk of a lowering of the U.S. federal government’s credit rating, and the risk of other economic
dislocations. Such a failure, or the perceived risk of such a failure, could consequently have a material adverse
effect on the financial markets and economic conditions in the U.S. and globally. If economic conditions severely
deteriorate as a result of U.S. federal government fiscal gridlock, our operations, or those of our tenants, could be
affected, which may adversely impact our financial condition and results of operations. These risks may also
impact our overall liquidity, our borrowing costs, or the market price of our common stock.
We may engage in hedging transactions, which can limit our gains and increase exposure to losses.
Subject to maintaining our qualification as a REIT, we may enter into hedging transactions to protect us
from the effects of interest rate fluctuations on floating rate debt. Our hedging transactions may include entering
into interest rate swap agreements or interest rate cap or floor agreements, or other interest rate exchange
contracts. Hedging activities may not have the desired beneficial impact on our results of operations or financial
condition. No hedging activity can completely insulate us from the risks associated with changes in interest rates.
Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:
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available interest rate hedging may not correspond directly with the interest rate risk for which we seek
protection;
the duration of the hedge may not match the duration of the related liability;
the party owing money in the hedging transaction may default on its obligation to pay;
the credit quality of the party owing money on the hedge may be downgraded to such an extent that it
impairs our ability to sell or assign our side of the hedging transaction; and
the value of derivatives used for hedging may be adjusted from time to time in accordance with
accounting rules to reflect changes in fair value, such as downward adjustments, or “mark-to-market
losses,” which would reduce our stockholders’ equity.
Hedging involves risk and typically involves costs, including transaction costs, that may reduce our overall
returns on our investments. These costs increase as the period covered by the hedging increases and during
periods of rising and volatile interest rates. These costs will also limit the amount of cash available for
distribution to stockholders. We generally intend to hedge as much of the interest rate risk as we determine is in
our best interests given the cost of such hedging transactions. The REIT tax rules may limit our ability to enter
into hedging transactions by requiring us to limit our income from non-qualifying hedges. If we are unable to
hedge effectively because of the REIT tax rules, we will face greater interest rate exposure than may be
commercially prudent.
In September 2019, in connection with the increase in authorized borrowings under our Unsecured Credit
Facility from $250 million to $300 million, we entered into a five-year interest rate swap for a notional amount of
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$50 million (the “Interest Rate Swap”). Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of
approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate 30-day the
London Interbank Offered Rate (“LIBOR”) payments. We have been incorporating LIBOR transition language in
our existing floating rate instruments, including the Interest Rate Swap, when they are extended or refinanced.
The Interest Rate Swap has been designated and qualifies as a cash flow hedge and has been recognized on
the consolidated balance sheets at fair value. Gains and losses resulting from changes in the fair value of
derivatives that are designated and qualify as cash flow hedges are reported as a component of other
comprehensive (loss) income and reclassified into earnings in the periods during which the hedged forecasted
transaction affects earnings.
As of December 31, 2022, the Interest Rate Swap was reported as an asset at its fair value of approximately
$2.7 million, which is included in other assets on the Company’s consolidated balance sheet. For the year ended
December 31, 2022, the amount of net realized gains reclassified to interest expense due to payments received
from the swap counterparty was $0.2 million. Accordingly, the fair value of the Interest Rate Swap has been
classified as a Level 2 fair value measurement. See Note 7 to our consolidated financial statements in this Annual
Report on Form 10-K.
Changes in the method pursuant to which reference rates are determined and phasing out of LIBOR after
2022 may affect our financial results.
On March 5, 2021, the chief executive of the United Kingdom Financial Conduct Authority (“FCA”), which
regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be
representative after June 30, 2023. The FCA’s announcement coincided with the March 5, 2021 announcement of
LIBOR’s administrator, the ICE Benchmark Administration Limited (“IBA”), indicating that, as a result of not
having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after
June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication
on June 30, 2023. These announcements mean that any of our LIBOR-based borrowings and assets that mature
beyond June 30, 2023 need to be converted to alternative interest rates. In addition, based on guidance from U.S.
banking regulators, U.S. financial institutions are not expected to enter into new U.S. Dollar LIBOR (“USD-
LIBOR”) contracts after December 31, 2021, which means that any of our new borrowings thereafter will be
done at alternative rates. Furthermore, in the United States, efforts to identify a set of alternative U.S. dollar
reference interest rates include proposals by the Alternative Reference Rates Committee of the Federal Reserve
Board and the Federal Reserve Bank of New York. The U.S. Federal Reserve, in conjunction with the Alternative
Reference Rates Committee (“ARRC”), a steering committee comprised of large U.S. financial institutions, is
considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index
calculated by short-term repurchase agreements, backed by Treasury securities. There are significant differences
between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending
rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities. We currently have
contracts that are indexed to LIBOR and expect that all LIBOR settings relevant to us will cease to be published
or will no longer be representative after June 30, 2023. As a result, we expect to amend our LIBOR-based
borrowings to reflect SOFR beginning in the first quarter of 2023. The differences between LIBOR and SOFR,
plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained
available, which could have a material adverse effect on our results. Although SOFR is the ARRC’s
recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates
that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher borrowing
costs for us. It is not yet possible to predict the magnitude of LIBOR’s end on our borrowing costs given the
uncertainty about which rates will replace LIBOR and the timing of actual replacement.
U.S. regulators and the ARRC have recommended that all LIBOR-based instruments include robust fallback
language dictating what rate will apply when LIBOR ends. The fallbacks recommended by the ARRC are
different for various non-derivative instruments, and not all USD-LIBOR-based instruments will incorporate the
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recommended fallbacks. The International Swaps and Derivatives Association (“ISDA”) has implemented
fallback language and a protocol that will ensure USD-LIBOR-based derivatives amongst protocol participants
fallback to compounded SOFR. We have opted into the ISDA 2020 IBOR Fallbacks protocol. However, the
variations in fallback language in different financial instruments and the adoption of different replacement rates
or methodologies in such fallback language could result in unexpected differences between our USD-LIBOR-
based assets and our USD-LIBOR-based interest rate hedges. In addition, we may incur costs amending
instruments not covered by the ISDA protocol or by clearinghouse rulebooks to implement fallbacks
recommended by the ARRC. We may also decide not to amend, in which case we may bear the cost and risk of
litigation. Some instruments, particularly consumer-facing adjustable-rate mortgages, are impractical to amend.
With respect to those instruments, we may bear the cost and risk of litigation. Our lenders may be less willing to
extend credit secured by assets that do not include robust fallbacks.
It is expected that switching existing financial instruments and hedging transactions from LIBOR to SOFR
or other replacement rates will include a spread adjustment. ISDA has described the spread calculation
methodology that will apply to derivatives that adopt the ISDA recommendations for derivatives, and the ARRC
has recommended the same methodology for all non-consumer financial instruments. The adjustment calculation
is intended to minimize value transfer between counterparties, borrowers, and lenders, but there is no assurance
that the calculated spread adjustment will be fair and accurate or that it will not result in higher interest costs.
Any changes announced by the IBA, FCA, U.S. Federal Reserve, other regulators or any other successor
governance or oversight body, or future changes adopted by such body, in the method pursuant to which the
reference rates are determined may result in a sudden or prolonged increase or decrease in the reported reference
rates. If that were to occur, the level of interest payments we incur may change. In addition, although certain of
our LIBOR based obligations provide for alternative methods of calculating the interest rate payable on certain of
our obligations if LIBOR is not reported, which include requesting certain rates from major reference banks in
London or New York, or alternatively using LIBOR for the immediately preceding interest period or using the
initial interest rate, as applicable, uncertainty as to the extent and manner of future changes may result in interest
rates and/or payments that are higher than, lower than or that do not otherwise correlate over time with the
interest rates and/or payments that would have been made on our obligations if LIBOR rate was available in its
current form.
Economic conditions may adversely affect the real estate market and our financial condition, results of
operations and cash flow.
Uncertainty over whether the U.S. economy will be adversely affected by inflation or stagflation, volatile
energy costs, geopolitical issues, the possibility of any pandemic, including the COVID-19 pandemic, the
availability and cost of credit, future policy and fiscal decisions of the federal government, the mortgage market
in the United States and the late-cycle real estate market may contribute to increased market volatility or threaten
business and consumer confidence. This uncertain operating environment could adversely affect our ability to
generate revenues, thereby reducing our operating income and earnings.
In addition, local real estate conditions such as an oversupply of properties or a reduction in demand for
properties, competition from other similar properties, our ability to provide or arrange for adequate maintenance,
insurance and management and advisory services, increased operating costs (including real estate taxes), the
attractiveness, location of the property, changes in market rental rates and region-specific legislation or political
initiatives may adversely affect a property’s income and value. A rise in energy costs could result in higher
operating costs, which may affect our results of operations. In addition, local conditions in the markets in which
we own or intend to own properties may significantly affect occupancy or rental rates at such properties. Events
that could prevent us from raising or maintaining rents or cause us to reduce rents include layoffs, plant closings,
relocations of significant local employers and other events reducing local employment rates, an oversupply of, or a
lack of demand for, office space, a decline in household formation, the inability or unwillingness of tenants to pay
rent increases, and geopolitical developments having a disproportionate effect on the markets in which we operate.
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Inflation and price volatility in the global economy could negatively impact our tenants and our results of
operations.
Inflation in the United States has risen to levels not experienced in recent decades, including rising energy
prices, prices for consumer goods, interest rates, wages and currency volatility. During the twelve months ended
December 31, 2022, the consumer price index rose by approximately 6.5% compared to the twelve months ended
December 31, 2021. These increases and any fiscal or other policy interventions by the U.S. government in
reaction to such events could negatively impact our results of operations, and could also negatively impact our
tenants’ businesses. While our leases generally provide for fixed annual rent increases, high levels of inflation
could outpace our contractual rent increases. The leases at our properties are either full-service gross or net lease
basis. Our full-service gross leases generally have a base year expense “stop,” whereby we pay a stated amount
of expenses as part of the rent payment while future increases (above the base year stop) in property operating
expenses are billed to the tenant based on such tenant’s proportionate square footage in the property.
Additionally, our triple-net leases require the lessee to pay all property operating expenses. Therefore, increases
in property-level expenses resulting from inflation could have an adverse impact on our lessees if increases in
their operating expenses exceed increases in their revenue, which may adversely affect our lessees’ ability to pay
rent or other obligations owed to us. An increase in our lessees’ expenses and a failure of their revenues to
increase at least with inflation could adversely affect our lessees’ and our financial condition and our results of
operations.
Our joint venture investments could be adversely affected by the capital markets, our lack of sole decision-
making authority, our reliance on joint venture partners’ financial condition and any disputes that may
arise between us and our joint venture partners.
We have in the past co-invested, and may in the future co-invest, with third parties through partnerships,
joint ventures or other structures, acquiring non-controlling interests in, or sharing responsibility for managing
the affairs of, a property, partnership, co-tenancy or other entity. Investments in joint ventures may, under certain
circumstances, involve risks not present when a third party is not involved, including potential deadlocks in
making major decisions, restrictions on our ability to exit the joint venture, triggering of forced sale or buy-out
mechanisms, reliance on our joint venture partners and the possibility that joint venture partners might become
bankrupt or fail to fund their share of required capital contributions, thus exposing us to liabilities in excess of
our share of the investment or take action that could jeopardize our REIT status. The funding of our capital
contributions may be dependent on proceeds from asset sales, credit facility advances and/or sales of equity
securities. Joint venture partners may have business interests or goals that are inconsistent with our business
interests or goals and may be in a position to take actions contrary to our policies or objectives. We may in
specific circumstances be liable for the actions of our joint venture partners. In addition, any disputes that may
arise between us and joint venture partners may result in litigation or arbitration that would increase our
expenses.
We could incur significant costs related to government regulation and private litigation over
environmental matters involving the presence, discharge or threat of discharge of hazardous or toxic
substances, which could adversely affect our operations, the value of our properties and our ability to
make distributions to our stockholders.
Our properties may be subject to environmental liabilities. Under various federal, state and local laws,
a current or previous owner, operator or tenant of real estate can face liability for environmental contamination
created by the presence, discharge or threat of discharge of hazardous or toxic substances. Liabilities can include
the cost to investigate, clean up and monitor the actual or threatened contamination and damages caused by the
contamination or threatened contamination.
The liability under such laws may be strict, joint and several, meaning that we may be liable regardless of
whether we knew of, or were responsible for, the presence of the contaminants, and the government entity or
private party may seek recovery of the entire amount from us even if there are other responsible parties.
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Liabilities associated with environmental conditions may be significant and can sometimes exceed the value of
the affected property. The presence of hazardous substances on a property may adversely affect our ability to sell
or rent that property or to borrow using that property as collateral.
Environmental laws also:
• may require the removal or upgrade of underground storage tanks;
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regulate the discharge of storm water, wastewater and other pollutants;
regulate air pollutant emissions, including greenhouse gas emissions;
regulate hazardous materials’ generation, management and disposal; and
regulate workplace health and safety.
Existing conditions at some of our properties may expose us to liability related to environmental matters.
Independent environmental consultants have conducted Phase I or similar environmental site assessments on
all of our properties. Site assessments are intended to discover and evaluate information regarding the
environmental condition of the surveyed property and surrounding properties. These assessments do not
generally include subsurface investigations or mold or asbestos surveys. None of the recent site assessments
revealed any past or present environmental liability that we believe would have a material adverse effect on our
business, financial condition, cash flows or results of operations. However, the assessments may have failed to
reveal all environmental conditions, liabilities or compliance concerns. Material environmental conditions,
liabilities or compliance concerns may have arisen after the review was completed or may arise in the future; and
future laws, ordinances or regulations may impose material additional environmental liability.
Costs of future environmental compliance could negatively affect our ability to make distributions to our
stockholders, and remedial measures required to address such conditions could have a material adverse effect on
our financial condition, results of operations, cash flows, or the market price of our common stock or preferred
stock.
Our properties may contain asbestos or develop harmful mold, which could lead to liability for adverse
health effects and costs of remediating the problem, which could adversely affect the value of the affected
property and our ability to make distributions to our stockholders.
We are required by federal regulations with respect to our properties to identify and warn, via signs and
labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials (“ACMs”)
and potential ACMs. We may be subject to an increased risk of personal injury lawsuits by workers and others
exposed to ACMs and potential ACMs at our properties as a result of these regulations. The regulations may
affect the value of any of our properties containing ACMs and potential ACMs. Federal, state and local laws and
regulations also govern the removal, encapsulation, disturbance, handling and disposal of ACMs and potential
ACMs when such materials are in poor condition or in the event of construction, remodeling, renovation or
demolition of a property.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur,
particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds
may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing because
exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other
reactions.
The presence of ACMs or significant mold at any of our properties could require us to undertake a costly
remediation program to contain or remove the ACMs or mold from the affected property. In addition, the
presence of ACMs or significant mold could expose us to claims of liability to our tenants, their or our
employees, and others if property damage or health concerns arise.
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Potential losses, including from adverse weather conditions, natural disasters and title claims, may not be
covered by insurance.
Certain of our properties are located in states where natural disasters such as tornadoes, hurricanes and
earthquakes are more common than in other states. Given recent extreme weather events across parts of the
United States, including devastating hurricanes in Florida, wildfires and floods in California, and winter storms
in Texas, it is also possible that our other properties could incur significant damage due to other natural disasters.
While we carry insurance to cover a substantial portion of the cost of such events, such as droughts or flooding,
our insurance includes deductible amounts and certain items may not be covered by insurance. Future natural
disasters may significantly affect our operations and properties and, more specifically, may cause us to
experience reduced rental revenue (including from increased vacancy), incur clean-up costs or otherwise incur
costs in connection with such events. Any of these events may have a material adverse effect on our financial
condition, results of operations, cash flows, or the market price of our common stock or preferred stock.
Furthermore, we do not carry insurance for certain losses, including, but not limited to, losses caused by
certain environmental conditions, such as mold or asbestos, riots, civil unrest or war. In addition, our title
insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to
increase our title insurance coverage as the market value of our portfolio increases. As a result, we may not have
sufficient coverage against all losses that we may experience, including from adverse title claims.
If we experience a loss that is uninsured or exceeds policy limits, we could incur significant costs and lose
the capital invested in the damaged properties as well as the anticipated future cash flows from those properties.
In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the
indebtedness, even if these properties were irreparably damaged.
Moreover, we carry several different lines of insurance, placed with several large insurance carriers. If any
one of these large insurance carriers were to become insolvent, we would be forced to replace the existing
insurance coverage with another suitable carrier and any outstanding claims would be at risk for collection. In
such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise
favorable terms. Replacing insurance coverage at unfavorable rates and the potential of uncollectible claims due
to carrier insolvency could adversely affect our financial condition, results of operations, cash flows, or the
market price of our common stock or preferred stock.
We may be limited in our ability to diversify our investments making us more vulnerable economically
than if our investments were diversified.
Our ability to diversify our portfolio may be limited both as to the number of investments owned and the
geographic regions in which our investments are located. While we seek to diversify our portfolio by geographic
location, we focus on our specified target markets that we believe offer the opportunity for attractive returns and,
accordingly, our actual investments may result in concentrations in a limited number of geographic regions. As a
result, there is an increased likelihood that the performance of any single property, or the economic performance
of a particular region in which our properties are located, could materially affect financial condition, results of
operation, cash flows, or the market price of our common stock or preferred stock.
We may acquire properties with lock-out provisions, or agree to such provisions in connection with
obtaining financing, which may prohibit us from selling or refinancing a property during the lock-out
period.
We may acquire properties in exchange for common units and agree to restrictions on sales or refinancing,
called “lock-out” provisions, which are intended to preserve favorable tax treatment for the owners of such
properties who sell them to us. In addition, we may agree to lock-out provisions in connection with obtaining
financing for the acquisition of properties. Lock-out provisions could materially restrict us from selling,
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otherwise disposing of or refinancing properties. These restrictions could affect our ability to turn our
investments into cash and thus affect cash available for distributions to our stockholders. Lock-out provisions
could impair our ability to take actions during the lock-out period that would otherwise be in the best interests of
our stockholders and, therefore, could adversely impact the market value of our common stock. In particular,
lock-out provisions could preclude us from participating in major transactions that could result in a disposition of
our assets or a change in control even though that disposition or change in control might be in the best interests
of our stockholders.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in
the performance of our properties and harm our financial condition.
The real estate investments made, and to be made, by us are relatively difficult to sell quickly. As a result,
our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial
and investment conditions is limited. Return of capital and realization of gains, if any, from an investment
generally will occur upon disposition or refinancing of the underlying property. We may be unable to realize our
investment objectives by sale, other disposition or refinancing at attractive prices within any given period of time
or may otherwise be unable to complete any exit strategy. In particular, our ability to dispose of one or more
properties is subject to weakness in or even the lack of an established market for a property, changes in the
financial condition or prospects of prospective purchasers, changes in national or international economic
conditions and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located.
In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable
to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we
hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may
cause us to forego or defer sales of properties that otherwise would be in our best interest. Therefore, we may not
be able to adjust our portfolio in response to economic or other conditions promptly or on favorable terms, which
may adversely affect our financial condition, results of operations, cash flows, or the market price of our
common stock or preferred stock.
If we sell properties by providing financing to purchasers, we will bear the risk of default by the
purchaser.
If we decide to sell any of our properties, we intend to use commercially reasonable efforts to sell them for
cash. However, in some instances we may sell our properties by providing financing to purchasers. If we provide
financing to purchasers, we will bear the risk of default by the purchasers which would reduce the value of our
assets, impair our ability to make distributions to our stockholders and reduce the price of our common stock or
preferred stock.
We may be unable to collect balances due on our leases from any tenants in bankruptcy, which could
adversely affect our cash flow and the amount of cash available for distribution to our stockholders.
The bankruptcy or insolvency of one or more of our tenants may adversely affect the income produced by
our properties. We cannot assure you that any tenant that files for bankruptcy protection will continue to pay us
rent. If a tenant files for bankruptcy, any or all of the tenant’s or a guarantor of a tenant’s lease obligations could
be subject to a bankruptcy proceeding pursuant to Chapter 11 or Chapter 7 of the U.S. Bankruptcy Code. Such a
bankruptcy filing would impose an automatic stay barring all efforts by us to collect pre-bankruptcy rents from
these entities or their properties, unless we receive an order from the bankruptcy court lifting the automatic stay
to permit us to pursue collections. A tenant or lease guarantor bankruptcy could delay our efforts to collect past
due balances under the relevant leases and could ultimately preclude collection of these sums. If a lease is
rejected by a tenant in bankruptcy, we would only have a general unsecured claim for damages. This claim could
be paid only in the event funds were available and then only in the same percentage as that realized on other
unsecured claims. Our claim would be capped at the rent reserved under the lease, without acceleration, for the
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greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already
due but unpaid. Therefore, if a lease is rejected, it is possible that we would not receive payment from the tenant
or that we would receive substantially less than the full value of any unsecured claims we hold, which would
result in a reduction in our rental income, cash flow and the amount of cash available for distribution to the
holders of our common stock or preferred stock.
We may face additional risks and costs associated with owning properties occupied by government
tenants, which could negatively impact our financial condition, results of operations, cash flows, or the
market price of our common stock or preferred stock.
As of December 31, 2022, we owned four properties in which some or all of the tenants are federal
government agencies. We may continue to pursue the acquisition of office properties in which substantial space
is leased to governmental agencies. As such, lease agreements with these federal government agencies contain
certain provisions required by federal law, which require, among other things, that the contractor (which is the
lessor or the owner of the property), agree to comply with certain rules and regulations, including, but not limited
to, rules and regulations related to anti-kickback procedures, examination of records, audits and records, equal
opportunity provisions, prohibition against segregated facilities, certain executive orders, subcontractor cost or
pricing data, certain provisions intending to assist small businesses and contractual rights of termination by the
tenants. We may be subject to requirements of the Employment Standards Administration’s Office of Federal
Contract Compliance Programs and requirements to prepare affirmative action plans pursuant to the applicable
executive order may be determined to be applicable to us.
In addition, some of our leases with government tenants may be subject to statutory or contractual rights of
termination by the tenants, which will allow them to vacate the leased premises before the stated terms of the
leases expire with little or no liability. For fiscal policy reasons, security concerns or other reasons, some or all of
our government tenants may decide to vacate our properties. If a significant number of such vacancies occur, our
rental income may materially decline, our cash flow and results of operations could be adversely affected and our
ability to pay regular distributions to you may be jeopardized.
Our government tenants are also subject to discretionary funding from the federal government. Federal
government programs are subject to annual congressional budget authorization and appropriation processes. For
many programs, Congress appropriates funds on a fiscal year basis even though the program performance period
may extend over several years. Laws and plans adopted by the federal government relating to, along with
pressures on and uncertainty surrounding the federal budget, potential changes in priorities and spending levels,
sequestration, the appropriations process, use of continuing resolutions (with restrictions, e.g., on new starts) and
the permissible federal debt limit, could adversely affect the funding for our government tenants. The budget
environment and uncertainty surrounding the appropriations processes remain significant long-term risks as
budget cuts could adversely affect the viability of our government tenants.
Some of the leases at our properties contain “early termination” provisions which, if triggered, may allow
tenants to terminate their leases without further payment to us, which could adversely affect our financial
condition and results of operations and the value of the applicable property.
Certain tenants have a right to terminate their leases upon payment of a penalty, but others are not required
to pay any penalty associated with an early termination. Most of our tenants that are federal or state
governmental agencies, which account for approximately 6.0% of the base rental revenue from our properties as
of December 31, 2022, may, under certain circumstances, vacate the leased premises before the stated terms of
the leases expire with little or no liability to us. There can be no assurance that tenants will continue their
activities and continue occupancy of the premises. Any cessation of occupancy by tenants may have an adverse
effect on our operations.
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The federal government’s “green lease” policies may adversely affect us.
In recent years, the federal government has instituted “green lease” policies which allow a government
tenant to require leadership in energy and environmental design for commercial interiors, or LEED®-CI,
certification in selecting new premises or renewing leases at existing premises. In addition, the Energy
Independence and Security Act of 2007 allows the General Services Administration to prefer buildings for lease
that have received an “Energy Star” label. Obtaining such certifications and labels may be costly and time
consuming, but our failure to do so may result in our competitive disadvantage in acquiring new or retaining
existing government tenants.
We may be unable to complete acquisitions and, even if acquisitions are completed, we may fail to
successfully operate acquired properties.
Our business plan includes, among other things, growth through identifying suitable acquisition
opportunities, consummating acquisitions and leasing such properties. We will evaluate the market of available
properties and may acquire properties when we believe strategic opportunities exist. Our ability to acquire
properties on favorable terms and successfully develop or operate them is subject to, among others, the following
risks:
• we may be unable to acquire a desired property because of competition from other real estate investors
with substantial capital, including from other REITs and institutional investment funds;
•
•
even if we are able to acquire a desired property, competition from other potential acquirers may
significantly increase the purchase price;
even if we enter into agreements for the acquisition of properties, these agreements are subject to
customary conditions to closing, including completion of due diligence investigations to our
satisfaction;
• we may incur significant costs in connection with evaluation and negotiation of potential acquisitions,
including acquisitions that we are subsequently unable to complete;
• we may acquire properties that are not initially accretive to our results upon acquisition, and we may
not successfully lease those properties to meet our expectations;
• we may be unable to finance the acquisition on favorable terms in the time period we desire, or at all;
•
even if we are able to finance the acquisition, our cash flows may be insufficient to meet our required
principal and interest payments;
• we may spend more than budgeted to make necessary improvements or renovations to acquired
properties;
• we may be unable to quickly and efficiently integrate new acquisitions, particularly the acquisition of
portfolios of properties, into our existing operations;
• market conditions may result in higher than expected vacancy rates and lower than expected rental
rates; and
• we may acquire properties subject to liabilities and without any recourse, or with only limited recourse,
with respect to unknown liabilities for clean-up of undisclosed environmental contamination, claims by
tenants or other persons dealing with former owners of the properties and claims for indemnification by
general partners, directors, officers and others indemnified by the former owners of the properties.
Acquired properties may be located in new markets where we may face risks associated with investing in
an unfamiliar market.
We may acquire properties in markets that are new to us. When we acquire properties located in new
markets, we may face risks associated with a lack of market knowledge or understanding of the local economy,
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forging new business relationships in the area and unfamiliarity with local government and permitting
procedures. We work to mitigate such risks through extensive diligence and research and associations with
experienced service providers. However, there can be no guarantee that all such risks will be eliminated.
Adverse market and economic conditions could cause us to recognize impairment charges or otherwise
impact our performance.
We intend to review the carrying value of our properties when circumstances, such as adverse market
conditions, indicate a potential impairment may exist. We intend to base our review on an estimate of the future
cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition on an
undiscounted basis. We intend to consider factors such as future operating income, trends and prospects, as well
as the effects of leasing demand, competition and other factors. If our evaluation indicates that we may be unable
to recover the carrying value of a real estate investment, an impairment loss will be recorded to the extent that the
carrying value exceeds the estimated fair value of the property.
Impairment losses would have a direct impact on our operating results because recording an impairment loss
results in an immediate negative adjustment to our operating results. The evaluation of anticipated cash flows is
highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital
requirements that could differ materially from actual results in future periods. If the real estate market
deteriorates, we may reevaluate the assumptions used in our impairment analysis. Impairment charges could
materially adversely affect our financial condition, results of operations, cash flows and ability to pay
distributions on, and the per share market price of, our common stock or preferred stock.
We may invest in properties with other entities, and our lack of sole decision-making authority or reliance
on a joint-venturer’s financial condition could make these joint venture investments risky and expose us to
losses or impact our ability to maintain our qualification as a REIT.
We may co-invest in the future with third parties through partnerships, joint ventures or other entities. We
may acquire non-controlling interests or share responsibility for managing the affairs of a property, partnership,
joint venture or other entity. In such events, we would not be in a position to exercise sole decision-making
authority regarding the property or entity. Investments in entities may, under certain circumstances, involve risks
not present were a third party not involved. These risks include the possibility that partners or joint-venturers:
• might become bankrupt or fail to fund their share of required capital contributions;
• may have economic or other business interests or goals that are inconsistent with our business interests
or goals; and
• may be in a position to take actions contrary to our policies or objectives or exercise rights to buy or
sell at an inopportune time for us.
Such investments may also have the potential risk of impasses on decisions, such as a sale or refinancing of
the property, because neither we nor the partner or joint-venturer would have full control over the partnership or
joint venture. Disputes between us and partners or joint-venturers may result in litigation or arbitration that
would increase our expenses and prevent our officers and directors from focusing their time and effort on our
business or result in costs to terminate the relationship. Actions of partners or joint-venturers may cause losses to
our investments and adversely affect our ability to maintain our qualification as a REIT. In addition, we may in
certain circumstances be liable for the actions of our third-party partners or joint-venturers if:
• we structure a joint venture or conduct business in a manner that is deemed to be a general partnership
with a third party;
•
third-party managers incur debt or other liabilities on behalf of a joint venture which the joint venture
is unable to pay, and the joint venture agreement provides for capital calls, in which case we could be
liable to make contributions as set forth in any such joint venture agreement or suffer adverse
consequences for a failure to contribute; or
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• we agree to cross default provisions or to cross-collateralize our properties with the properties in a joint
venture, in which case we could face liability if there is a default relating to those properties in the joint
venture or the obligations relating to those properties.
Compliance with the Americans with Disabilities Act and similar laws may require us to make significant
unanticipated expenditures.
All of our properties and any future properties that we acquire are and will be required to comply with the
ADA. The ADA requires that all public accommodations must meet federal requirements related to access and
use by disabled persons. For those projects receiving federal funds, the Rehabilitation Act of 1973 (the “RA”)
also has requirements regarding disabled access. Although we believe that our properties are substantially in
compliance with the present requirements, we may incur unanticipated expenses to comply with the ADA, the
RA and other applicable legislation in connection with the ongoing operation or redevelopment of our properties.
These and other federal, state and local laws may require modifications to our properties, or affect renovations of
our properties. Non-compliance with these laws could result in the imposition of fines or an award of damages to
private litigants and also could result in an order to correct any non-complying feature, which could result in
substantial capital expenditures.
Our property taxes could increase due to property tax rate changes or reassessment, which may adversely
impact our cash flows.
Even as a REIT, we will be required to pay some state and local taxes on our properties. The real property
taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed
by taxing authorities. Therefore, the amount of property taxes that we pay in the future may increase
substantially. If the property taxes that we pay increase, our cash flow could be impacted, and our ability to pay
expected distributions to our stockholders may be adversely affected.
It may be difficult to enforce civil liabilities against members of our board of directors or our executive
officers.
Most of the members of our board of directors and our executive officers reside in Canada and substantially
all of the assets of such persons are located in Canada. As a result, it may be difficult for you to effect service of
process within the United States or in any other jurisdiction outside of Canada upon these persons or to enforce
against them in any jurisdiction outside of Canada judgments predicated upon the laws of any such jurisdiction,
including any judgment predicated upon the federal and state securities laws of the United States.
Our commitments to Second City Real Estate II Corporation (“Second City”), Clarity Real Estate III GP,
Limited Partnership (“Clarity RE”), Clarity Real Estate Ventures GP, Limited Partnership (together with
Clarity RE, “Clarity”), and their respective affiliates may give rise to various conflicts of interest.
We are subject to conflicts of interest arising out of our relationship with Second City and Clarity. As a
result of the internalization of our former external advisor on February 1, 2016, we agreed to allow our
management to continue to provide services to Second City under the terms of an administrative services
agreement. In addition, the terms of the administrative services agreement and the employment agreements we
entered into with each of our executive officers permit, under certain circumstances and subject to the oversight
of our Board of Directors, our executive officers to advise or oversee new or additional funds in the future. On
July 31, 2019, we, through an indirect, wholly owned subsidiary, entered into a separate administrative services
agreement with Clarity to provide administrative services to Clarity similar to those provided to Second City.
These arrangements with Second City and Clarity may create potential conflicts of interests, including
competition for the time and services of personnel that work for us and our affiliates.
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Risks Related to Our Status as a REIT
Our failure to maintain our qualification as a REIT would result in significant adverse tax consequences to
us and would adversely affect our business and the value of our stock.
We have elected and intend to continue to operate in a manner that will allow us to qualify to be taxed as a
REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2014.
Qualification as a REIT involves the application of highly technical and complex tax rules, for which there are
only limited judicial and administrative interpretations. The fact that we hold substantially all of our assets
through our Operating Partnership further complicates the application of the REIT requirements. Even a
seemingly minor technical or inadvertent mistake could jeopardize our REIT status. Our REIT status depends
upon various factual matters and circumstances that may not be entirely within our control. For example, in order
to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, such
as rents from real property, and we must satisfy a number of requirements regarding the composition of our
assets. Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable
income, determined without regard to the deduction for dividends paid and excluding net capital gains. In
addition, new legislation, regulations, administrative interpretations or court decisions, each of which could have
retroactive effect, may make it more difficult or impossible for us to maintain our qualification as a REIT, or
could reduce the desirability of an investment in a REIT relative to other investments. We have not requested and
do not plan to request a ruling from the Internal Revenue Service (the “IRS”) that we qualify as a REIT, and the
statements in this annual report are not binding on the IRS or any court. Accordingly, we cannot be certain that
we will be successful in maintaining our qualification as a REIT.
If we fail to maintain our qualification as a REIT in any taxable year, we will face serious adverse U.S.
federal income tax consequences that would substantially reduce the funds available to distribute to you. If we
fail to maintain our qualification as a REIT:
• we would not be allowed to deduct distributions to stockholders in computing our taxable income and
would be subject to U.S. federal income tax at regular corporate rates; and
•
unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a
REIT for four taxable years following the year in which we were disqualified.
In addition, if we fail to maintain our qualification as a REIT, we will not be required to make distributions
to stockholders. As a result of all these factors, our failure to maintain our qualification as a REIT could impair
our ability to expand our business and raise capital and would adversely affect the value of our capital stock.
Even if we qualify as a REIT, we may be subject to some U.S. federal, state and local income, property and
excise taxes on our income or property and, in certain cases, a 100% penalty tax, in the event we sell property
that we hold primarily for sale to customers in the ordinary course of business. In addition, our taxable REIT
subsidiaries (“TRSs”) are subject to tax as regular corporations in the jurisdictions in which they operate.
To maintain our qualification as a REIT, we may be forced to borrow funds during unfavorable market
conditions to make distributions to our stockholders.
To maintain our qualification as a REIT, we generally must distribute to our stockholders at least 90% of
our REIT taxable income each year, determined without regard to the deduction for dividends paid and excluding
any net capital gain, and we will be subject to regular corporate income taxes to the extent that we distribute less
than 100% of our REIT taxable income each year. In addition, we will be subject to a 4% nondeductible excise
tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of
our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
To maintain our qualification as a REIT and avoid the payment of income and excise taxes, we may need to
borrow funds to meet the REIT distribution requirements. These borrowing needs could result from:
•
differences in timing between the actual receipt of cash and inclusion of income for U.S. federal
income tax purposes;
30
•
•
•
the effect of nondeductible capital expenditures;
the creation of reserves; or
required debt or amortization payments.
We may need to borrow funds at times when the then-prevailing market conditions are not favorable for
borrowing. These borrowings could increase our costs or reduce our equity and adversely affect the value of our
common stock or preferred stock.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum U.S. federal income tax rate applicable to qualified dividend income payable to certain
non-corporate U.S. stockholders, including individuals, trusts and estates, is 20%. Dividends payable by REITs,
however, generally are not eligible for the reduced qualified dividend rates. For taxable years beginning before
January 1, 2026, non-corporate taxpayers may deduct up to 20% of certain pass-through business income,
including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are not
designated as capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an
effective maximum U.S. federal income tax rate of 29.6% on such income. Although the reduced U.S. federal
income tax rate applicable to qualified dividend income does not adversely affect the taxation of REITs or
dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends and the
reduced corporate tax rate could cause investors who are individuals, trusts and estates to perceive investments in
REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends,
which could adversely affect the value of the shares of REITs, including the market price of our capital stock.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in
transactions which would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited
transactions are sales or other dispositions of property, other than foreclosure property, held in inventory
primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any
properties that would be characterized as inventory held for sale to customers in the ordinary course of our
business, such characterization is a factual determination and no guarantee can be given that the IRS would agree
with our characterization of our properties or that we will always be able to make use of the available safe
harbors.
We may face risks in connection with like-kind exchanges pursuant to section 1031 of the Code
(“Section 1031 Exchanges”).
From time to time, we dispose of properties in transactions that are intended to qualify as Section 1031
Exchanges. It is possible that the qualification of a transaction as a Section 1031 Exchange could be successfully
challenged and determined to be currently taxable or that we may be unable to identify and complete the
acquisition of a suitable replacement property to effect a Section 1031 Exchange. In such case, our taxable
income and earnings and profits would increase. This could increase the dividend income to our stockholders by
reducing any return of capital they received. In some circumstances, we may be required to pay additional
dividends or, in lieu of that, corporate income tax, possibly including interest and penalties. As a result, we may
be required to borrow funds in order to pay additional dividends or taxes and the payment of such taxes could
cause us to have less cash available to distribute to our stockholders. In addition, if a Section 1031 Exchange
were later to be determined to be taxable, we may be required to amend our tax returns for the applicable year in
question, including any information reports we sent our stockholders, and we may be required to make a special
dividend payment to our shareholders if we are unable to mitigate the taxable gains realized. Moreover, unless
the property was disposed of or received in the exchange on or before such date, section 1031 of the Code
permits exchanges of real property only. It is possible that additional legislation could be enacted that could
31
further modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult or
not possible for us to dispose of properties on a tax deferred basis.
To maintain our qualification as a REIT, we may be forced to forego otherwise attractive opportunities.
To maintain our qualification as a REIT, we must satisfy tests concerning, among other things, the sources
of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders and
the ownership of our stock. We may be required to make distributions to stockholders at times when it would be
more advantageous to reinvest cash in our business or when we do not have funds readily available for
distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis
of maximizing profits.
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets
consists of cash, cash items, government securities and qualified real estate assets. The remainder of our
investment in securities (other than government securities, securities of any qualified REIT subsidiary or TRS of
ours and securities that are qualified real estate assets) generally may not include more than 10% of the
outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities
of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government
securities, securities of any qualified REIT subsidiary or TRS of ours and securities that are qualified real estate
assets) may consist of the securities of any one issuer. No more than 20% of the value of our total assets can be
represented by securities of one or more TRSs, and no more than 25% of our assets can be represented by debt of
“publicly offered” REITs (i.e., REITs that are required to file annual and periodic reports with the SEC under the
Exchange Act) that is not secured by real property or interests in real property. If we fail to comply with these
requirements at the end of any calendar quarter, we must remedy the failure within 30 days or qualify for certain
limited statutory relief provisions to avoid losing status as a REIT. As a result, we may be required to liquidate
otherwise attractive investments. These actions could have the effect of reducing our income and amounts
available for distribution to our stockholders.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability,
reduce our operating flexibility and reduce the market price of our shares of capital stock.
At any time, the U.S. federal income tax laws governing REITs may be amended or the administrative and
judicial interpretations of those laws may be changed. We cannot predict when or if any new U.S. federal income
tax law, regulation, or administrative and judicial interpretation, or any amendment to any existing U.S. federal
income tax law, regulation or administrative or judicial interpretation, will be adopted, promulgated or become
effective, and any such law, regulation, or interpretation may be effective retroactively. We cannot predict the
long-term effect of any future changes on REITs and their stockholders generally. We and our stockholders could
be adversely affected by any change in, or any new, U.S. federal income tax law, regulation or administrative and
judicial interpretation.
Risks Related to Our Organizational Structure
Conflicts of interest exist or could arise in the future between the interests of our stockholders and the
interests of holders of units in our Operating Partnership, which may impede business decisions that could
benefit our stockholders.
Conflicts of interest exist or could arise in the future as a result of the relationships between us, on the
one hand, and our Operating Partnership or any partner thereof, on the other. Our directors and officers have
duties to our Company under applicable Maryland law in connection with their management of our Company. At
the same time, we, as the general partner of our Operating Partnership, have fiduciary duties and obligations to
our Operating Partnership and its limited partners under Maryland law and the partnership agreement of our
32
Operating Partnership in connection with the management of our Operating Partnership. Our fiduciary duties and
obligations as general partner to our Operating Partnership and its partners may come into conflict with the duties
of our directors and officers to our Company.
Additionally, the partnership agreement provides that we and our officers, directors and employees, will not
be liable or accountable to our Operating Partnership for losses sustained, liabilities incurred or benefits not
derived if we, or such officer, director or employee acted in good faith. The partnership agreement also provides
that we will not be liable to our Operating Partnership or any partner for monetary damages for losses sustained,
liabilities incurred or benefits not derived by our Operating Partnership or any limited partner, except for liability
for our intentional harm or gross negligence. Moreover, the partnership agreement provides that our Operating
Partnership is required to indemnify us and our officers, directors, employees, agents and designees from and
against any and all claims that relate to the operations of our Operating Partnership, except (1) if the act or
omission of the person was material to the matter giving rise to the action and either was committed in bad faith
or was the result of active and deliberate dishonesty, (2) for any transaction for which the indemnified party
received an improper personal benefit, in money, property or services or otherwise in violation or breach of any
provision of the partnership agreement or (3) in the case of a criminal proceeding, if the indemnified person had
reasonable cause to believe that the act or omission was unlawful. We are not aware of any reported decision of a
Maryland appellate court that has interpreted provisions similar to the provisions of the partnership agreement of
our Operating Partnership that modify and reduce our fiduciary duties or obligations as the general partner or
reduce or eliminate our liability for money damages to our Operating Partnership and its partners, and we have
not obtained an opinion of counsel as to the enforceability of the provisions set forth in the partnership agreement
that purport to modify or reduce the fiduciary duties that would be in effect were it not for the partnership
agreement.
The consideration that we pay for the properties and assets we own may exceed their aggregate fair
market value.
The amount of consideration that we pay for properties is based on management’s estimate of fair market
value, including an analysis of market sales comparables, market capitalization rates for other properties and
assets and general market conditions for such properties and assets. In certain instances, management’s estimate
of fair market value may exceed the fair market value of these properties and assets.
We are a holding company with no direct operations and, as such, we rely on funds received from our
Operating Partnership to pay liabilities, and the interests of our stockholders are structurally
subordinated to all liabilities and obligations of our Operating Partnership and its subsidiaries.
We are a holding company and conduct substantially all of our operations through our Operating
Partnership. We do not have, apart from an interest in our Operating Partnership, any independent operations. As
a result, we rely on distributions from our Operating Partnership to pay any dividends that we may declare
on shares of our capital stock. We also rely on distributions from our Operating Partnership to meet any of our
obligations, including any tax liability on taxable income allocated to us from our Operating Partnership. In
addition, because we are a holding company, your claims as stockholders are structurally subordinated to all
existing and future liabilities and obligations (whether or not for borrowed money) of our Operating Partnership
and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those
of our Operating Partnership and its subsidiaries will be available to satisfy the claims of our stockholders only
after all of our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
We may have assumed unknown liabilities in connection with our acquisition of properties and any
properties we may acquire in the future may expose us to unknown liabilities.
We may have acquired entities and assets that may be subject to existing liabilities, some of which may be
unknown or unquantifiable. These assumed liabilities might include liabilities for cleanup or remediation of
33
undisclosed environmental conditions, claims by tenants, vendors, tax liabilities and accrued but unpaid liabilities
incurred in the ordinary course of business or other potential claims or liabilities. While in some instances we
may have the right to seek reimbursement against an insurer, any recourse against third parties, including the
contributors of our assets, for these liabilities are limited. There can be no assurance that we are entitled to any
such reimbursements or that ultimately we will be able to recover in respect of such rights for any of these
historical liabilities.
In addition, there can be no assurance that our current title insurance policies will adequately protect us
against any losses resulting from such title defects or adverse developments.
We may acquire properties subject to liabilities and without any recourse, or with only limited recourse,
against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were
asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or
contest it, which could adversely affect our financial condition, results of operations, cash flows, or the market
price of our common stock or preferred stock. Unknown liabilities with respect to acquired properties might
include:
•
•
•
•
liabilities for clean-up of undisclosed or undiscovered environmental contamination;
claims by tenants, vendors or other persons against the former owners of the properties;
liabilities incurred in the ordinary course of business; and
claims for indemnification by general partners, directors, officers and others indemnified by the former
owners of the properties.
We face risks associated with our tenants being designated “Prohibited Persons” by the Office of Foreign
Assets Control.
Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the U.S.
Department of the Treasury, or OFAC, maintains a list of persons designated as terrorists or who are otherwise
blocked or banned, or Prohibited Persons. OFAC regulations and other laws prohibit conducting business or
engaging in transactions with Prohibited Persons. Certain of our loan and other agreements may require us to
comply with these OFAC requirements. If a tenant or other party with whom we contract is placed on the OFAC
list, we may be required by the OFAC requirements to terminate the lease or other agreement. Any such
termination could result in a loss of revenue or a damage claim by the other party that the termination was
wrongful.
Tax protection agreements may limit our ability to sell or otherwise dispose of certain properties and may
require our Operating Partnership to maintain certain debt levels that otherwise would not be required to
operate our business.
In connection with contributions of properties to our Operating Partnership, our Operating Partnership has
entered and may in the future enter into tax protection agreements under which it agrees to minimize the tax
consequences to the contributing partners resulting from the sale or other disposition of the contributed
properties. Tax protection agreements may make it economically prohibitive to sell any properties that are
subject to such agreements even though it may otherwise be in our stockholders’ best interests to do so. In
addition, we may be required to maintain a minimum level of indebtedness throughout the term of any tax
protection agreement regardless of whether such debt levels are otherwise required to operate our business.
Nevertheless, we have entered and may in the future enter into tax protection agreements to assist contributors of
properties to our Operating Partnership in deferring the recognition of taxable gain as a result of and after any
such contribution.
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Our charter, our amended and restated bylaws and Maryland law contain provisions that may delay,
defer or prevent a change of control transaction and may prevent our stockholders from receiving a
premium for their shares.
Our charter contains ownership limits that may delay, defer or prevent a change of control transaction.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and
desirable to qualify as a REIT. Unless exempted by our board of directors, our charter provides that no person
may own more than 9.8% of the value of our outstanding shares of capital stock or more than 9.8% in value or
number (whichever is more restrictive) of the outstanding shares of our common stock. Our board of directors
may not grant such an exemption to any proposed transferee whose ownership in excess of 9.8% of the foregoing
ownership limits would result in the termination of our status as a REIT. These restrictions on transferability and
ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to
qualify as a REIT. The ownership limit may delay or impede a transaction or a change of control that might
involve a premium price for our common stock or otherwise be in the best interests of our stockholders.
We could authorize and issue stock without stockholder approval that may delay, defer or prevent a
change of control transaction.
Our charter authorizes us to issue additional authorized but unissued shares of our common stock or
preferred stock. In addition, our board of directors may classify or reclassify any unissued shares of our common
stock or preferred stock and may set the preferences, rights and other terms of the classified or
reclassified shares. Our board of directors may also, without stockholder approval, amend our charter to increase
the authorized number of shares of our common stock or our preferred stock that we may issue. Our board of
directors could establish a class or series of common stock or preferred stock that could, depending on the terms
of such class or series, delay, defer or prevent a transaction or a change of control that might involve a premium
price for our common stock or otherwise be in the best interests of our stockholders.
Certain provisions of Maryland law could delay, defer or prevent a change of control transaction.
Certain provisions of the Maryland General Corporation Law (“MGCL”) may have the effect of inhibiting a
third party from making a proposal to acquire us or of impeding a change of control. In some cases, such an
acquisition or change of control could provide you with the opportunity to realize a premium over the then-
prevailing market price of your shares. These MGCL provisions include:
•
•
“business combination” provisions that, subject to limitations, prohibit certain business combinations
between us and an “interested stockholder” for certain periods. An “interested stockholder” is generally
any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or
associate of ours who, at any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of our then-outstanding voting stock. A person is
not an interested stockholder under the statute if our board of directors approved in advance the
transaction by which he otherwise would have become an interested stockholder. Business
combinations with an interested stockholder are prohibited for five years after the most recent date on
which the stockholder becomes an interested stockholder. After that period, the MGCL imposes
two super-majority voting requirements on such combinations; and
“control share” provisions that provide that holders of “control shares” of our Company acquired in a
“control share acquisition” have no voting rights with respect to the control shares unless holders of
two-thirds of our voting stock (excluding interested shares) consent. “Control shares” are shares that,
when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise
one of three increasing ranges of voting power in electing directors. A “control share acquisition” is the
direct or indirect acquisition of ownership or control of “control shares” from a party other than the
issuer.
35
In the case of the business combination provisions of the MGCL, we opted out by resolution of our board of
directors. In the case of the control share provisions of the MGCL, we opted out pursuant to a provision in our
amended and restated bylaws. However, our board of directors may by resolution elect to opt in to the business
combination provisions of the MGCL. Further, we may opt in to the control share provisions of the MGCL in the
future by amending our bylaws, which our board of directors can do without stockholder approval.
Maryland law, and our charter and amended and restated bylaws, also contain other provisions that may
delay, defer or prevent a transaction or a change of control that might involve a premium price for our common
stock or otherwise be in the best interest of our stockholders.
The ability of our board of directors to revoke our REIT status without stockholder approval may cause
adverse consequences to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election,
without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to
qualify as a REIT. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable
income and would no longer be required to distribute most of our taxable income to our stockholders, which may
have adverse consequences on our total return to our stockholders.
Our board of directors may amend our investing and financing guidelines without stockholder approval,
and, accordingly, you would have limited control over changes in our policies that could increase the risk
that we default under our debt obligations or that could harm our financial condition, results of
operations, cash flows, or the market price of our common stock or preferred stock.
Although we are not required to maintain any particular leverage ratio, we intend, when appropriate, to
employ prudent amounts of leverage and to use debt as a means of providing additional funds for the acquisition
of our target assets and the diversification of our portfolio. Our organizational documents do not limit the amount
or percentage of debt that we may incur, nor do they limit the types of properties that we may acquire or develop.
The amount of leverage we will deploy for particular investments in our target assets will depend upon our
management team’s assessment of a variety of factors, which may include the anticipated liquidity and price
volatility of the target assets in our investment portfolio, the potential for losses, the availability and cost of
financing the assets, our opinion of the creditworthiness of our financing counterparties, the health of the U.S.
economy and commercial mortgage markets, our outlook for the level, slope and volatility of interest rates, the
credit quality of our target assets and the collateral underlying our target assets. Our board of directors may alter
or eliminate our current guidelines on investing and financing at any time without stockholder approval. Changes
in our strategy or in our investing and financing guidelines could expose us to greater credit risk and interest rate
risk and could also result in a more leveraged balance sheet. These factors could result in an increase in our debt
service and could adversely affect our cash flow and our ability to make expected distributions to you. Higher
leverage also increases the risk that we would default on our debt.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Maryland law provides that a director or officer generally has no liability in that capacity if he or she
performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and
with the care that an ordinarily prudent person in a like position would use under similar circumstances. As
permitted by the MGCL, our charter limits the liability of our directors and officers to us and our stockholders for
money damages, except for liability resulting from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
active and deliberate dishonesty established by a final judgment and which is material to the cause of
action.
36
In addition, our charter authorizes us to obligate our Company, and our amended and restated bylaws
require us, to indemnify and pay or reimburse our present and former directors and officers for actions taken by
them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders
may have more limited rights against our directors and officers than might otherwise exist under common law.
Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the
performance of our Company, your ability to recover damages from such director or officer will be limited.
General Risk Factors
We may incur significant costs complying with various federal, state and local laws, regulations and
covenants that are applicable to our properties, which could have an adverse impact on our financial
condition, results of operations, cash flows, or the market price of our common stock and preferred stock.
The properties in our portfolio are subject to various covenants and federal, state and local laws and
regulatory requirements, including permitting and licensing requirements. Local regulations, including municipal
or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict
our use of our properties and may require us to obtain approval or waivers from local officials or restrict our use
of our properties and may require us to obtain approval from local officials of community standards
organizations at any time with respect to our properties, including prior to acquiring a property or when
undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to
fire and safety, seismic or hazardous material abatement requirements. There can be no assurance that existing or
future laws and regulatory policies, including federal laws or executive actions affecting the markets in which we
operate, will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that
additional regulations will not be adopted that could increase such delays or result in additional costs. Our growth
strategy may be affected by our ability to obtain permits, licenses and zoning relief. Our failure to obtain such
permits, licenses and zoning relief or to comply with applicable laws could have an adverse effect on our
financial condition, results of operations, cash flows, or the market price of our common stock or preferred stock.
Climate change may adversely affect our business.
Climate change may result in extreme weather and changes in precipitation and temperature, all of which
may result in physical damage or a decrease in demand for our properties located in the areas affected by these
conditions. For example, a number of our properties are located in Arizona which is facing water supply issues
resulting from the ongoing drought in the Western United States. In August 2022, the U.S. Bureau of
Reclamation declared a Tier 2 shortage at Lake Mead, which increased water restrictions for states in the
southwest. Beginning in January 2023, Arizona will forfeit approximately 21% of the state’s yearly allotment of
water from Lake Mead. The success of our Arizona properties may continue to be negatively impacted by
increased stress on water supplies caused by climate change. Should the impact of climate change be material in
nature or occur for lengthy periods of time, our financial condition or results of operations would be adversely
affected. In addition, changes in federal and state legislation and regulation on climate change could result in
increased capital expenditures to improve the energy efficiency of our existing properties in order to comply with
such regulations. The federal government has enacted, and some of the states and localities in which we operate
may enact, certain climate change laws and regulations or have begun regulating carbon footprints and
greenhouse gas emissions. Although these laws and regulations have not had any known material adverse effects
on our business to date, they could result in substantial costs, including compliance costs, increased energy costs,
retrofit costs and construction costs, including monitoring and reporting costs, and capital expenditures for
environmental control facilities and other new equipment. Furthermore, our reputation could be negatively
affected if we violate climate change laws or regulations. We cannot predict how future laws and regulations, or
future interpretations of current laws and regulations, related to climate change will affect our properties,
business, results of operations and financial condition. Lastly, the physical impacts of climate change on our
operations are highly uncertain, and would be particular to the geographic circumstances in areas in which we
operate. These may include changes in global weather patterns, which could include changes in rainfall and
37
storm patterns and intensities, water shortages, changing sea levels and changing temperature averages or
extremes. These impacts may adversely affect our properties, our business, financial condition and results of
operations.
Litigation may result in unfavorable outcomes.
Like many real estate operators, we may be involved in lawsuits involving premises liability claims and
alleged violations of landlord-tenant laws, which may give rise to class action litigation or governmental
investigations. Any material litigation not covered by insurance, such as a class action, could result in us
incurring substantial costs and harm our financial condition, results of operations, cash flows, or the market price
of our common stock or preferred stock.
Our business could be adversely impacted if there are deficiencies in our disclosure controls and
procedures or internal control over financial reporting.
The design and effectiveness of our disclosure controls and procedures and internal control over financial
reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to
review the effectiveness of our disclosure controls and procedures and internal control over financial reporting,
there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all
control objectives all of the time. Deficiencies, including any material weakness, in our internal control over
financial reporting that may occur in the future could result in misstatements of our results of operations,
restatements of our financial statements, or otherwise adversely impact our financial condition, results of operations,
cash flows, or the market price of our common stock or preferred stock, and our ability to satisfy our debt service
obligations and to pay dividends and distributions to the holders of our common stock or preferred stock.
Our business and operations would suffer in the event of system failures.
Despite system redundancy and the implementation of security measures for our IT networks and related
systems, our systems are vulnerable to damages from any number of sources, including computer viruses, energy
blackouts, natural disasters, terrorism, war, and telecommunication failures. We rely on our IT networks and
related systems, including the Internet, to process, transmit and store electronic information and to manage or
support a variety of our business processes, including financial transactions and keeping of records, which may
include personal identifying information of tenants and lease data. We rely on commercially available systems,
software, tools and monitoring to provide security for processing, transmitting and storing confidential tenant
information, such as individually identifiable information relating to financial accounts. Any failure to maintain
proper function, security and availability of our IT networks and related systems could interrupt our operations,
damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse
effect on our operations. As such, any of the foregoing events could have a material adverse effect on our
financial condition, results of operations, cash flows, or the market price of our common stock or preferred stock.
We face risks associated with security breaches through cyber-attacks, cyber intrusions or otherwise, as
well as other significant disruptions of our IT networks and related systems.
We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the
Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with
access to systems inside our organization, and other significant disruptions of our IT networks and related
systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion,
including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number,
intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT
networks and related systems are essential to the operation of our business and our ability to perform day-to-day
operations (including managing our building systems or those of our third-party providers that we rely on), and,
in some cases, may be critical to the operations of certain of our tenants. There can be no assurance that our
efforts to maintain the security and integrity of these types of IT networks and related systems will be effective or
38
that attempted security breaches or disruptions would not be successful or damaging. A security breach or other
significant disruption involving our IT networks and related systems could, among other things:
•
•
•
•
•
•
result in unauthorized access to, destruction, loss, theft, misappropriation or release of proprietary,
confidential, sensitive or otherwise valuable information of ours or others, including personally
identifiable and account information that could be used to compete against us or for disruptive,
destructive or otherwise harmful purposes and outcomes;
result in unauthorized access to or changes to our financial accounting and reporting systems and
related data;
result in our inability to maintain building systems relied on by our tenants;
require significant management attention and resources to remedy any damage that results;
subject us to regulatory penalties or claims for breach of contract, damages, credits, penalties or
terminations of leases or other agreements; or
damage our reputation among our tenants and investors.
These events could have an adverse impact on our financial condition, results of operations, cash flows, the
quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends
and distributions to our security holders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
39
ITEM 2. PROPERTIES
As of December 31, 2022, we owned 25 office complexes comprised of 60 office buildings with a total of
approximately 6.0 million square feet of NRA in the metropolitan areas of Dallas, Denver, Orlando, Phoenix,
Portland, Raleigh, San Diego, Seattle and Tampa. The following table presents an overview of our portfolio as of
December 31, 2022.
Metropolitan
Area
Phoenix, AZ
(25.3% of NRA)
Tampa, FL
(17.5%)
Denver, CO
(13.4%)
Orlando, FL
(12.0%)
Dallas, TX
(9.8%)
Raleigh, NC
(8.3%)
Portland, OR
(5.5%)
San Diego, CA
(4.7%)
Seattle, WA
(3.5%)
Property
Economic
Interest
NRA
(000s
Square
Feet)
Annualized
Base Rent
per Square
Foot
Annualized
Gross Rent
per Square
Foot(1)
Annualized
Base Rent(2)
($000s)
In Place
Occupancy
Block 23
Pima Center
SanTan
5090 N. 40th St
Camelback Square
The Quad
Papago Tech
Park Tower
City Center
Intellicenter
Carillon Point
Denver Tech
Circle Point
Superior Pointe
Florida Research Park
Central Fairwinds
Greenwood Blvd
190 Office Center
The Terraces
2525 McKinnon
Bloc 83
AmberGlen
Cascade Station
Mission City
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
94.8%
95.0%
100.0%
100.0%
100.0%
100.0%
100.0%
96.5%
97.0%
100.0%
100.0%
100.0%
100.0%
100.0%
76.0%
100.0%
100.0%
307
272
267
176
172
163
163
478
244
204
124
381
272
152
393
168
155
303
173
111
495
203
128
281
94.0%
43.7%
46.3%
96.1%
83.5%
100.0%
86.1%
88.7%
85.5%
100.0%
100.0%
93.2%
84.5%
98.3%
87.9%
92.5%
100.0%
77.5%
99.0%
97.8%
83.5%
98.4%
100.0%
73.7%
$29.66
$27.99
$31.74
$31.98
$34.32
$32.11
$24.01
$27.56
$28.21
$25.64
$30.11
$24.15
$19.73
$18.92
$25.61
$27.77
$24.25
$26.57
$38.62
$30.07
$37.40
$23.79
$29.13
$39.03
$31.92
$27.99
$31.74
$31.98
$34.32
$32.42
$24.01
$27.56
$28.21
$25.64
$30.11
$28.60
$34.59
$31.92
$27.37
$27.77
$24.25
$26.57
$58.62
$51.07
$37.63
$27.06
$31.05
$39.03
Canyon Park
100.0%
207
100.0%
$23.17
$29.17
8,563
$
3,324
$
3,916
$
5,396
$
4,934
$
5,234
$
$
3,364
$ 11,686
5,883
$
5,219
$
3,739
$
8,480
$
4,531
$
2,833
$
8,758
$
4,319
$
3,760
$
6,241
$
6,600
$
$
3,276
$ 15,458
$
$
$
$
4,743
3,731
8,097
4,791
Total / Weighted Average—December 31, 2022(3)
5,992
86.2%
$28.46
$31.59
$146,876
(1) Annualized gross rent per square foot includes adjustment for estimated expense reimbursements of triple net leases for the year ended
December 31, 2022.
(2) Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month ended
December 31, 2022 by (ii) 12.
(3) Averages weighted based on the property’s NRA, adjusted for occupancy.
40
Lease Maturity Profile
The chart below sets out the percentage of NRA of our properties subject to lease expiration during the
periods shown without regard to renewal options.
Lease Maturity Schedule(1)
30%
25%
20%
15%
10%
5%
0%
2.8%(2)
11.0%
13.2%
8.2%
Vacant &
Contracted
2023
2024
7.4%
2025
11.9%
8.3%
8.8%
9.2%
2026
2027
2028
2029
4.9%
2030
2.7%
2031
11.6%
2032 &
Thereafter
(1) Percentage represents the NRA of the leases divided by the total NRA of the portfolio, as of December 31, 2022.
(2) 2.8% represents the leases under contract but not yet in occupancy as of December 31, 2022.
The following table sets forth the lease expirations for leases in place in our properties as of December 31,
2022, plus available space, for each of the calendar years ending December 31, 2023 to December 31, 2032 and
thereafter. The information set forth in the table assumes that tenants exercise no renewal options and do not
exercise early termination rights. Leases in place have a weighted average term to maturity of 4.9 years.
Year of Lease Expiration
Vacant
. . . . . . . . . . . . . . . . . .
Contracted . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . .
2027 . . . . . . . . . . . . . . . . . . . .
2028 . . . . . . . . . . . . . . . . . . . .
2029 . . . . . . . . . . . . . . . . . . . .
2030 . . . . . . . . . . . . . . . . . . . .
2031 . . . . . . . . . . . . . . . . . . . .
2032 & Thereafter . . . . . . . . .
Number of
Leases
Expiring
NRA of
Expiring
Leases
(000s)
Percentage of
NRA
Annualized
Base Rent(1)
(000s)
Percentage of
Total Properties
Rent
—
—
65
65
50
34
41
38
20
14
4
21
657
167
789
491
445
500
716
527
549
295
164
692
11.0%
2.8%
13.2%
8.2%
7.4%
8.3%
11.9%
8.8%
9.2%
4.9%
2.7%
11.6%
—
—
21,856
13,670
12,464
13,257
19,628
13,780
16,121
10,158
4,015
21,927
—
—
14.9%
9.3%
8.5%
9.0%
13.4%
9.4%
11.0%
6.9%
2.7%
14.9%
Annualized
Base Rent
per Leased
Square
Foot
Expiring(2)
Annualized
Base Rent
(including Rent
Abatement at
Dec 31, 2022)
Annualized
Base Rent
per Leased
Square Foot
Expiring
(Including
Rent
Abatement at
Dec 31, 2022)
—
—
27.70
27.84
28.01
26.51
27.41
26.15
29.36
34.43
24.48
31.69
—
—
21,294
13,670
12,464
12,839
19,628
10,607
15,003
5,030
4,015
17,827
—
—
26.99
27.84
28.01
25.68
27.41
20.13
27.33
17.05
24.48
25.76
Total / Weighted Average . .
352
5,992
100.0%
$146,876
100.0%
$28.46
$132,377
$25.61
(1) Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month of
December 31, 2022, by (ii) 12.
(2) Annualized rent per leased square foot expiring reflects rental payments for the month of December 31, 2022, multiplied by 12 and
divided by the NRA of expiring lease.
41
ITEM 3. LEGAL PROCEEDINGS
We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of their
business. We are not presently subject to any material litigation nor, to our knowledge, is any other litigation
threatened against us, other than routine actions for negligence or other claims and administrative proceedings
arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all
of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or
business or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
42
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been listed on the NYSE under the symbol “CIO” since April 15, 2014. Prior to that
time, there was no public market for our common stock.
On February 16, 2023, the closing sale price of our common stock on the NYSE was $9.32. American Stock
Transfer & Trust Company, LLC is the transfer agent and registrar for our common stock. On February 16, 2023,
we had 55 holders of record of our common stock. This figure does not represent the actual number of beneficial
owners of our common stock because shares of our common stock are frequently held in “street name” by
securities dealers and others for the benefit of beneficial owners who may vote the shares.
We generally intend to continue to declare quarterly dividends on our common stock, subject to the Board’s
discretion and applicable law. The actual amount and timing of dividends, however, will be at the discretion of
our board of directors and will depend upon our financial condition in addition to the requirements of the Code
and Maryland law, and no assurance can be given as to the amounts or timing of future distributions, if any. From
time to time, our board of directors may approve the repurchase of our shares of common stock or Series A
Preferred Stock, par value $0.01 per share, through open market purchases or otherwise.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by Item 5 is incorporated by reference to our definitive Proxy Statement for our
2023 annual stockholders’ meeting.
43
Stock Performance Graph
The following graph sets forth the five-year cumulative stockholder return (assuming reinvestment of
dividends) to our stockholders, as well as the corresponding returns on an overall stock market index (Russell
2000 Index) and two peer group indexes (MSCI US REIT Index and Dow Jones U.S. Real Estate Office
Index). The stock performance graph assumes that $100 was invested on December 31, 2017. Historical total
stockholder return is not necessarily indicative of future results. The MSCI US REIT Index consists of equity
REITs that are included in the MSCI US Investible Market 2500 Index, except for specialty equity REITs that do
not generate a majority of their revenue and income from real estate rental and leasing operations. The Dow
Jones U.S. Real Estate Index consists of publicly traded U.S. office REITs. We have included the MSCI US
REIT Index and the Dow Jones U.S. Real Estate Office Index because we believe that each is representative of
the industry in which we compete and, therefore, each is relevant to an assessment of our performance.
Issuer Repurchases of Equity Securities
On March 9, 2020, the Company’s Board of Directors approved a share repurchase plan authorizing the
Company to repurchase up to $100 million of its outstanding shares of common stock. In July 2020, the
Company completed the full March 2020 share repurchase program. On August 5, 2020, the Company’s Board
of Directors approved an additional share repurchase plan authorizing the Company to repurchase up to an
additional aggregate amount of $50 million of its outstanding shares of common stock. In September 2022, the
Company completed the full August 2020 share repurchase plan. Under the share repurchase programs, the
shares may be repurchased from time to time using a variety of methods, which may include open market
transactions, privately negotiated transactions or otherwise, all in accordance with the rules of the SEC and other
applicable legal requirements.
Repurchased shares of common stock will be classified as authorized and unissued shares. The Company
recognizes the cost of shares of common stock it repurchases, including direct costs incurred, as a reduction in
stockholders’ equity. Such reductions of stockholders equity due to the repurchases of shares of common stock
repurchased will be applied first, to reduce common stock in the amount of the par value associated with the
shares of common stock repurchased and second, to reduce additional paid-in capital by the amount that the
purchase price for the shares of common stock repurchased exceed the par value.
44
During the year ended December 31, 2022, the Company completed the repurchase of 4,006,897 shares of
its common stock for approximately $50.0 million. There were no shares repurchased during the year ended
December 31, 2021. During the year ended December 31, 2020, the Company completed the repurchase of
11,363,851 shares of its common stock for approximately $100.0 million.
ITEM 6. [RESERVED]
45
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is based on, and should be read in conjunction with, the consolidated
financial statements and the related notes thereto of the City Office REIT, Inc. for the years ended December 31,
2022 and December 31, 2021.
As used in this section, unless the context otherwise requires, references to “we,” “our,” “us,” and “our
company” refer to City Office REIT, Inc., a Maryland corporation, together with our consolidated subsidiaries,
including City Office REIT Operating Partnership L.P., a Maryland limited partnership of which we are the sole
general partner and which we refer to in this section as our “Operating Partnership”, except where it is clear
from the context that the term only means City Office REIT, Inc.
This management’s discussion and analysis of financial condition and results of operations (this “MD&A”)
contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary
Statement Regarding Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions
associated with those statements. Our actual results may differ materially from those expressed or implied in the
forward-looking statements as a result of various factors, including, but not limited to, those in “Risk Factors”
and included in other portions of this Annual Report on Form 10-K.
You should read the following MD&A in conjunction with the historical consolidated financial statements,
and notes thereto, included elsewhere in this Annual Report on Form 10-K. We have omitted from this MD&A a
detailed discussion of the year-over-year changes from the Company’s fiscal year 2020 as compared to fiscal
year 2021, which can be found in the MD&A section in the Company’s annual report on Form 10-K for the year
ended December 31, 2021, filed with the U.S. Securities and Exchange Commission on February 25, 2022.
Overview
Company
We were formed as a Maryland corporation on November 26, 2013. On April 21, 2014, we completed our
initial public offering (“IPO”) of shares of common stock. We contributed the net proceeds of the IPO to our
Operating Partnership in exchange for common units in our Operating Partnership. Both we and our Operating
Partnership commenced operations upon completion of the IPO and certain related formation transactions.
The Company’s interest in the Operating Partnership entitles the Company to share in distributions from,
and allocations of profits and losses of, the Operating Partnership in proportion to the Company’s percentage
ownership of common units. As the sole general partner of the Operating Partnership, the Company has the
exclusive power under the Operating Partnership’s partnership agreement to manage and conduct the Operating
Partnership’s business, subject to limited approval and voting rights of the limited partners.
The Company has elected to be taxed and will continue to operate in a manner that will allow it to qualify as
a REIT under the Code. Subject to qualification as a REIT, the Company will be permitted to deduct dividend
distributions paid to its stockholders, eliminating the U.S. federal taxation of income represented by such
distributions at the Company level. REITs are subject to a number of organizational and operational
requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S.
federal and state income tax on its taxable income at regular corporate tax rates and any applicable alternative
minimum tax.
During the first quarter of 2022, the sole tenant at the Lake Vista Pointe property exercised its lease option
to purchase the building and the Company signed a purchase and sale agreement with the tenant. At the time the
tenant exercised the option, the Company reassessed the lease classification of the lease, in accordance with ASC
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842 – Leases, and determined that the lease should be reclassified from an operating lease to a sales-type lease.
This reclassification resulted in a gain on sale of $21.7 million net of disposal related costs. On June 15, 2022,
the Company sold the Lake Vista Pointe property in Dallas, Texas for a gross sales price of $43.8 million.
During the year ended December 31, 2022, the Company completed the repurchase of 4,006,897 shares of
its common stock for approximately $50.0 million.
Indebtedness
At December 31, 2022, the Company had $200.5 million outstanding under the Company’s Unsecured
Credit Facility and a $4.2 million letter of credit to satisfy escrow requirements for a mortgage lender.
For additional information regarding these mortgage loans, the Unsecured Credit Facility, including the
Company’s five-year $50 million Term Loan thereunder and the related five-year Interest Rate Swap for a
notional amount of $50 million to which the Company is a party, please refer to “Liquidity and Capital
Resources” below.
Revenue Base
As of December 31, 2022, we owned 25 properties comprised of 60 office buildings with a total of
approximately 6.0 million square feet of NRA. As of December 31, 2022, our properties were approximately
86.2% leased.
Office Leases
Historically, most leases for our properties have been on a full-service gross or net lease basis, and we
expect to continue to use such leases in the future. A full-service gross lease generally has a base year expense
“stop,” whereby we pay a stated amount of expenses as part of the rent payment while future increases (above the
base year stop) in property operating expenses are billed to the tenant based on such tenant’s proportionate
square footage in the property. The property operating expenses are reflected in operating expenses; however,
only the increased property operating expenses above the base year stop recovered from tenants are reflected as
tenant recoveries in our statements of operations. In a triple net lease, the tenant is typically responsible for all
property taxes and operating expenses. As such, the base rent payment does not include any operating expenses,
but rather all such expenses are billed to or paid by the tenant. The full amount of the expenses for this lease type
is reflected in operating expenses, and the reimbursement is reflected in tenant recoveries. We are also a lessor
for a fee simple ground lease at the AmberGlen property.
Factors That May Influence Our Operating Results and Financial Condition
Economic Environment and Inflation
During 2022, economic conditions in the U.S. and globally have deteriorated, primarily due to rising
inflation. As inflation continued to reach new highs, it set off a chain reaction of events, beginning with the
Federal Reserve taking and signaling severe tightening measures, interest rates rising across the yield curve,
volatility and losses in the public equity and debt markets, and now increasing concerns that the U.S. economy
may experience a recession. This evolving operating environment impacts our operating activities as:
•
•
business leaders may generally become more reticent to make large capital allocation decisions, such
as entry into a new lease, given the uncertain economic environment;
our cost of capital has increased due to higher interest rates and credit spreads, and private market debt
financing is significantly more challenging to arrange; and
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•
retaining and attracting new tenants has become increasingly challenging due to potential business
layoffs, downsizing and industry slowdowns.
Despite the challenging economic environment, there is increasing evidence that many businesses have or
will tighten up in-person work policies as economic conditions worsen. Many of these companies increased their
workforce during the pandemic without increasing their available space. We expect these factors to help offset, at
least partially, the recessionary headwinds to demand for office space.
COVID-19
Our business has been and will likely continue to be impacted by the COVID-19 pandemic. In addition, our
business has been and will likely continue to be impacted by tenant uncertainty regarding office space needs
given the evolving remote and hybrid working trends as a result of the COVID-19 pandemic. While the usage of
our assets in 2022 was still lower than pre-pandemic levels, usage has been increasing year over year. Usage of
our assets in the near future depends on corporate and individual decisions regarding return to usage of office
space, which is impossible to estimate.
Leasing activity has been and is expected to be impacted by the COVID-19 pandemic until and unless
tenants increase the utilization of their spaces. We have experienced and we expect that we will continue to
experience slower new leasing, and there remains uncertainty over existing tenants’ long-term space
requirements. Overall, this could reduce our anticipated rental revenues. In addition, certain tenants in our
markets have and may explore opportunities to sublease all or a portion of their leased square footage to other
tenants or third parties. While subleasing generally does not impact the ability to collect payment from the
original lessee and will not result in any decrease in the rental revenues expected to be received from the primary
tenant, this trend could reduce our ability to lease incremental square footage to new tenants, could increase the
square footage of our properties that “goes dark,” could reduce anticipated rental revenue should tenants
determine their long-term needs for square footage are lower than originally anticipated and could impact the
pricing and competitiveness for leasing office space in our markets.
We will continue to actively evaluate business operations and strategies to optimally position ourselves
given current economic and industry conditions.
Additional information about our response to the COVID-19 pandemic and the impact on our business is
included elsewhere in this MD&A.
Business and Strategy
We focus on owning and acquiring office properties in our footprint of growth markets predominantly in the
Sun Belt. Our markets generally possess growing populations with above-average employment growth forecasts,
a large number of government offices, large international, national and regional employers across diversified
industries, generally low-cost centers for business operations and a high quality of life. We believe these
characteristics have made our markets desirable, as evidenced by domestic net migration generally towards our
geographic footprint. We utilize our management’s market-specific knowledge and relationships as well as the
expertise of local real estate property and leasing managers to identify acquisition opportunities that we believe
will offer cash flow stability and long-term value appreciation.
Rental Revenue and Tenant Recoveries
The amount of net rental revenue generated by our properties will depend principally on our ability to
maintain the occupancy rates of currently leased space and to lease currently available space and space that
becomes available from lease terminations. The amount of rental revenue generated also depends on our ability
to maintain or increase rental rates at our properties. Negative trends in one or more of these factors could
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adversely affect our rental revenue in future periods. Future economic downturns or regional downturns affecting
our markets or submarkets or downturns in our tenants’ industries, including as a result of rising interest rates
and the increasing likelihood of a U.S. recession, that impair our ability to renew or re-let space and the ability of
our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our
ability to maintain or increase rental rates at our properties. In addition, growth in rental revenue will also
partially depend on our ability to acquire additional properties that meet our investment criteria.
Operating Expenses
Our operating expenses generally consist of utilities, property and ad valorem taxes, insurance and site
maintenance costs. Increases in these expenses over tenants’ base years (until the base year is reset at expiration)
are generally passed along to tenants in our full-service gross leased properties and are generally paid in full by
tenants in our net leased properties. The COVID-19 pandemic did not cause a material change in our operating
expenses for the fiscal year ended December 31, 2022.
Conditions in Our Markets
Positive or negative changes in economic or other conditions in the markets we operate in, including state
budgetary shortfalls, employment rates, natural hazards and other factors, may impact our overall performance.
While we generally expect the trend of positive population and economic growth in our Sun Belt cities to
continue, there is no way for us to predict whether these trends will continue, especially in light of inflation and
rising interest rates as well as the potential changes in tax policy, fiscal policy and monetary policy. In addition, it
is uncertain and impossible to estimate the potential impact that the COVID-19 pandemic will have on the short-
and long-term demand for office space in our markets.
Critical Accounting Policies and Estimates
Basis of Preparation
The accompanying consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) and include the financial position and results of
operations of the Company, the Operating Partnership and its subsidiaries. All significant intercompany
transactions and balances have been eliminated on consolidation.
Use of Estimates
The Company has made a number of significant estimates and assumptions relating to the reporting of assets
and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and
expenses to prepare these consolidated financial statements in conformity with GAAP. Significant estimates
made include the recoverability of accounts receivable, allocation of property purchase price to tangible and
intangible assets acquired and liabilities assumed, the determination and measurement of impairment of long-
lived assets and the useful lives of long-lived assets. These estimates and assumptions are based on our best
estimates and judgment. We evaluate our estimates and assumptions on an ongoing basis using historical
experience and other factors, including the current economic environment. The current economic environment
has increased the degree of uncertainty inherent in these estimates and assumptions. Management adjusts such
estimates when facts and circumstances dictate. Actual results could differ materially from those estimates.
Business Combinations
The fair value of the real estate acquired, which includes the impact of fair value adjustments for assumed
mortgage debt related to property acquisitions, is allocated to the acquired tangible assets, consisting of land,
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building and improvements and identified intangible assets and liabilities, consisting of the value of above-
market and below-market leases, other value of in-place leases and value of tenant relationships, based in each
case on their fair values. For acquisitions that do not meet the business combination accounting criteria, these are
accounted for as asset acquisitions. The Company allocates the cost of the acquisition, which includes any
associated acquisition costs to individual assets and liabilities assumed on a relative fair value basis. Also,
non-controlling interests acquired are recorded at estimated fair market value.
The fair value of the tangible assets of an acquired property (which includes land, building and
improvements and fixtures and equipment) is determined by valuing the property as if it were vacant. The
“as-if-vacant” value is then allocated to land and building and improvements based on our determination of
relative fair values of these assets. Factors considered by us in performing these analyses include an estimate of
carrying costs during the expected lease-up periods considering current market conditions and costs to execute
similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses
and estimates of lost rental revenue during the expected lease-up periods based on current market demand. We
also estimate costs to execute similar leases including leasing commissions.
The fair value of above-market and below-market lease values are recorded based on the difference between
the current in place lease rent and our estimate of current market rents. Below-market lease intangibles are
recorded as part lease intangibles liability and amortized into rental revenue over the non-cancelable periods and
bargain renewal periods of the respective leases. Above-market leases are recorded as part of intangible assets
and amortized as a direct charge against rental revenue over the non-cancelable portion of the respective leases.
The fair value of acquired in place leases are recorded based on the costs we estimate we would have
incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates
include the fair value of leasing commissions and legal costs that would be incurred to lease the property to this
occupancy level. Additionally, we evaluate the time period over such occupancy level would be achieved and
include an estimate of the net operating costs incurred during the lease-up period.
Revenue Recognition
We recognize lease revenue on a straight-line basis over the term of the lease. Certain leases allow for the
tenant to terminate the lease, but the tenant must make a termination payment as stipulated in the lease. If the
termination payment is in such an amount that continuation of the lease appears, at the time of lease inception, to
be reasonably assured, then we recognize revenue over the term of the lease. We have determined that for these
leases, the termination payment is in such an amount that continuation of the lease appears, at the time of
inception, to be reasonably assured. We recognize lease termination fees as other revenue in the period received
and write off unamortized lease-related intangible and other lease-related account balances, provided there are no
further obligations by us under the lease. Otherwise, such fees and balances are recognized on a straight-line
basis over the remaining obligation period with the termination payments being recorded as a component of rent
receivable-deferred or deferred revenue on the consolidated balance sheets.
If we fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition
will commence when control of the space is turned over to the tenant. Tenant improvements are deferred and
amortized on a straight-line basis over the terms of the respective lease. If we determine that the tenant
allowances are lease incentives, we commence revenue recognition when possession or control of the space is
turned over to the tenant for tenant work to begin. The lease incentive is recorded as a deferred expense and
amortized as a reduction of revenue on a straight-line basis over the respective lease term.
Recoveries from tenants for real estate taxes, insurance and other operating expenses are recognized as
revenues in the period that the applicable costs are incurred. We recognize differences between estimated
recoveries and the final billed amounts in the subsequent year. Final billings to tenants for real estate taxes,
insurance and other operating expenses did not vary significantly as compared to the estimated receivable
balances.
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Leases
We determine if an arrangement is a lease at inception. Operating and financing right-of-use assets and lease
liabilities are included within other assets and other liabilities on the consolidated balance sheets. Right-of-use
assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation
to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at
commencement date based on the present value of lease payments over the lease term. As most of our leases do
not provide an implicit rate, we use our incremental borrowing rate based on the information available at the
commencement date in determining the present value of future payments. Right-of-use assets include any prepaid
lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum
lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to
extend or terminate the lease if it is reasonably certain we will exercise that option. For lease agreements with
lease and non-lease components, we account for the components as a single combined lease component.
Impairment of Real Estate Properties
Long-lived assets currently in use are reviewed periodically for possible impairment and will be written
down to fair value if considered impaired. Long-lived assets to be disposed of are written down to the lower of
cost or fair value less the estimated cost to sell. We review our real estate properties for impairment when there is
an event or a change in circumstances that indicates that the carrying amount may not be recoverable. We
measure and record impairment losses and reduce the carrying amount of properties when indicators of
impairment are present and the expected undiscounted cash flows related to those properties are less than their
carrying amounts. In cases in which we do not expect to recover the carrying amount of properties held for use,
we reduce our carrying amount to fair value. The valuation of impaired assets is determined using valuation
techniques including discounted cash flow analysis, analysis of recent comparable sales transactions and
purchase offers received from third parties. The Company may consider a single valuation technique or multiple
valuation techniques, as appropriate, when estimating the fair value of its real estate.
Recently Issued or Adopted Accounting Standards
In March 2020, the Financial Accounting Standards Board (the “FASB”) established Topic 848, Facilitation
of the Effects of Reference Rate Reform on Financial Reporting, by issuing Accounting Standards Update
(“ASU”) No. 2020-04 (“ASU 2020-04”). ASU 2020-04 provides companies with optional expedients and
exceptions to the guidance on contract modifications and hedge accounting to ease the potential accounting
burden associated with transitioning away from reference rates that are expected to be discontinued. For contracts
affected by reference rate reform, if certain criteria are met, companies can elect to not remeasure contracts at the
modification date or reassess a previous accounting conclusion. Companies can also elect various optional
expedients that would allow them to continue applying hedge accounting for hedging relationships affected by
reference rate reform if certain criteria are met. Further, in January 2021, the FASB issued ASU No. 2021-01,
Reference Rate Reform (Topic 848)(“ASU 2021-01”). ASU 2021-01 clarified the scope of Topic 848 so that
derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and
exceptions in Topic 848. ASU 2020-04 and ASU 2021-01 can be applied as of the beginning of the interim
period that includes March 12, 2020, however, the guidance will only be available for optional use through
December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic
848): Deferral of the Sunset Date of Topic 848 (“ASU 2022-06”). ASU 2022-06 amends the date the guidance
will be available to December 31, 2024. The new standard applies prospectively to contract modifications and
hedging relationships and may be elected over time as reference rate reform activities occur. The Company has
not yet adopted the standard and continues to evaluate the impact of ASU 2020-04, ASU 2021-01 and ASU
2022-06 on its consolidated financial statements and may elect optional expedients in future periods as reference
rate reform activities occur.
In July 2021, the FASB issued ASU No. 2021-05 (“ASU 2021-05”), Leases (Topic 842): Lessors—Certain
Leases with Variable Lease Payments. ASU 2021-05 requires lessors to classify a lease with variable lease
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payments that do not depend on an index or rate as an operating lease if the lease would have been classified as a
sales-type lease or a direct financing lease under the pre-ASU classification criteria, and sales-type or direct
financing classification would result in a Day 1 loss. The ASU is effective for fiscal years beginning after
December 15, 2021. The ASU may be early adopted and can be applied either retrospectively to leases that
commenced or were modified on or after the adoption of ASU No. 2016-02 or prospectively to leases that
commence or are modified on or after the date that an entity first applies the amendments. The Company adopted
ASU 2021-05 prospectively on January 1, 2022. The adoption of ASU 2021-05 did not have a material impact on
the Company’s consolidated financial statements.
Results of Operations
Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021
Rental and Other Revenues. Revenue includes net rental income, including parking, signage and other
income, as well as the recovery of operating costs and property taxes from tenants. Rental and other revenues
increased $16.5 million, or 10%, to $180.5 million for the year ended December 31, 2022 compared to
$164.0 million for the year ended December 31, 2021. Of this increase, the acquisitions of Block 23, The
Terraces and Bloc 83 in December 2021 contributed increases of $9.8 million, $10.3 million and $17.1 million,
respectively. Also contributing to this increase was Mission City, which had increased revenue of $0.5 million
over the prior year due to higher occupancy. Offsetting these increases, the disposition of Cherry Creek in
February 2021, Sorrento Mesa in December 2021 and Lake Vista Pointe in June 2022 decreased revenue by
$0.8 million, $12.2 million and $2.5 million, respectively. Revenue also decreased at Park Tower by $5.1 million
due to a termination fee recognized in the prior year associated with an early tenant departure and the associated
downtime in which a replacement tenant did not take occupancy until the middle of the second quarter of 2022.
The remaining properties’ rental and other revenues remained relatively unchanged in comparison to the prior
period.
Operating Expenses
Total Operating Expenses. Total operating expenses consist of property operating expenses, general and
administrative expenses and depreciation and amortization. Total operating expenses increased by $26.7 million,
or 20%, to $157.5 million for the year ended December 31, 2022, from $130.8 million for the year ended
December 31, 2021. Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 in December 2021
contributed increases of $6.1 million, $6.6 million and $10.8 million, respectively. Also contributing to the
increase was a $13.4 million impairment of real estate which was recorded in Q4 2022. The impairment was a
result of the write-down of 190 Office Center and Cascade Station to fair value. Offsetting these increases, the
disposition of Cherry Creek, Sorrento Mesa and Lake Vista Pointe decreased total operating expenses by
$0.3 million, $6.0 million and $1.6 million, respectively. General and administrative expenses decreased by
$1.7 million over the prior period primarily due to a one-time $3.5 million employee bonus incurred in the prior
year as a result of the Sorrento Mesa sale transaction. Depreciation and amortization for Pima Center decreased
by $1.1 million from the prior period as the amortization expense associated with acquired lease intangible assets
has now been fully amortized. The remaining properties’ total operating expenses increased a combined
$0.5 million.
Property Operating Expenses. Property operating expenses are comprised mainly of building common area
and maintenance expenses, insurance, property taxes, property management fees, as well as certain expenses that
are not recoverable from tenants, the majority of which are related to costs necessary to maintain the appearance
and marketability of vacant space. In the normal course of business, property expenses fluctuate and are impacted
by various factors including, but not limited to, occupancy levels, weather, utility costs, repairs, maintenance and
re-leasing costs. Property operating expenses increased by $9.7 million, or 17%, to $67.7 million for the year
ended December 31, 2022, from $58.0 million for the year ended December 31, 2021. Of this increase, the
acquisitions of Block 23, The Terraces and Bloc 83 in December 2021 contributed increases of $2.6 million,
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$3.2 million and $4.0 million, respectively. An increase of $0.9 million was attributable to the Ingenuity Drive
property within the Florida Research Park portfolio as that property was converted from a single tenant property
where the tenant paid for its own operating expenses into a multi-tenant property where expenses are paid by the
landlord and reimbursements are charged to the tenants. An increase of $0.7 million was attributable to Park
Tower due to higher non-recoverable expenses and utilities. Offsetting these increases, the disposition of Cherry
Creek, Sorrento Mesa and Lake Vista Pointe decreased property operating expenses by $0.3 million, $2.6 million
and $0.8 million, respectively. The remaining properties’ expenses increased a combined $2.0 million due to a
combination of factors including higher utilization at our properties.
General and Administrative. General and administrative expenses are comprised of public company
reporting costs and the compensation of our management team and Board of Directors, as well as non-cash stock-
based compensation expenses. General and administrative expenses decreased $1.7 million, or 11%, to
$13.8 million for the year ended December 31, 2022, from $15.5 million reported for the same period in 2021. In
the prior period, general and administrative expenses increased due to a one-time $3.5 million employee bonus
incurred as a result of the Sorrento Mesa sale transaction. Offsetting this decrease were higher stock-based
compensation expense and higher professional fees.
Depreciation and Amortization. Depreciation and amortization increased $5.2 million, or 9%, to
$62.5 million for the year ended December 31, 2022, from $57.3 million reported for the same period in 2021. Of
this increase, the acquisitions of Block 23, The Terraces and Bloc 83 in December 2021 contributed increases of
$3.5 million, $3.4 million and $6.8 million, respectively. Offsetting these increases, the disposition of Sorrento
Mesa and Lake Vista Pointe decreased depreciation and amortization expense by $3.4 million and $0.7 million,
respectively. Depreciation and amortization for Pima Center decreased by $1.1 million from the prior period as
the amortization expense associated with acquired lease intangible assets has now been fully amortized. The
remaining properties’ depreciation and amortization expense decreased a combined $3.3 million compared to the
prior year, mainly due to accelerated amortization of tenant-related assets recorded in the prior year at SanTan,
Park Tower and Mission City associated with early lease terminations at those properties.
Other Expense (Income)
Interest Expense. Interest expense increased $2.4 million, or 10%, to $27.0 million for the year ended
December 31, 2022, from $24.6 million for the year ended December 31, 2021. The increase was primarily
attributable to the increase in the amount drawn and interest rates on our floating rate debt.
Net Gain on the Sale of Real Estate Property. During the first quarter of 2022, the sole tenant at the Lake
Vista Pointe property exercised its lease option to purchase the building and we signed a purchase and sale
agreement with the tenant. At the time the tenant exercised the option, we reassessed the lease classification of
the lease, in accordance with ASC 842 – Leases, and determined that the lease should be reclassified from an
operating lease to a sales-type lease. This reclassification resulted in a gain on sale of $21.7 million net of
disposal related costs. The Lake Vista Pointe property was sold in June 2022. In the prior year, we recorded a net
gain on the sale of real estate property of $476.7 million related to the sale of Cherry Creek in February 2021 and
the sale of the Sorrento Mesa portfolio in December 2021 for net gains of $47.4 million and $429.3 million,
respectively.
Impairment of Real Estate. Impairment of real estate was $13.4 million for the year ended December 31,
2022 compared to nil in the prior year. The impairment was related to the write down of the carrying amount of
190 Office Center and Cascade Station, to fair value.
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Cash Flows
Comparison of Period Ended December 31, 2022 to Period Ended December 31, 2021
Cash, cash equivalents and restricted cash were $44.3 million and $42.3 million as of December 31, 2022
and December 31, 2021, respectively.
Cash flow from operating activities. Net cash provided by operating activities increased by $33.5 million to
$106.7 million for the year ended December 31, 2022 compared to $73.2 million for the year ended
December 31, 2021. The increase in cash was primarily due to receipts received from the sales-type lease at the
Lake Vista property, which was sold in 2022, partially offset by changes in working capital.
Cash flow to investing activities. Net cash used in investing activities increased by $29.7 million to
$47.1 million for the year ended December 31, 2022 compared to $17.4 million for the year ended December 31,
2021. The increase in cash used in investing activities was primarily due to a decrease in proceeds from sale of
real estate in 2022 compared to 2021. The higher proceeds from sale of real estate in 2021 was attributable to the
sale of the Cherry Creek property and the Sorrento Mesa portfolio. This decrease was partially offset by higher
acquisition of real estate in 2021 compared to 2022 and higher additions to real estate properties in 2022
compared to 2021.
Cash flow to financing activities. Net cash used in financing activities decreased by $1.9 million to
$57.6 million for the year ended December 31, 2022 compared to $59.5 million for the year ended December 31,
2021. The decrease in cash used in financing activities was primarily due to higher net proceeds from borrowings
in 2022 compared to 2021, partially offset by repurchases of our common stock for the year ended December 31,
2022 compared to no repurchases of our common stock for the year ended December 31, 2021.
Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources
We had approximately $28.2 million of cash and cash equivalents and $16.1 million of restricted cash as of
December 31, 2022.
On March 15, 2018, the Company entered into the Credit Agreement for our Unsecured Credit Facility that
provided for commitments of up to $250 million, which included an accordion feature that allowed the Company
to borrow up to $500 million, subject to customary terms and conditions. On November 16, 2021, the Company
entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) that
provides for commitments of up to $300 million on the Unsecured Credit Facility. Our Unsecured Credit Facility
matures in November 2025 and may be extended 12 months at the Company’s option upon meeting certain
conditions. Borrowings under our Unsecured Credit Facility bear an interest at a rate equal to the LIBOR rate
plus a margin of between 125 to 225 basis points depending upon the Company’s consolidated leverage ratio.
Combined with the Company’s five-year Term Loan, described further below, the total authorized borrowings
increased from $300 million to $350 million. As of December 31, 2022, we had approximately $200.5 million
outstanding under our Unsecured Credit Facility and a $4.2 million letter of credit to satisfy escrow requirements
for a mortgage lender.
On September 27, 2019, the Company entered into the five-year Term Loan, increasing its authorized
borrowings under the Company’s Unsecured Credit Facility from $250 million to $300 million. Borrowings
under the Term Loan bear interest at a rate equal to the LIBOR rate plus a margin between 125 to 215 basis
points depending upon the Company’s consolidated leverage ratio. In conjunction with the Term Loan, the
Company also entered into the five-year Interest Rate Swap for a notional amount of $50 million. Pursuant to the
Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of the notional amount annually,
payable monthly, and receive floating rate 30-day LIBOR payments.
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On February 26, 2020, the Company and the Operating Partnership entered into equity distribution
agreements (collectively, the “Agreements”) with each of KeyBanc Capital Markets Inc., Raymond James &
Associates, Inc., BMO Capital Markets Corp., RBC Capital Markets, LLC, B. Riley FBR, Inc., D.A. Davidson &
Co. and Janney Montgomery Scott LLC (the “Sales Agents”) pursuant to which the Company may issue and sell
from time to time up to 15,000,000 shares of common stock and up to 1,000,000 shares of Series A Preferred
Stock through the Sales Agents, acting as agents or principals (the “ATM Program”). On May 7, 2021 the
Company delivered to D.A. Davidson & Co. a notice of termination of the Agreement, effective May 7, 2021.
The Company did not issue any shares of common stock or Series A Preferred Stock under the ATM Program
during the fiscal year ended December 31, 2022.
During the second half of 2022, the lenders for two of our mortgage borrowings have elected their right to
escrow property level cash flow for the purpose of meeting future payment, tenant improvement and capital
obligations. For these two properties, the total restricted cash as of December 31, 2022 was $6.4 million.
After considering the effect of the COVID-19 pandemic on our consolidated operations, it is possible that
we could fail certain financial covenants within certain property-level mortgage borrowings. For mortgages with
financial covenants, the lenders’ remedy of a covenant failure would be a requirement to escrow funds for the
purpose of meeting our future debt payment obligations.
Our short-term liquidity requirements primarily consist of operating expenses and other expenditures
associated with our properties, distributions to our limited partners and distributions to our stockholders required
to qualify for REIT status, capital expenditures and, potentially, acquisitions. We expect to meet our short-term
liquidity requirements through net cash provided by operations and reserves established from existing cash. We
have further sources such as proceeds from our public offerings, including under our ATM program, and
borrowings under our mortgage loans and our Unsecured Credit Facility.
Our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at maturity,
property acquisitions and non-recurring capital improvements. We expect to meet our long-term liquidity
requirements with net cash from operations, long-term secured and unsecured indebtedness and the issuance of
equity and debt securities. We also may fund property acquisitions and non-recurring capital improvements using
our Unsecured Credit Facility pending longer term financing.
We believe we have access to multiple sources of capital to fund our long-term liquidity requirements,
including the incurrence of additional debt and the issuance of additional equity securities. However, we cannot
assure you that this is or will continue to be the case. Our ability to incur additional debt is dependent on a
number of factors, including our degree of leverage, interest rates, the value of our unencumbered assets and
borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets is
dependent on a number of factors as well, including general market conditions for REITs and market perceptions
about us.
55
Consolidated Indebtedness as of December 31, 2022
As of December 31, 2022, we had approximately $693.8 million of outstanding consolidated principal
indebtedness, 71.1% of which is effectively fixed rate debt when factoring in an interest rate swap. The following
table sets forth information as of December 31, 2022 with respect to our outstanding indebtedness (in thousands).
Property
. . . . . . . . . . . . .
Unsecured Credit Facility(3)(4)
Term Loan(3) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mission City . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canyon Park(5)
. . . . . . . . . . . . . . . . . . . . . . . . .
Circle Point
. . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
190 Office Center(6)
SanTan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intellicenter
. . . . . . . . . . . . . . . . . . . . . . . . . . .
The Quad . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2525 McKinnon . . . . . . . . . . . . . . . . . . . . . . . .
FRP Collection . . . . . . . . . . . . . . . . . . . . . . . . .
Greenwood Blvd . . . . . . . . . . . . . . . . . . . . . . .
Cascade Station . . . . . . . . . . . . . . . . . . . . . . . .
5090 N. 40th St . . . . . . . . . . . . . . . . . . . . . . . . .
AmberGlen . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Central Fairwinds . . . . . . . . . . . . . . . . . . . . . . .
FRP Ingenuity Drive(7) . . . . . . . . . . . . . . . . . . .
Carillon Point . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2022
Interest Rate as of
December 31, 2022(1)
$200,500
50,000
46,859
39,673
39,440
38,894
32,140
31,297
30,600
27,000
26,784
21,396
21,192
20,810
20,000
16,273
16,165
14,773
LIBOR +1.30%(2)
LIBOR +1.25%(2)
3.78%
4.30%
4.49%
4.79%
4.56%
4.65%
4.20%
4.24%
3.10%
3.15%
4.55%
3.92%
3.69%
3.15%
4.44%
3.10%
Maturity
November 2025
September 2024
November 2027
March 2027
September 2028
October 2025
March 2027
October 2025
September 2028
April 2027
September 2023
December 2025
May 2024
January 2027
May 2027
June 2024
December 2024
October 2023
Total Principal
. . . . . . . . . . . . . . . . . . . . .
Deferred financing costs, net . . . . . . . . . .
Unamortized fair value adjustments . . . .
693,796
(3,887)
190
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$690,099
(1) All interest rates are fixed interest rates with the exception of the Unsecured Credit Facility and the Term Loan, as
explained in footnotes 3 and 4 below.
(4)
(2) As of December 31, 2022, the one-month LIBOR rate was 4.39%.
(3)
In September 2019, the Company entered into a five-year $50 million Term Loan increasing its authorized borrowings
under the Unsecured Credit Facility from $250 million to $300 million. Borrowings under the Term Loan bear interest at
a rate equal to the LIBOR rate plus a margin between 125 to 215 basis points depending upon the Company’s
consolidated leverage ratio. In conjunction with the Term Loan, the Company also entered into the five-year Interest
Rate Swap for a notional amount of $50 million. Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of
approximately 1.27% of the notional amount annually, payable monthly, and receive floating rate 30-day LIBOR
payments.
In March 2018, the Company entered into the Credit Agreement for the Unsecured Credit Facility that provides for
commitments of up to $250 million, which includes an accordion feature that allows the Company to borrow up to
$500 million, subject to customary terms and conditions. On November 16, 2021, the Company entered into an Amended
and Restated Credit Agreement for the Unsecured Credit Facility that provides for commitments of up to $300 million.
Combined with the Company’s existing Term Loan, the total authorized borrowings increased from $300 million to
$350 million. The Unsecured Credit Facility matures in November 2025 and may be extended 12 months at the
Company’s option upon meeting certain conditions. Borrowings under the Unsecured Credit Facility bear interest at a
rate equal to the LIBOR rate plus a margin of between 125 to 225 basis points depending upon the Company’s
consolidated leverage ratio. As of December 31, 2022, the Unsecured Credit Facility had $200.5 million drawn and a
$4.2 million letter of credit to satisfy escrow requirements for a mortgage lender. The Unsecured Credit Facility requires
the Company to maintain a fixed charge coverage ratio of no less than 1.50x.
56
(5) The mortgage loan anticipated repayment date (“ARD”) is March 1, 2027. The final scheduled maturity date can be
(6)
extended up to 5 years beyond the ARD. If the loan is not paid off at ARD, loan’s interest rate shall be adjusted to the
greater of (i) the initial interest rate plus 200 basis points or (ii) the yield on the five year “on the run” treasury reported
by Bloomberg market data service plus 450 basis points.
In Q4 2022, a ‘cash-sweep’ began for the 190 Office Center loan due to the non-renewal of the minimum square footage
of a major tenant in the building. A ‘cash-sweep’ results in excess funds being held in escrow to fund future leasing costs
related to the major tenant’s space. As of December 31, 2022, total restricted cash for the property was $3.8 million.
(7) As of September 30, 2022, the Debt Service Coverage Ratio (“DSCR”) covenant for FRP Ingenuity Drive was not met,
which triggered a ‘cash-sweep’ event that began in Q4 2022 where excess funds have been held in escrow to fund future
tenant improvement expenses of current vacant space. As of December 31, 2022, total restricted cash for the property
was $2.6 million.
Contractual Obligations and Other Long-Term Liabilities
The following table provides information with respect to our commitments as of December 31, 2022,
including any guaranteed or minimum commitments under contractual obligations. The table does not reflect
available debt extension options.
Payments Due by Period (in thousands)
Contractual Obligations
Total
2023
2024-2025
2026-2027
Principal payments on mortgage loans . . . . . . . . . . . . . .
Interest payments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant-related commitments . . . . . . . . . . . . . . . . . . . . .
Lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$693,796
100,611
14,795
37,046
$47,980
30,506
14,795
663
$400,977
52,163
—
1,555
$180,719
15,860
—
1,327
More than
5 years
$64,120
2,082
—
33,501
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$846,248
$93,944
$454,695
$197,906
$99,703
(1) Contracted interest on the floating rate borrowings under our Unsecured Credit Facility was calculated based on the
balance and interest rate at December 31, 2022. Contracted interest on the Term Loan was calculated based on the
Interest Rate Swap rate fixing the LIBOR component of the borrowing rate to approximately 1.27%.
Inflation
We believe that we are less susceptible to the negative economic effects that inflation may have on our
industry due to the presence of expense pass through provisions in our leases and the predominance of fixed
contractual interest rates on our indebtedness.
Substantially all of our office leases include expense reimbursements that provide for property operating
expense escalations. In addition, most of the leases provide for fixed rent increases. We believe that inflationary
increases may be at least partially offset by these contractual rent increases and expense escalations. However, a
longer period of inflation could affect our cash flows or earnings, or impact our borrowings, as discussed
elsewhere in this Report.
As of December 31, 2022, 71.1% of our outstanding consolidated indebtedness was effectively fixed rate
debt when factoring in an interest rate swap. A portion of the balance relates to the Term Loan against which we
have applied the Interest Rate Swap. The Interest Rate Swap effectively fixes the 30-day LIBOR rate at
approximately 1.27% until maturity of the Term Loan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future income, cash flows and fair values relevant to financial instruments are dependent upon
prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and
57
interest rates. We use derivative financial instruments to manage or hedge interest rate risks related to
borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with
major financial institutions based upon their credit rating and other factors. We have entered, and we will only
enter into, contracts with major financial institutions based on their credit rating and other factors. See Note 7 to
our consolidated financial statements in Item 15 of this Annual Report on Form 10-K for more information
regarding our derivatives.
The primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure is
LIBOR. We primarily use fixed interest rate financing to manage our exposure to fluctuations in interest rates.
The Financial Conduct Authority (the authority that regulates LIBOR) has announced that it intends to stop
compelling banks to submit rates for the calculation of LIBOR by June 30, 2023. The ARRC has proposed that
SOFR is the rate that represents best practice as the alternative to LIBOR, and in some cases, the forward-looking
term rate based on SOFR published by CME Group Benchmark Administration Ltd (“CME Term SOFR”).
ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently
working on industry-wide and company specific transition plans as it relates to derivatives and cash markets
exposed to LIBOR. There are significant differences between LIBOR and SOFR, such as LIBOR being an
unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR
reflects term rates at different maturities. We currently have contracts that are indexed to LIBOR and expect that
all LIBOR settings relevant to us will cease to be published or will no longer be representative after June 30,
2023. As a result, we expect to amend our LIBOR-based borrowings to reflect SOFR beginning in the first
quarter of 2023. The differences between LIBOR and SOFR, plus the recommended spread adjustment, could
result in interest costs that are higher than if LIBOR remained available, which could have a material adverse
effect on our results. Although SOFR is the ARRC’s recommended replacement rate, it is also possible that
lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR
or in other ways that would result in higher borrowing costs for us. It is not yet possible to predict the magnitude
of LIBOR’s end on our borrowing costs given the uncertainty about which rates will replace LIBOR and the
timing of actual replacement.
On March 15, 2022, President Biden signed the Adjustable Interest Rate (LIBOR) Act (the “Act”), which
transitions contracts that use LIBOR as a benchmark for adjustable interest rates to another benchmark, once
LIBOR is permanently discontinued after June 30, 2023. The Act provides, among other things, that a default
alternative benchmark based on SOFR published by the New York Federal Reserve Bank will automatically
apply after the LIBOR replacement date for any contract that does not select a benchmark replacement for
LIBOR or identify a person authorized to select a benchmark replacement after LIBOR is permanently
discontinued. The Act also provides that if the SOFR-based benchmark replacement is selected to replace
LIBOR, the person responsible under a contract for determining values is not required to obtain the consent of
anyone before determining values based on that benchmark replacement. The Act further creates a safe harbor by
ensuring that the SOFR-based benchmark replacement is by law a commercially reasonable replacement for
LIBOR, that the use of that benchmark replacement cannot be deemed a breach of a contract or an impairment of
the right of any person to receive payment under that contract, and that no person can be liable for selecting or
using that benchmark replacement. The Act further authorizes the Board of the Federal Reserve to promulgate
regulations under the statute to designate specific SOFR-based rates that incorporate the statutory spread
adjustments as replacement rates for covered LIBOR contracts. The Federal Reserve’s final rules were issued in
December 2022 and provide for the following SOFR-based replacement rates: (i) SOFR compounded in arrears
for derivatives, using the same methodology as under the International Swaps and Derivatives Association
protocol, (ii) CME Term SOFR for all covered cash products, except Federal Housing Finance Agency
(“FHFA”) -regulated entity contracts and (iii) a 30-day compounded SOFR average for certain FHFA-regulated
entity contracts. We are evaluating the impact of the final rules on assets and liabilities covered by the legislation
and will continue to consider all available options. However, we believe that the Act should provide some
measure of certainty with respect to the treatment of such instruments once LIBOR is permanently discontinued.
We are monitoring the developments with respect to the phasing out of LIBOR and are working with our lenders
to minimize the impact of any LIBOR transition on our financial condition and results of operations, but can
provide no assurances regarding the impact of the discontinuation of LIBOR.
58
We currently consider our interest rate exposure to be moderate because as of December 31, 2022,
approximately $493.3 million, or 71.1%, of our debt had fixed interest rates, or effectively fixed rates when
factoring in an interest rate swap, and $200.5 million, or 28.9%, had variable interest rates. The $493.3 million
fixed rate debt includes the $50.0 million Term Loan against which we have applied the Interest Rate Swap. The
Interest Rate Swap effectively fixes the 30-day LIBOR rate at approximately 1.27% until maturity of the Term
Loan. An increase of 1% in LIBOR would result in a $2.0 million increase to our annual interest costs on debt
outstanding as of December 31, 2022 and would decrease the fair value of our outstanding debt, as well as
increase interest costs associated with future debt issuances or borrowings under our Unsecured Credit Facility.
A 1% decrease in LIBOR would result in a $2.0 million decrease to our annual interest costs on debt outstanding
as of December 31, 2022 and would increase the fair value of our outstanding debt, as well as decrease interest
costs associated with future debt issuances or borrowings under our Unsecured Credit Facility.
Interest rate risk amounts are our management’s estimates based on our Company’s capital structure and
were determined by considering the effect of hypothetical interest rates on our financial instruments. These
analyses do not consider the effect of any change in overall economic activity that could occur in that
environment. We may take actions to further mitigate our exposure to changes in interest rates. However, due to
the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no
changes in our Company’s financial structure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is included as a separate section in this Annual Report on Form 10-K.
Refer to “Item 15. Exhibits, Financial Statement Schedules.”
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information
required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported
within the time periods specified in the rules and regulations of the SEC and that such information is
accumulated and communicated to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
We have carried out an evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure
controls and procedures as of December 31, 2022, the end of the period covered by this Annual Report. Based on
the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded, as of December 31,
2022, that our disclosure controls and procedures were effective in ensuring that information required to be
disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and
reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow for timely decisions regarding required disclosure.
59
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance
regarding the reliability of our financial reporting for external purposes in accordance with accounting principles
generally accepted in the United States of America. Internal control over financial reporting includes maintaining
records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that
transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance
that receipts and expenditures of Company assets are made in accordance with management authorization; and
providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could
have a material effect on our financial statements would be prevented or detected on a timely basis. Because of
its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that
a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of December 31, 2022.
The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited
by KPMG LLP, the independent registered public accounting firm that audited the consolidated financial
statements included in this annual report, as stated in their report, which expresses an unqualified opinion on the
effectiveness of our internal control over financial reporting as of December 31, 2022.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS
Not applicable.
60
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference to our definitive Proxy Statement for our
2023 annual stockholders’ meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to our definitive Proxy Statement for our
2023 annual stockholders’ meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference to our definitive Proxy Statement for our
2023 annual stockholders’ meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is incorporated by reference to our definitive Proxy Statement for our
2023 annual stockholders’ meeting.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to Independent Registered Public Accounting Firm
The information required by Item 14 is incorporated by reference to our definitive Proxy Statement for our
2023 annual stockholders’ meeting.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
61
CITY OFFICE REIT, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2022
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Registered Public Accounting Firm (PCAOB ID: 85)
. . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021 . . . . . . . . . . . . . . . . . . . . . .
Page
63
67
Consolidated Statements of Operations for the Years Ended December 31, 2022, December 31, 2021 and
December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022,
December 31, 2021 and December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2022, December 31,
2021 and December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, December 31, 2021 and
December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule III – Real Estate Properties and Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
72
89
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
City Office REIT, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of City Office REIT, Inc. (the Company) as
of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income,
changes in equity, and cash flows for each of the years in the three year period ended December 31, 2022, and
the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2022, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2023 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the
consolidated financial statements that was communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and
(2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit
matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we
are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosures to which it relates.
63
Revenue recognition for new and modified lease arrangements
As discussed in Note 2 to the consolidated financial statements, the Company generally recognizes lease
revenue on a straight-line basis over the term of the lease. The timing and amount of revenue recognized on a
straight-line basis for new and modified leases is impacted by the determination of who is the accounting owner
of the tenant improvements of the leased space for accounting purposes. The cost to construct tenant
improvements is either recorded as a reduction of lease revenue on a straight-line basis over the lease term or as a
capital asset amortized on a straight-line basis over the lease term, depending on whether the tenant
improvements are determined to be owned by the Company or the tenant. As discussed in Note 9 to the
consolidated financial statements, during the year ended December 31, 2022, the Company reported
$179.0 million of lease revenue, which includes revenue related to new and modified lease arrangements.
We identified the assessment of the Company’s determination of revenue recognition on a straight-line basis
for new and modified lease arrangements as a critical audit matter. Assessing the determination of the ownership
of tenant improvements and the impact on revenue recognized required complex auditor judgment and increased
extent of audit effort.
The following are the primary procedures we performed to address this critical audit matter. We evaluated
the design and tested the operating effectiveness of certain internal controls related to the Company’s process
over recognition of lease revenue for new and modified lease arrangements. This included controls related to the
assessment of the ownership of tenant improvements and the accuracy of straight-line rent calculations. We
examined a selection of new and modified lease arrangements and (1) compared the terms contained in the lease
agreements to the factors assessed by the Company and (2) evaluated whether the costs incurred, incentives
granted, and payments made in connection with the new or modified lease arrangements were tenant
improvements owned by the Company or lease incentives. For this selection of new and modified lease
arrangements, we assessed whether the straight-line lease revenue calculations were consistent with the
conclusions on the ownership of tenant improvements.
/s/ KPMG LLP
Chartered Professional Accountants
We have served as the Company’s auditor since 2013.
Vancouver, Canada
February 23, 2023
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
City Office REIT, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited City Office REIT, Inc.’s (the Company) internal control over financial reporting as of
December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021,
the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for
each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement
schedule III (collectively, the consolidated financial statements), and our report dated February 23, 2023
expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
65
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ KPMG LLP
Chartered Professional Accountants
Vancouver, Canada
February 23, 2023
66
City Office REIT, Inc.
Consolidated Balance Sheets
(In thousands, except par value and share data)
December 31,
2022
December 31,
2021
Assets
Real estate properties
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 199,537
1,215,000
139,365
689
$ 204,801
1,244,177
119,011
664
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,554,591
(175,720)
1,568,653
(157,356)
1,378,871
1,411,297
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rents receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred leasing costs, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired lease intangible assets, net
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,187
16,075
44,429
21,989
55,438
29,450
21,321
20,945
30,415
20,327
68,925
28,283
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,574,439
$1,601,513
Liabilities and Equity
Liabilities:
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant rent deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired lease intangible liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 690,099
35,753
9,147
7,040
9,150
20,076
$ 653,648
27,101
11,600
6,165
10,872
21,532
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
771,265
730,918
Commitments and Contingencies (Note 10)
Equity:
6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares
authorized, 4,480,000 issued and outstanding as of December 31, 2022 and 2021 . . .
112,000
112,000
Common stock, $0.01 par value, 100,000,000 shares authorized, 39,718,767 and
43,554,375 shares issued and outstanding as of December 31, 2022 and 2021 . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interests in properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
397
436,161
251,542
2,731
802,831
343
803,174
435
482,061
275,502
(382)
869,616
979
870,595
Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,574,439
$1,601,513
Subsequent Events (Note 13)
The accompanying notes are an integral part of these consolidated financial statements.
67
City Office REIT, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Years Ended December 31,
2021
2020
2022
Rental and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
$180,485
$164,041
$160,840
Property operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67,739
13,782
62,495
13,444
58,005
15,489
57,317
—
58,312
10,690
60,367
—
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
157,460
130,811
129,369
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense:
Contractual interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs and debt fair value . . . . . . . . . .
Net gain on sale of real estate property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
23,025
33,230
31,471
(25,784)
(1,218)
(27,002)
21,658
(23,268)
(1,332)
(24,600)
476,651
(26,363)
(1,326)
(27,689)
1,347
17,681
485,281
5,129
Net income attributable to non-controlling interests in properties . . . . . .
(691)
(886)
Net income attributable to the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,990
(7,420)
484,395
(7,420)
(602)
4,527
(7,420)
Net income/(loss) attributable to common stockholders . . . . . . . . . . . . . . . .
$
9,570
$476,975
$ (2,893)
Net income/(loss) per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.23
0.22
$
$
10.97
10.80
$
$
(0.06)
(0.06)
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,052
43,498
47,223
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,866
44,145
47,223
Dividend distributions declared per common share . . . . . . . . . . . . . . . . . . . . . .
$
0.80
$
0.65
$
0.60
The accompanying notes are an integral part of these consolidated financial statements.
68
City Office REIT, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income/(loss):
Unrealized cash flow hedge gain/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified to interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Comprehensive income attributable to non-controlling interests in
Years Ended December 31,
2022
2021
2020
$17,681
$485,281
$ 5,129
3,336
(223)
3,113
989
589
(3,003)
328
1,578
(2,675)
20,794
486,859
2,454
properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(691)
(886)
(602)
Comprehensive income attributable to the Company . . . . . . . . . . . . . . . . . . . .
$20,103
$485,973
$ 1,852
The accompanying notes are an integral part of these consolidated financial statements.
69
City Office REIT, Inc.
Consolidated Statements of Changes in Equity
(In thousands)
Number
of shares
of
preferred
stock
Number
of
shares of
common
stock
Preferred
stock
Common
stock
Additional
paid-in
capital
Retained
earnings/
(accumulated
deficit)
Accumulated
other
comprehensive
income/(loss)
Total
stockholders’
equity
Non-controlling
interests in
properties
Total
equity
Balance—January 1, 2020 . . . . . . . . . . . . . . . . . . . 4,480 $112,000 54,591 $ 545 $ 577,131 $(142,383)
(243)
Restricted stock award grants and vesting . . . . . . . —
—
Common stock repurchased . . . . . . . . . . . . . . . . . . —
(27,439)
Common stock dividend distribution declared . . . . —
(7,420)
Preferred stock dividend distribution declared . . . . —
—
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
—
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
4,527
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
—
Other comprehensive loss . . . . . . . . . . . . . . . . . . . —
—
170
— (11,364)
—
—
—
—
—
—
2
(114)
—
—
—
—
—
—
2,531
(100,251)
—
—
—
—
—
—
—
—
—
—
—
—
$
715
—
—
—
—
—
—
—
(2,675)
$ 548,008
2,290
(100,365)
(27,439)
(7,420)
—
—
4,527
(2,675)
$ 1,124
—
—
—
—
52
(829)
602
—
$ 549,132
2,290
(100,365)
(27,439)
(7,420)
52
(829)
5,129
(2,675)
Balance—December 31, 2020 . . . . . . . . . . . . . . . . 4,480 $112,000 43,397 $ 433 $ 479,411 $(172,958)
$(1,960)
$ 416,926
$
949
$ 417,875
Restricted stock award grants and vesting . . . . . . . —
Common stock dividend distribution declared . . . . —
Preferred stock dividend distribution declared . . . . —
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other comprehensive income . . . . . . . . . . . . . . . . . —
—
—
—
—
—
—
—
157
—
—
—
—
—
—
2
—
—
—
—
—
—
2,650
—
—
—
—
—
—
(228)
(28,287)
(7,420)
—
—
484,395
—
—
—
—
—
—
—
1,578
2,424
(28,287)
(7,420)
—
—
484,395
1,578
—
—
—
286
(1,142)
886
—
2,424
(28,287)
(7,420)
286
(1,142)
485,281
1,578
Balance—December 31, 2021 . . . . . . . . . . . . . . . . 4,480 $112,000 43,554 $ 435 $ 482,061 $ 275,502
$ (382)
$ 869,616
$
979
$ 870,595
Restricted stock award grants and vesting . . . . . . . —
Common stock repurchased . . . . . . . . . . . . . . . . . . —
Common stock dividend distribution declared . . . . —
Preferred stock dividend distribution declared . . . . —
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other comprehensive income . . . . . . . . . . . . . . . . . —
171
—
— (4,007)
—
—
—
—
—
—
—
—
—
—
—
—
2
(40)
—
—
—
—
—
—
4,142
(50,042)
—
—
—
—
—
—
(352)
—
(33,178)
(7,420)
—
—
16,990
—
—
—
—
—
—
—
—
3,113
3,792
(50,082)
(33,178)
(7,420)
—
—
16,990
3,113
—
—
—
—
170
(1,497)
691
—
3,792
(50,082)
(33,178)
(7,420)
170
(1,497)
17,681
3,113
Balance—December 31, 2022 . . . . . . . . . . . . . . . . 4,480 $112,000 39,718 $ 397 $ 436,161 $ 251,542
$ 2,731
$ 802,831
$
343
$ 803,174
The accompanying notes are an integral part of these consolidated financial statements.
70
City Office REIT, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
2021
2020
2022
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$ 17,681
$ 485,281
$
5,129
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs and debt fair value . . . . . . . . . . . . . . . . . . . .
Amortization of above and below market leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Straight-line rent/expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receipts from sales-type lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of real estate property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in non-cash working capital:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rents receivable, net
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant rent deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,495
1,218
75
(9,218)
3,879
43,549
(21,658)
13,444
(6,033)
(10)
2,833
(2,453)
875
57,317
1,332
343
(566)
2,641
—
(476,651)
—
(654)
(345)
451
3,653
420
60,367
1,326
(17)
(3,389)
2,332
—
(1,347)
—
(182)
53
(4,194)
702
(857)
Net Cash Provided By Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . .
106,677
73,222
59,923
Cash Flows to Investing Activities:
Additions to real estate properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sale of real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred leasing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(37,485)
—
—
(9,565)
(17,869)
(632,317)
640,995
(8,190)
(26,352)
—
6,340
(7,791)
Net Cash Used In Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(47,050)
(17,381)
(27,803)
Cash Flows to Financing Activities:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend distributions paid to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions to non-controlling interests in properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares withheld for payment of taxes on restricted stock unit vesting . . . . . . . . . . . . . . . . .
Contributions from non-controlling interests in properties
. . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance and extinguishment costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,500
(62,270)
(41,365)
(50,082)
(1,497)
(87)
170
—
180,000
(202,442)
(33,506)
—
(1,142)
(216)
286
(2,506)
130,000
(61,330)
(41,178)
(100,365)
(829)
(42)
52
—
Net Cash Used In By Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . .
(57,631)
(59,526)
(73,692)
Net Increase/(Decrease) in Cash, Cash Equivalents and Restricted Cash . . . . . . . . . . . . . . .
Cash, Cash Equivalents and Restricted Cash, Beginning of Period . . . . . . . . . . . . . . . . . . . .
1,996
42,266
(3,685)
45,951
(41,572)
87,523
Cash, Cash Equivalents and Restricted Cash, End of Period . . . . . . . . . . . . . . . . . . . . . . . . .
$ 44,262
$ 42,266
$ 45,951
Reconciliation of Cash, Cash Equivalents and Restricted Cash:
Cash and Cash Equivalents, End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Cash, End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,187
16,075
21,321
20,945
25,305
20,646
Cash, Cash Equivalents and Restricted Cash, End of Period . . . . . . . . . . . . . . . . . . . . . . . .
$ 44,262
$ 42,266
$ 45,951
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of additions in real estate properties included in accounts payable . . . . . . . . . . . .
Purchase of deferred leasing costs included in accounts payable . . . . . . . . . . . . . . . . . . . . .
$ 23,064
$ 13,004
1,274
$
$ 23,344
5,815
$
2,790
$
$ 26,454
7,640
$
289
$
The accompanying notes are an integral part of these consolidated financial statements.
71
City Office REIT, Inc.
Notes to Consolidated Financial Statements
1. Organization and Description of Business
City Office REIT, Inc. (the “Company”) was organized in the state of Maryland on November 26, 2013. On
April 21, 2014, the Company completed its initial public offering (“IPO”) of shares of the Company’s common
stock. The Company contributed the net proceeds of the IPO to City Office REIT Operating Partnership, L.P., a
Maryland limited partnership (the “Operating Partnership”), in exchange for common units of limited partnership
interest in the Operating Partnership (“common units”).
The Company’s interest in the Operating Partnership entitles the Company to share in distributions from,
and allocations of profits and losses of, the Operating Partnership in proportion to the Company’s percentage
ownership of common units. As the sole general partner of the Operating Partnership, the Company has the
exclusive power under the Operating Partnership’s partnership agreement to manage and conduct the Operating
Partnership’s business, subject to limited approval and voting rights of the limited partners.
The Company has elected to be taxed and will continue to operate in a manner that will allow it to continue
to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the
“Code”). Subject to qualification as a REIT, the Company will be permitted to deduct dividend distributions paid
to its stockholders, eliminating the U.S. federal taxation of income represented by such distributions at the
Company level. REITs are subject to a number of organizational and operational requirements. If the Company
fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax
on its taxable income at regular corporate tax rates and, for years prior to 2018, any applicable alternative
minimum tax.
2. Summary of Significant Accounting Policies
Basis of Preparation and Summary of Significant Accounting Policies
The accompanying consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) and include the financial position and results of
operations of the Company, the Operating Partnership and its subsidiaries. All significant intercompany
transactions and balances have been eliminated on consolidation.
Use of Estimates
The Company has made a number of significant estimates and assumptions relating to the reporting of assets
and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and
expenses to prepare these consolidated financial statements in conformity with GAAP. Significant estimates
made include the recoverability of accounts receivable, allocation of property purchase price to tangible and
intangible assets acquired and liabilities assumed, the determination and measurement of impairment of long-
lived assets and the useful lives of long-lived assets. These estimates and assumptions are based on our best
estimates and judgment. The Company evaluates its estimates and assumptions on an ongoing basis using
historical experience and other factors, including the current economic environment. The current economic
environment has increased the degree of uncertainty inherent in these estimates and assumptions. Management
adjusts such estimates when facts and circumstances dictate. Actual results could differ materially from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents include unrestricted cash and short-term investments with a maturity date of less
than three months when acquired.
72
Restricted Cash
Restricted cash consists of cash held in escrow by lenders pursuant to certain lender agreements and cash
received from contracted building sales.
Rent Receivable, Net
The Company continuously monitors collections from tenants and makes a provision for estimated losses
based upon historical experience and any specific tenant collection issues that the Company has identified.
Business Combinations
When a property is acquired, management considers the substance of the agreement in determining whether
the acquisition represents an asset acquisition or a business combination. Upon acquisitions of properties that
constitutes a business, the fair value of the real estate acquired, which includes the impact of fair value
adjustments for assumed mortgage debt related to property acquisitions, is allocated to the acquired tangible
assets, consisting of land, buildings and improvements and identified intangible assets and liabilities, consisting
of the value of above-market and below-market leases, other value of in-place leases and value of tenant
relationships, based in each case on their fair values. For acquisitions that do not meet the business combination
accounting criteria, these are accounted for as asset acquisitions. The Company allocates the cost of the
acquisition, which includes any associated acquisition costs to individual assets and liabilities assumed on a
relative fair value basis. Also, non-controlling interests acquired are recorded at estimated fair market value.
The fair value of the tangible assets of an acquired property (which includes land, buildings and
improvements and fixtures and equipment) is determined by valuing the property as if it were vacant. The
“as-if-vacant” value is then allocated to land and buildings and improvements based on management’s
determination of relative fair values of these assets. Factors considered by management in performing these
analyses include an estimate of carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate
taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up
periods based on current market demand. Management also estimates costs to execute similar leases including
leasing commissions.
The fair value of above-market and below-market lease values are recorded based on the difference between
the current in-place lease rent and management’s estimate of current market rents. Below-market lease
intangibles are recorded as part of acquired lease intangibles liability and amortized into rental revenue over the
non-cancelable periods and bargain renewal periods of the respective leases. Above-market leases are recorded as
part of intangible assets and amortized as a direct charge against rental revenue over the non-cancelable portion
of the respective leases.
The fair value of acquired in-place leases are recorded based on the costs management estimates the
Company would have incurred to lease the property to the occupancy level of the property at the date of
acquisition. Such estimates include the fair value of leasing commissions and legal costs that would be incurred
to lease the property to this occupancy level. Additionally, management evaluates the time period over which
such occupancy level would be achieved and includes an estimate of the net operating costs incurred during the
lease-up period. Acquired in-place leases are amortized on a straight-line basis over the term of the individual
leases.
Revenue Recognition
The Company recognizes lease revenue on a straight-line basis over the term of the lease. Certain leases
allow for the tenant to terminate the lease, but the tenant must make a termination payment as stipulated in the
73
lease. If the termination payment is in such an amount that continuation of the lease appears, at the time of lease
inception, to be reasonably assured, then the Company recognizes revenue over the term of the lease. The
Company has determined that for these leases, the termination payment is in such an amount that continuation of
the lease appears, at the time of inception, to be reasonably assured. The Company recognizes lease termination
fees as revenue in the period received and writes off unamortized lease-related intangible and other lease-related
account balances, provided there are no further Company obligations under the lease. Otherwise, such fees and
balances are recognized on a straight-line basis over the remaining obligation period with the termination
payments being recorded as a component of rent receivable-deferred or deferred revenue on the consolidated
balance sheets.
If the Company funds tenant improvements and the tenant improvements are determined to be owned by the
Company, revenue recognition will commence when control of the space is turned over to the tenant. Tenant
improvements are deferred and amortized on a straight-line basis over the lease term. If the Company determines
that the tenant allowances are lease incentives, the Company commences revenue recognition when possession or
control of the space is turned over to the tenant for tenant work to begin. The lease incentive is recorded as a
reduction of lease revenue on a straight-line basis over the lease term.
Recoveries from tenants for real estate taxes, insurance and other operating expenses are recognized as
revenues in the period that the applicable costs are incurred. The Company recognizes differences between
estimated recoveries and the final billed amounts in the subsequent year. Final billings to tenants for real estate
taxes, insurance and other operating expenses did not vary significantly as compared to the estimated receivable
balances.
Leases
Lessors are required to classify leases as a sales-type, direct financing, or operating lease and requires
lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. We
determine if an arrangement is a lease at inception. Operating and financing right-of-use assets and lease
liabilities are included within other assets and other liabilities on the consolidated balance sheets. Right-of-use
assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation
to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at
commencement date based on the present value of lease payments over the lease term. As most of our leases do
not provide an implicit rate, we use our incremental borrowing rate based on the information available at the
commencement date in determining the present value of future payments. Right-of-use assets include any prepaid
lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum
lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to
extend or terminate the lease if it is reasonably certain we will exercise that option. For lease agreements with
lease and non-lease components, we account for the components as a single combined lease component.
Real Estate Properties
Real estate properties are stated at cost less accumulated depreciation, except land. Depreciation is
computed on the straight-line basis over estimated useful lives of:
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . .
Years
28-59
4-10
Expenditures for maintenance and repairs are charged to operations as incurred.
74
Impairment of Real Estate Properties
Long-lived assets currently in use are reviewed periodically for possible impairment and will be written
down to fair value if determined impaired. Long-lived assets, to be disposed of, are written down to the lower of
cost or fair value less the estimated cost to sell. The Company reviews its real estate properties for impairment
when there is an event or a change in circumstances that indicates that the carrying amount may not be
recoverable. The Company measures and records impairment losses and reduces the carrying amount of
properties when indicators of impairment are present and the expected undiscounted cash flows related to those
properties are less than their carrying amounts. In cases where the Company does not expect to recover the
carrying amount on properties held for use, the Company reduces its carrying amount to fair value. The valuation
of impaired assets is determined using valuation techniques including discounted cash flow analysis, analysis of
recent comparable sales transactions and purchase offers received from third parties. The Company may consider
a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its
real estate.
Concentration of Credit Risk
The Company places its temporary cash investments in high credit financial institutions. However, a portion
of temporary cash investments may exceed FDIC insured levels from time to time. The Company has never
experienced any losses related to these balances.
Income Taxes
The Company has elected to be taxed, and intends to continue to operate in a manner that will allow it to
continue to qualify, as a REIT. To qualify as a REIT, the Company is required to distribute dividends equal to at
least 90% of its REIT taxable income (computed without regard to the deduction for dividends paid and
excluding net capital gains) to its stockholders, and meet the various other requirements imposed by the Code
relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership.
Provided the Company qualifies for taxation as a REIT, it is generally not subject to U.S. federal corporate-level
income tax on the earnings distributed currently to its stockholders. If the Company fails to qualify as a REIT in
any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at
regular corporate tax rates and, for years prior to 2018, any applicable alternative minimum tax. In addition, the
Company may not be able to re-elect as a REIT for the four subsequent taxable years. From time to time, the
Company has elected to treat certain subsidiaries as TRSs. A TRS is treated as a regular corporation and is
subject to federal income tax and applicable state income and franchise taxes at regular corporate rates.
Non-controlling Interests
The Company follows the provisions pertaining to non-controlling interests of ASC Topic 810. A
non-controlling interest is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.
Among other matters, the non-controlling interest standards require that non-controlling interests be reported as
part of equity in the consolidated balance sheet (separately from the controlling interest’s equity).
Equity-Based Compensation
The Company accounts for equity-based compensation, including shares of restricted stock units, in
accordance with ASC Topic 718 Compensation – Stock Compensation, which requires the Company to
recognize an expense for the fair value of equity-based awards. The estimated fair value of restricted stock units
is amortized over their respective vesting period.
75
Earnings per Common Share
The Company calculates net income per common share based upon the weighted average shares outstanding
at period end. Diluted earnings per share is calculated after giving effect to all potential dilutive shares
outstanding during the period.
Derivative Instruments and Hedging Activities
The Company enters into interest rate swap contracts to mitigate its interest rate risk on the related financial
instruments. The Company does not enter into derivative or interest rate transactions for speculative purposes.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair
value of derivatives depends on whether the Company has elected to designate a derivative in a hedging
relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary
to apply hedge accounting. For derivatives that qualify as hedging instruments, a company must designate the
instruments as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation.
Fair Value of Financial Instruments
ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) establishes a fair value hierarchy
that distinguishes between market participant assumptions based on market data obtained from sources
independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified
within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the
Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for
similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other
than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances where the determination of the fair
value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a
particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to
the asset or liability.
Deferred Leasing Costs
Fees and costs paid in the successful negotiation of leases are deferred and amortized on a straight-line basis
over the terms of the respective leases.
Segment Reporting
The Company operates in one industry segment, commercial real estate.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (the “FASB”) established Topic 848, Facilitation
of the Effects of Reference Rate Reform on Financial Reporting, by issuing Accounting Standards Update
(“ASU”) No. 2020-04 (“ASU 2020-04”). ASU 2020-04 provides companies with optional expedients and
exceptions to the guidance on contract modifications and hedge accounting to ease the potential accounting
76
burden associated with transitioning away from reference rates that are expected to be discontinued. For contracts
affected by reference rate reform, if certain criteria are met, companies can elect to not remeasure contracts at the
modification date or reassess a previous accounting conclusion. Companies can also elect various optional
expedients that would allow them to continue applying hedge accounting for hedging relationships affected by
reference rate reform if certain criteria are met. Further, in January 2021, the FASB issued ASU No. 2021-01,
Reference Rate Reform (Topic 848) (“ASU 2021-01”). ASU 2021-01 clarified the scope of Topic 848 so that
derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and
exceptions in Topic 848. ASU 2020-04 and ASU 2021-01 can be applied as of the beginning of the interim
period that includes March 12, 2020, however, the guidance will only be available for optional use through
December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic
848): Deferral of the Sunset Date of Topic 848 (“ASU 2022-06”). ASU 2022-06 amends the date the guidance
will be available to December 31, 2024. The new standard applies prospectively to contract modifications and
hedging relationships and may be elected over time as reference rate reform activities occur. The Company has
not yet adopted the standard and continues to evaluate the impact of ASU 2020-04, ASU 2021-01 and ASU
2022-06 on its consolidated financial statements and may elect optional expedients in future periods as reference
rate reform activities occur.
In July 2021, the FASB issued ASU No. 2021-05 (“ASU 2021-05”), Leases (Topic 842): Lessors–Certain
Leases with Variable Lease Payments. ASU 2021-05 requires lessors to classify a lease with variable lease
payments that do not depend on an index or rate as an operating lease if the lease would have been classified as a
sales-type lease or a direct financing lease under the pre-ASU classification criteria, and sales-type or direct
financing classification would result in a Day 1 loss. The ASU is effective for fiscal years beginning after
December 15, 2021. The ASU may be early adopted and can be applied either retrospectively to leases that
commenced or were modified on or after the adoption of ASU No. 2016-02 or prospectively to leases that
commence or are modified on or after the date that an entity first applies the amendments. The Company adopted
ASU 2021-05 prospectively on January 1, 2022. The adoption of ASU 2021-05 did not have a material impact on
the Company’s consolidated financial statements.
3. Rents Receivable, Net
The Company’s rents receivable is comprised of the following components (in thousands):
Billed receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Straight-line receivables (unbilled receivables) . . . . .
Total rents receivable . . . . . . . . . . . . . . . . . . . . .
December 31,
2022
December 31,
2021
$ 4,675
39,754
$44,429
$ 2,820
27,595
$30,415
As of December 31, 2022, the Company’s allowance for doubtful accounts was $0.1 million. As of
December 31, 2021, the Company’s allowance for doubtful accounts was $0.2 million.
4. Real Estate Investments
Acquisitions
During the years ended December 31, 2022, December 31, 2021 and December 31, 2020 the Company
acquired the following properties:
Property
Date Acquired
Percentage Owned
Bloc 83 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2021
The Terraces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2021
Block 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2021
5910 Pacific Center and 9985 Pacific Heights(1)
May 2021
. . .
100%
100%
100%
100%
(1)
5910 Pacific Center and 9985 Pacific Heights were added to the existing Sorrento Mesa portfolio of properties
(collectively “Sorrento Mesa”). The Sorrento Mesa portfolio was subsequently sold in December 2021.
77
Each of the foregoing acquisitions were accounted for as asset acquisitions.
The following table summarizes the Company’s allocations of the purchase price of assets acquired and
liabilities assumed during the year ended December 31, 2021 (in thousands):
5910 Pacific
Center and 9985
Pacific Heights
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and improvements . . . . . . . . . . . . . .
Tenant improvements . . . . . . . . . . . . . . . . . .
Lease intangible assets . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and other liabilities . . . . . .
Lease intangible liabilities . . . . . . . . . . . . . . .
$37,294
2,979
917
2,469
19
(319)
(103)
Block 23
The Terraces
Bloc 83
$ — $ 15,861
101,455
115,747
6,431
2,375
11,074
11,306
15
10,627
(319)
(1,914)
(2,118)
(2,197)
$ 18,956
280,313
5,075
19,560
291
(463)
(3,014)
December 31,
2021
$ 72,111
500,494
14,798
44,409
10,952
(3,015)
(7,432)
Net assets acquired . . . . . . . . . . . . . . . . . . . . .
$43,256
$135,944
$132,399
$320,718
$632,317
As part of the Block 23 acquisition, the Company was assigned an agreement from the prior owner for a
billboard asset located at the property. The Company and a third party each hold a 50% undivided interest in the
billboard and the related debt associated with the asset. The Company has accounted for this arrangement under
the equity method. As of the acquisition date, the fair value assigned to the equity method investment was
$0.3 million, which was included in other assets. As of December 31, 2022, the Company’s interest in the asset
and the debt are $0.5 million and $0.2 million, respectively.
Sale of Real Estate Property
During the first quarter of 2022, the sole tenant at the Lake Vista Pointe property exercised its lease option
to purchase the building and the Company signed a purchase and sale agreement with the tenant. At the time the
tenant exercised the option, the Company reassessed the lease classification of the lease, in accordance with ASC
842—Leases, and determined that the lease should be reclassified from an operating lease to a sales-type lease.
This reclassification resulted in a gain on sale of $21.7 million net of disposal related costs. On June 15, 2022,
the Company sold the Lake Vista Pointe property in Dallas, Texas for a gross sales price of $43.8 million.
On December 2, 2021, the Company sold the Sorrento Mesa portfolio (“Sorrento Mesa”) in San Diego,
California for a gross sales price of $576.0 million, resulting in an aggregate gain of $429.3 million net of
$28.3 million of disposal-related costs. All the property gains have been classified as a net gain on sale of real
estate property in the consolidated statements of operations.
On February 10, 2021, the Company sold the Cherry Creek property in Denver, Colorado for a gross sales
price of $95.0 million, resulting in an aggregate gain of $47.4 million net of disposal-related costs.
On July 23, 2020, the Company sold a land parcel at the Circle Point property in Denver, Colorado for
$6.5 million, resulting in an aggregate gain of $1.3 million net of disposal-related costs.
Impairment of Real Estate
In December 2022, the Company determined there were indicators of impairment for two of its properties,
which resulted in the Company recognizing impairment of real estate for $13.4 million. The impairment was
related to the write down of the carrying amount of 190 Office Center in Dallas, Texas and Cascade Station in
Portland, Oregon for $6.9 million and $6.5 million, respectively, to fair value. Fair value was determined based
either on recent comparable sales transactions (adjusted for relevant factors such as the size, quality and
78
occupancy rates of comparable properties) or on reports provided by an external valuator (which considered
comparable sales transactions, discounted cash flows and other factors), each of which are classified as Level 3
inputs. There was no impairment of real estate during the years ended December 31, 2021 and December 31,
2020.
5. Lease Intangibles
Lease intangibles and the value of assumed lease obligations as of December 31, 2022 and December 31,
2021 were comprised as follows (in thousands):
Lease Intangible Assets
Lease Intangible Liabilities
December 31, 2022
Above
Market
Leases
In Place
Leases
Leasing
Commissions
Total
Below
Market
Leases
Cost . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . .
$18,793
(9,069)
$ 78,720
(49,772)
$ 34,123
(17,357)
$131,636
(76,198)
$(15,682)
6,618
Below
Market
Ground
Lease
$(138)
52
Total
$(15,820)
6,670
$ 9,724
$ 28,948
$ 16,766
$ 55,438
$ (9,064)
$ (86)
$ (9,150)
Lease Intangible Assets
Lease Intangible Liabilities
December 31, 2021
Above
Market
Leases
In Place
Leases
Leasing
Commissions
Total
Below
Market
Leases
Cost . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . .
$21,147
(9,627)
$ 93,761
(56,987)
$ 39,345
(18,714)
$154,253
(85,328)
$(16,743)
5,961
Below
Market
Ground
Lease
$(138)
48
Total
$(16,881)
6,009
$11,520
$ 36,774
$ 20,631
$ 68,925
$(10,782)
$ (90)
$(10,872)
The estimated aggregate amortization expense for lease intangibles for the five succeeding years and in the
aggregate are as follows (in thousands):
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,861
6,660
6,479
6,491
4,287
13,510
$46,288
79
6. Debt
The following table summarizes the outstanding indebtedness as of December 31, 2022 and 2021 (in
thousands):
Property
December 31,
2022
December 31,
2021
Interest Rate as
of
December 31,
2022(1)
Maturity
Unsecured Credit Facility(3)(4)
Term Loan(3)
. . . . . . . . . . . . . . . . . . . . . . . .
Mission City . . . . . . . . . . . . . . . . . . . . . . . .
Canyon Park(5) . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Circle Point
190 Office Center(6) . . . . . . . . . . . . . . . . . . .
SanTan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intellicenter . . . . . . . . . . . . . . . . . . . . . . . . .
The Quad . . . . . . . . . . . . . . . . . . . . . . . . . . .
2525 McKinnon . . . . . . . . . . . . . . . . . . . . . .
FRP Collection . . . . . . . . . . . . . . . . . . . . . .
Greenwood Blvd . . . . . . . . . . . . . . . . . . . . .
Cascade Station . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
5090 N. 40th St
AmberGlen . . . . . . . . . . . . . . . . . . . . . . . . .
Central Fairwinds . . . . . . . . . . . . . . . . . . . .
FRP Ingenuity Drive(7) . . . . . . . . . . . . . . . . .
Carillon Point . . . . . . . . . . . . . . . . . . . . . . . .
Lake Vista Pointe(8) . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . $200,500
50,000
46,859
39,673
39,440
38,894
32,140
31,297
30,600
27,000
26,784
21,396
21,192
20,810
20,000
16,273
16,165
14,773
—
$142,000 LIBOR +1.30%(2) November 2025
50,000 LIBOR +1.25%(2) September 2024
3.78% November 2027
47,000
4.30%
40,381
March 2027
4.49% September 2028
39,650
October 2025
4.79%
39,581
March 2027
4.56%
32,807
4.65%
31,883
October 2025
4.20% September 2028
30,600
4.24%
27,000
April 2027
3.10% September 2023
27,535
3.15% December 2025
21,920
May 2024
4.55%
21,581
January 2027
3.92%
21,233
May 2027
3.69%
20,000
3.15%
16,707
June 2024
4.44% December 2024
16,457
October 2023
3.10%
15,185
—
17,018
—
Total Principal . . . . . . . . . . . . . . . . . . .
Deferred financing costs, net . . . . . . . .
Unamortized fair value adjustments . .
693,796
(3,887)
190
658,538
(5,223)
333
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . $690,099
$653,648
(1) All interest rates are fixed interest rates with the exception of the Unsecured Credit Facility and the Term Loan, as explained in
footnotes 3 and 4 below.
(2) As of December 31, 2022, the one-month LIBOR rate was 4.39%.
(3)
(4)
In September 2019, the Company entered into a five-year $50 million Term Loan increasing its authorized borrowings under the
Unsecured Credit Facility from $250 million to $300 million. Borrowings under the Term Loan bear interest at a rate equal to the
LIBOR rate plus a margin between 125 to 215 basis points depending upon the Company’s consolidated leverage ratio. In
conjunction with the Term Loan, the Company also entered into the five-year Interest Rate Swap for a notional amount of
$50 million. Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of the notional amount
annually, payable monthly, and receive floating rate 30-day LIBOR payments.
In March 2018, the Company entered into the Credit Agreement for the Unsecured Credit Facility that provides for commitments of
up to $250 million, which includes an accordion feature that allows the Company to borrow up to $500 million, subject to
customary terms and conditions. On November 16, 2021, the Company entered into an Amended and Restated Credit Agreement
for the Unsecured Credit Facility that provides for commitments of up to $300 million. Combined with the Company’s existing
five-year Term Loan, the total authorized borrowings increased from $300 million to $350 million. The Unsecured Credit Facility
matures in November 2025 and may be extended 12 months at the Company’s option upon meeting certain conditions. Borrowings
under the Unsecured Credit Facility bear interest at a rate equal to the LIBOR rate plus a margin of between 125 to 225 basis points
depending upon the Company’s consolidated leverage ratio. As of December 31, 2022, the Unsecured Credit Facility had
$200.5 million drawn and a $4.2 million letter of credit to satisfy escrow requirements for a mortgage lender. The Unsecured Credit
Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.
(5) The mortgage loan anticipated repayment date (“ARD”) is March 1, 2027. The final scheduled maturity date can be extended up to 5 years
beyond the ARD. If the loan is not paid off at ARD, loan’s interest rate shall be adjusted to the greater of (i) the initial interest rate plus
200 basis points or (ii) the yield on the five year “on the run” treasury reported by Bloomberg market data service plus 450 basis points.
80
(6)
In Q4 2022, a ‘cash-sweep’ began for the 190 Office Center loan due to the non-renewal of the minimum square footage of a major
tenant in the building. A ‘cash-sweep’ results in the excess funds being held in escrow to fund future leasing costs related to the
major tenant’s space. As of December 31, 2022, total restricted cash for the property was $3.8 million.
(7) As of September 30, 2022, the Debt Service Coverage Ratio (“DSCR”) covenant for FRP Ingenuity Drive was not met, which
triggered a ‘cash-sweep’ event that began in Q4 2022 where excess funds have been held in escrow to fund future tenant
improvement expenses of current vacant space. As of December 31, 2022, total restricted cash for the property was $2.6 million.
In June 2022, the loan balance of $16.8 million was repaid in full.
(8)
The scheduled principal repayments of mortgage payable as of December 31, 2022 are as follows (in
thousands):
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 47,980
108,480
292,497
4,416
176,303
64,120
$693,796
7. Fair Value of Financial Instruments
Fair value measurements are based on assumptions that market participants would use in pricing an asset or
a liability. The hierarchy for inputs used in measuring fair value is as follows:
Level 1 Inputs – quoted prices in active markets for identical assets or liabilities
Level 2 Inputs – observable inputs other than quoted prices in active markets for identical assets and
liabilities
Level 3 Inputs – unobservable inputs
In September 2019, the Company entered into the five-year Interest Rate Swap for a notional amount of
$50 million. Pursuant to the Interest Rate Swap, the Company will pay a fixed rate of approximately 1.27% of
the notional amount annually, payable monthly, and receive floating rate 30-day LIBOR payments.
The Interest Rate Swap has been designated and qualifies as a cash flow hedge and has been recognized on
the consolidated balance sheets at fair value. The fair value of the Interest Rate Swap has been classified as a
Level 2 fair value measurement. Gains and losses resulting from changes in the fair value of derivatives that have
been designated and qualify as cash flow hedges are reported as a component of other comprehensive income and
reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.
As of December 31, 2022, the Interest Rate Swap was reported as an asset at its fair value of approximately
$2.7 million, which is included in other assets on the Company’s consolidated balance sheet. For the year ended
December 31, 2022, approximately $0.2 million of net realized gains were reclassified to interest expense due to
payments received from the swap counterparty.
As of December 31, 2021, the Interest Rate Swap was reported as a liability at its fair value of
approximately $0.4 million, which is included in other liabilities on the Company’s consolidated balance sheet.
For the year ended December 31, 2021, approximately $0.6 million of realized losses were reclassified to interest
expense due to payments made to the swap counterparty.
Cash and Cash Equivalents, Restricted Cash, Rents Receivable, Accounts Payable and Accrued Liabilities
The Company estimates that the fair value approximates carrying value due to the relatively short-term
nature of these instruments.
81
Fair Value of Financial Instruments Not Carried at Fair Value
With the exception of fixed rate mortgage loans payable, the carrying amounts of the Company’s financial
instruments approximate their fair value. The Company determines the fair value of its fixed rate mortgage loan
payable based on a discounted cash flow analysis using a discount rate that approximates the current borrowing
rates for instruments of similar maturities. Based on this, the Company has determined that the fair value of these
instruments was $420.7 million and $478.1 million (compared to a carrying value of $443.3 million and
$466.5 million) as of December 31, 2022 and December 31, 2021, respectively. Accordingly, the fair value of
mortgage loans payable have been classified as Level 3 fair value measurements.
8. Related Party Transactions
Administrative Services Agreements
On October 29, 2018, the Company entered into the First Amendment (the “Amendment”) to the
Administrative Services Agreement with real estate investment funds affiliated with Second City Capital II
Corporate and Second City Real Estate II Corporation (“SCRE II”). The terms of the Amendment were effective
on February 1, 2019 (the “Effective Date”). After February 1, 2019, the annual fees payable to the Company will
be $500,000 for the first twelve months following the Effective Date and thereafter an amount equal to 40% of
the management fee paid to SCRE II by the fund managed by SCRE II. During the years ended December 31,
2022, 2021, and 2020, the Company earned $0.3 million, $0.4 million, and $0.5 million, respectively, in
administrative services performed for SCRE II and its affiliates.
On July 31, 2019, an indirect, wholly owned subsidiary of the Company entered into an administrative
services agreement with Clarity Real Estate III GP, Limited Partnership and Clarity Real Estate Ventures GP,
Limited Partnership (together, “Clarity”), entities affiliated with principals of Second City and officers of the
Company. Pursuant to the Administrative Services Agreement, the Company will provide various administrative
services and support to the related entities managing the Clarity funds. During the year ended December 31,
2022, the Company earned $0.3 million in administrative services performed for Clarity. During the year ended
December 31, 2021, the Company earned $0.2 million in administrative services performed for Clarity. During
the year ended December 31, 2020, the Company earned $0.2 million in administrative services performed for
Clarity.
9. Leases
Lessor Accounting
The Company is focused on acquiring, owning and operating high-quality office properties for lease to a
stable and diverse tenant base. Our properties have both full-service gross and net leases which are generally
classified as operating leases. Rental income related to such leases is recognized on a straight-line basis over the
remaining lease term. The Company’s total revenue includes fixed base rental payments provided under the lease
and variable payments, which principally consist of tenant expense reimbursements for certain property operating
expenses as provided under the lease. The Company elected the practical expedient to account for its lease and
non-lease components as a single combined operating lease component under ASC 842. As a result, rental
income, expense reimbursement, and other were aggregated into a single line within rental and other revenues on
the consolidated statements of operations.
82
The Company recognized fixed and variable lease payments for operating leases for the years ended
December 31, 2022 and December 31, 2021 as follows (in thousands):
Years Ended
December 31,
2022
2021
Fixed payments . . . . . . . . . . . . . . . . . . . . . . . . .
Variable payments . . . . . . . . . . . . . . . . . . . . . . .
$154,126
24,827
$141,138
22,718
$178,953
$163,856
The Company recognized interest income of $0.6 million and variable lease payments of $0.2 million for
the sales-type lease at the Lake Vista Pointe property for the year ended December 31, 2022.
Future minimum lease payments to be received as of December 31, 2022 under noncancellable operating
leases for the next five years and thereafter are as follows (in thousands):
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$124,384
115,513
104,178
95,714
79,481
220,157
$739,427
The Company’s leases may include various provisions such as scheduled rent increases, renewal options,
purchase options and termination options. The majority of the Company’s leases include defined rent increase
rather than variable payments based on an index or unknown rate.
Lessee Accounting
As a lessee, the Company has ground and office leases which are classified as operating and financing
leases. As of December 31, 2022, these leases had remaining terms of under one year to 66 years and a weighted
average remaining lease term of 50 years. Right-of-use assets and lease liabilities have been included within
other assets and other liabilities on the Company’s consolidated balance sheet as follows (in thousands):
December 31,
2022
December 31,
2021
Right-of-use asset – operating leases . . . . .
Lease liability – operating leases . . . . . . . .
Right-of-use asset – financing leases . . . . .
Lease liability – financing leases . . . . . . . .
$12,935
$ 8,802
$10,054
$ 1,475
$14,114
$ 9,160
$10,308
$ 1,425
Lease liabilities are measured at the commencement date based on the present value of future lease
payments. One of the Company’s operating ground leases includes rental payment increases over the lease term
based on increases in the Consumer Price Index (“CPI”). Changes in the CPI were not estimated as part of the
measurement of the operating lease liability. As most of the Company’s leases do not provide an implicit rate, the
Company uses its incremental borrowing rate based on the information available at the commencement date in
determining the present value of future payments. The Company used a weighted average discount rate of 6.2%
in determining its lease liabilities. The discount rates were derived from the Company’s assessment of the credit
quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread
adjustments.
83
Right-of-use assets include any prepaid lease payments and exclude any lease incentives and initial direct
costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease
term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the
Company will exercise that option.
Operating lease expense for the years ended December 31, 2022 and 2021 was $1.0 million and
$1.0 million, respectively. Financing lease expense for the year ended December 31, 2022 was $0.3 million.
Financing lease expense for the year ended December 31, 2021 was nominal.
Future minimum lease payments to be paid by the Company as a lessee for operating and finance leases as
of December 31, 2022 for the next five years and thereafter are as follows (in thousands):
Operating
Leases
Financing
Leases
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
$
651
770
770
724
587
26,563
$
12
7
8
8
8
6,938
Total future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount
30,065
(21,263)
6,981
(5,506)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,802
$ 1,475
10. Commitments and Contingencies
The Company is obligated under certain tenant leases to fund tenant improvements and the expansion of the
underlying leased properties.
Under various federal, state and local laws, ordinances and regulations relating to the protection of the
environment, a current or previous owner or operator of real estate may be liable for the cost of removal or
remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or
discharged from, on, at, under, or in a property. As such, the Company may be potentially liable for costs
associated with any potential environmental remediation at any of its formerly or currently owned properties.
The Company believes that it is in compliance in all material respects with all federal, state and local
ordinances and regulations regarding hazardous or toxic substances. Management is not aware of any
environmental liability that it believes would have a material adverse impact on the Company’s financial position
or results of operations. Management is unaware of any instances in which the Company would incur significant
environmental costs if any or all properties were sold, disposed of or abandoned. However, there can be no
assurance that any such non-compliance, liability, claim or expenditure will not arise in the future.
The Company is involved from time to time in lawsuits and other disputes which arise in the ordinary
course of business. As of December 31, 2022, management believes that these matters will not have a material
adverse effect, individually or in the aggregate, on the Company’s financial position or results of operations.
84
11. Earnings per Share
The table below is a reconciliation of the numerators and denominators of the basic and diluted EPS
computations for the years ended December 31, 2022, 2021, and 2020 (in thousands, except per share amounts):
Years ended December 31,
2022
2021
2020
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to non-controlling interests in properties . . . .
Less: Net income attributable to preferred stockholders . . . . . . . . . . . . . . . .
$17,681
(691)
(7,420)
$485,281
(886)
(7,420)
$ 5,129
(602)
(7,420)
Numerator for basic and diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,570
$476,975
$ (2,893)
Denominator for basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive effect of RSUs and PSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,052
814
43,498
647
47,223
—
Denominator for dilutive EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,866
44,145
47,223
Net income/(loss) per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.23
0.22
$
$
10.97
10.80
$ (0.06)
$ (0.06)
12. Stockholder’s Equity
On October 4, 2016, the Company completed a public preferred stock offering pursuant to which the
Company sold 4,000,000 shares of our 6.625% Series A Cumulative Redeemable Preferred Stock (“Series A
Preferred Stock”), par value $0.01 per share to the public at a price of $25.00 per share. The Company raised
$100.0 million in gross proceeds, resulting in net proceeds to the Company of approximately $96.5 million after
deducting $3.5 million in underwriting discounts and expenses related to the offering. On October 28, 2016, the
Company issued an additional 480,000 shares of Series A Preferred Stock pursuant to the partial exercise of the
underwriters’ overallotment option, raising an additional $12.0 million in gross proceeds before underwriting
discounts and expenses. The preferred stock is perpetual and from October 4, 2021, the Company may at its
option redeem the Preferred Stock in whole or in part at a redemption price equal to $25.00 per share, plus any
accrued and unpaid dividends (whether or not declared) to, but not including the date of redemption.
On February 26, 2020, the Company and the Operating Partnership entered into equity distribution
agreements (collectively, the “Agreements”) with each of KeyBanc Capital Markets Inc., Raymond James &
Associates, Inc., BMO Capital Markets Corp., RBC Capital Markets, LLC, B. Riley FBR, Inc., D.A. Davidson &
Co. and Janney Montgomery Scott LLC (the “Sales Agents”) pursuant to which the Company may issue and sell
from time to time up to 15,000,000 shares of common stock and up to 1,000,000 shares of Series A Preferred
Stock through the Sales Agents, acting as agents or principals (the “ATM Program”). On May 7, 2021 the
Company delivered to D.A. Davidson & Co. a notice of termination of the Agreement, effective May 7, 2021.
The Company did not issue any shares of common stock or Series A Preferred Stock under the ATM Program
during the fiscal years ended December 31, 2022, December 31, 2021 and December 31, 2020.
Share Repurchase Plan
On March 9, 2020, the Company’s Board of Directors approved a share repurchase plan authorizing the
Company to repurchase up to $100 million of its outstanding shares of common stock. In July 2020, the
Company completed the full March 2020 share repurchase plan. On August 5, 2020, the Company’s Board of
Directors approved an additional share repurchase plan authorizing the Company to repurchase up to an
additional aggregate amount of $50 million of its outstanding shares of common stock. In September 2022, the
Company completed the full August 2020 share repurchase plan. Under the share repurchase programs, the
shares may be repurchased from time to time using a variety of methods, which may include open market
transactions, privately negotiated transactions or otherwise, all in accordance with the rules of the SEC and other
applicable legal requirements.
85
Repurchased shares of common stock will be classified as authorized and unissued shares. The Company
recognizes the cost of shares of common stock it repurchases, including direct costs incurred, as a reduction in
stockholders’ equity. Such reductions of stockholders equity due to the repurchases of shares of common stock
will be applied first, to reduce common stock in the amount of the par value associated with the shares of
common stock repurchased and second, to reduce additional paid-in capital by the amount that the purchase price
for the shares of common stock repurchased exceed the par value.
During the year ended December 31, 2022, the Company completed the repurchase of 4,006,897 shares of
its common stock for approximately $50.0 million. There were no shares repurchased during the year ended
December 31, 2021. During the year ended December 31, 2020, the Company completed the repurchase of
11,363,851 shares of its common stock for approximately $100.0 million.
Common Stock and Common Unit Distributions
During the year ended December 31, 2022, the Company declared aggregate cash distributions to common
stockholders and common unitholders of $33.2 million. The Company paid aggregate cash distributions of
$33.9 million for the year ended December 31, 2022 and $7.9 million was payable as of December 31, 2022,
which is included within other liabilities on the consolidated balance sheets.
During the year ended December 31, 2022, the Company declared the following distributions per share and
unit:
Period
Distribution per
Common
Share/Unit
Declaration Date
Record Date
Payment Date
January 1, 2022 – March 31, 2022 . . . .
April 1, 2022 – June 30, 2022 . . . . . . . .
July 1, 2022 – September 30, 2022 . . . .
October 1, 2022 – December 31, 2022 . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
$0.20
0.20
0.20
0.20
$0.80
Preferred Stock Distributions
March 15, 2022
June 16, 2022
April 22, 2022
July 22, 2022
September 15, 2022 October 7, 2022 October 21, 2022
December 15, 2022 January 10, 2023 January 24, 2023
April 8, 2022
July 8, 2022
During the year ended December 31, 2022, the Company declared aggregate cash distributions to preferred
stockholders of $7.4 million. The Company paid aggregate cash distributions of $7.4 million for the year ended
December 31, 2022 and $1.9 million was payable as of December 31, 2022, which is included within in other
liabilities on the consolidated balance sheets.
Equity Incentive Plan
The Company has an equity incentive plan (“Equity Incentive Plan”) for executive officers, directors and
certain non-executive employees, and with approval of the Board of Directors, for subsidiaries and their
respective affiliates. The Equity Incentive Plan provides for grants of restricted common stock, restricted stock
units, phantom shares, stock options, dividend equivalent rights and other equity-based awards (including LTIP
Units), subject to the total number of shares available for issuance under the plan. The Equity Incentive Plan is
administered by the compensation committee of the Board of Directors (the “Plan Administrator”). On May 4,
2022, the Company’s stockholders approved an amendment to the Equity Incentive Plan increasing the maximum
number of shares of common stock that may be issued under the Equity Incentive Plan from 2,263,580 shares to
3,763,580 shares. To the extent an award granted under the Equity Incentive Plan expires or terminates, the
shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the
case may be, will again become available for the issuance of additional awards.
86
A restricted stock unit (“RSU”) award represents the right to receive shares of the Company’s common
stock in the future, after the applicable vesting criteria, determined by the plan administrator, has been satisfied.
The holder of an award of RSU has no rights as a stockholder until shares of common stock are issued in
settlement of vested restricted stock units. The plan administrator may provide for a grant of dividend equivalent
rights in connection with the grant of RSU; provided, however, that if the restricted stock units do not vest solely
upon satisfaction of continued employment or service, any payment in respect to the related dividend equivalent
rights will be held by the Company and paid when, and only to the extent that, the related RSU vest.
On January 27, 2020, each of the Board of Directors and the Compensation Committee approved a new
form of performance-based restricted unit award agreement (the “Performance RSU Award Agreement”) that
will be used to grant performance-based restricted stock unit awards (“Performance RSU Awards”) pursuant to
the Equity Incentive Plan. The Performance RSU Awards are based upon the total stockholder return (“TSR”) of
the Company’s common stock over a three-year measurement period beginning January 1 of the year of grant
(the “Measurement Period”) relative to the TSR of a defined peer group list of other US Office REIT companies
(the “Peer Group”) as of the first trading date in the year of grant. The payouts under the Performance RSU
Awards are evaluated on a sliding scale as follows: TSR below the 30th percentile of the Peer Group would result
in a 50% payout; TSR at the 50th percentile of the Peer Group would result in a 100% payout; and TSR at or
above the 75th percentile of the Peer Group would result in a 150% payout. Payouts are mathematically
interpolated between these stated percentile targets, subject to a 150% maximum. To the extent earned, the
payouts of the Performance RSU Awards are intended to be settled in the form of shares of the Company’s
common stock, pursuant to the Equity Incentive Plan. Upon satisfaction of the vesting conditions, dividend
equivalents in an amount equal to all regular and special dividends declared with respect to the Company’s
common stock during each annual measurement period during the Measurement Period are determined and paid
on a cumulative, reinvested basis over the term of the applicable Performance RSU Award, at the time such
award vests and based on the number of shares of the Company’s common stock that are earned.
The following table summarizes the activity of the awards under the Equity Incentive Plan for the years
ended December 31, 2022, December 31, 2021 and December 31, 2020:
Outstanding at December 31, 2019 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of dividend equivalents . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2020 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of dividend equivalents . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2021 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of dividend equivalents . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of RSUs
335,415
147,050
25,727
(175,757)
332,435
169,500
18,665
(177,038)
(1,403)
342,159
237,986
25,987
(177,812)
Outstanding at December 31, 2022 . . . . . . . . . . . . . . . . .
428,320
Number of
Performance
RSUs
—
97,500
—
—
97,500
120,000
—
—
—
217,500
90,000
—
—
307,500
87
During the years ended December 31, 2022, December 31, 2021 and December 31, 2020 the Company
granted the following restricted stock units (“RSUs”) and Performance RSU Awards to directors, executive
officers and certain non-executive employees:
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Units Granted
RSUs
237,986
169,500
147,050
Performance
RSUs
Fair Value
(in thousands)
90,000
120,000
97,500
$5,753
2,808
3,355
Weighted Average
Grant Fair Value
Per Share
$17.54
9.70
13.72
The RSU Awards will vest in three equal, annual installments on each of the first three anniversaries of the
grant of date. The Performance RSU Awards will vest on the last day of the three-year measurement period.
During the years ended December 31, 2022, December 31, 2021 and December 31, 2020 the Company
recognized net compensation expense for the RSUs and Performance RSU Awards as follows (in thousands):
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs
$2,554
1,833
1,919
Performance
RSUs
$1,325
808
414
Total
$3,879
2,641
2,333
As of December 31, 2022, there was $5.0 million of unrecognized share-based compensation expense,
which will be recognized over the next two years, with a weighted average period of approximately one year.
13. Subsequent Events
On January 5, 2023, the Company entered into a second amendment to the Amended and Restated Credit
Agreement for the Unsecured Credit Facility and entered into a three-year $25 million term loan, increasing its
total authorized borrowings from $350 million to $375 million. In conjunction with the $25 million term loan,
the Company also entered into a three-year interest rate swap for a notional amount of $25 million, effectively
fixing the rate of the term loan at approximately 5.9% for a three-year term.
On February 9, 2023, the Company entered into an interest rate swap for a notional amount of $140 million
with a maturity date of November 16, 2025, effectively fixing the variable interest rate for $140 million of the
Unsecured Credit Facility at approximately 5.6% through November 16, 2025.
88
City Office REIT, Inc.
SCHEDULE III – REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION
December 31, 2022
(In thousands)
Initial Costs to Company
Costs
Capitalized
Subsequent to
Acquisition
Gross Amount at Which
Carried as of December 31,
2022(1)
Description
Encumbrances(2) Land
Buildings and
Improvements
Land,
Buildings, and
Improvements(3) Land
Building and
Improvements
Total
Accumulated
Amortization
Year of
Construction
Year
Acquired
AmberGlen . . . . . . . . . .
City Center . . . . . . . . . . .
Central Fairwinds . . . . . .
Florida Research Park . . .
Superior Pointe . . . . . . . .
Denver Tech . . . . . . . . . .
190 Office Center . . . . . .
Intellicenter . . . . . . . . . . .
. . . . . . . . .
Carillon Point
Park Tower . . . . . . . . . . .
5090 N 40th St . . . . . . . . .
SanTan . . . . . . . . . . . . . .
2525 McKinnon . . . . . . .
Mission City . . . . . . . . . .
Papago Tech . . . . . . . . . .
Pima Center . . . . . . . . . . .
Circle Point . . . . . . . . . . .
The Quad . . . . . . . . . . . . .
Greenwood Blvd . . . . . . .
Camelback Square . . . . . .
Canyon Park . . . . . . . . . .
Cascade Station . . . . . . . .
Block 23 . . . . . . . . . . . . .
The Terraces . . . . . . . . . .
Bloc 83 . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . .
$ 20,000
$
—
16,273
42,949
—
—
38,894
31,297
14,773
—
20,810
32,140
27,000
46,859
—
—
39,440
30,600
21,396
—
39,673
21,192
—
—
—
250,500
6,546 $
3,123
1,747
11,446
3,153
18,002
7,162
5,244
5,172
3,479
6,696
6,803
10,629
25,741
10,746
—
9,320
8,079
3,945
11,738
7,098
—
—
15,861
18,956
—
3,490
10,656
9,751
56,475
19,834
52,719
39,690
34,278
17,316
68,656
32,123
37,187
34,515
41,474
19,762
45,133
39,101
39,858
26,019
37,922
38,416
27,220
115,747
101,455
280,313
—
$
2,791
11,731
7,333
7,154
3,758
9,709
(11,277)
137
1,903
22,491
4,444
4,268
3,124
11,221
1,553
6,267
5,796
245
1,224
7,371
5,500
(8,495)
7,397
6,796
12,354
—
$
6,546 $
3,123
1,747
11,446
3,153
18,002
6,013
5,244
5,172
3,479
6,696
6,803
10,629
25,741
10,746
—
9,320
8,079
3,945
11,738
7,098
—
—
15,861
18,956
—
6,281 $
22,387
17,084
63,629
23,592
62,428
29,562
34,415
19,219
91,147
36,567
41,455
37,639
52,695
21,315
51,400
44,897
40,103
27,243
45,293
43,916
18,725
123,144
108,251
292,667
—
12,827
25,510
18,831
75,075
26,745
80,430
35,575
39,659
24,391
94,626
43,263
48,258
48,268
78,436
32,061
51,400
54,217
48,182
31,188
57,031
51,014
18,725
123,144
124,112
311,623
—
$
3,611
9,360
6,197
15,010
6,204
12,775
—
7,607
5,228
20,475
6,732
8,986
6,052
13,316
4,975
8,647
7,947
6,008
3,845
5,871
5,988
—
2,891
2,678
5,317
—
2009
1984-1998
2010
1984
1982
2012
1999 2014; 2016
2015
2000
1999; 1997 2015; 2019
2015
2015
2016
2016
2016
2016
2017
2017
2017
2018
2018
2018
2018
2018
2019
2019
2021
2021
2021
2001
2008
2007
1973
1988
2000-2003
2003
1990-2007
1993-1995
2006-2008
2001
1982
1997
1978
1993; 1999
2008-2009
2019
2017
2019; 2021
Total . . . . . . . . . . . . . . . .
$693,796
$200,686 $1,229,110
$124,795
$199,537 $1,355,054 $1,554,591
$175,720
(1) The aggregate cost for federal tax purposes as of December 31, 2022 of our real estate assets was approximately $1.1 billion.
(2) Encumbrances exclude net deferred financing costs of $3.9 million and unamortized fair value adjustments of $0.2 million.
(3)
Includes impairments recorded subsequent to acquisition for 190 Office Center and Cascade Station.
89
A summary of activity for real estate and accumulated depreciation for the years ended December 31, 2022, 2021
and 2020 is as follows:
Real Estate Properties
2022
2021
2020
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dispositions and Impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,568,653
—
(58,735)
44,673
—
$1,086,809
587,403
(121,602)
16,043
—
$1,109,173
—
(1,993)
27,503
(47,874)
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,554,591
$1,568,653
$1,086,809
Accumulated Depreciation
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dispositions and Impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation on assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 157,356
46,654
(28,290)
—
$ 131,220
39,106
(12,970)
—
$ 101,835
38,372
(1,962)
(7,025)
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 175,720
$ 157,356
$ 131,220
90
Exhibit
Number
1.1
1.2
1.3
1.4
1.5
1.6
1.7
3.1
3.2
4.1
4.2
4.3
EXHIBIT INDEX
Description
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City
Office Operating Partnership, L.P. and KeyBanc Capital Markets Inc. (incorporated by reference to
Exhibit 1.1 to the Company’s Current Report on Form 8-K filed with the Commission on
February 26, 2020).
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City
Office Operating Partnership, L.P. and Raymond James & Associates, Inc. (incorporated by
reference to Exhibit 1.2 to the Company’s Current Report on Form 8-K filed with the Commission on
February 26, 2020).
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City
Office Operating Partnership, L.P. and BMO Capital Markets Corp. (incorporated by reference to
Exhibit 1.3 to the Company’s Current Report on Form 8-K filed with the Commission on
February 26, 2020).
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City
Office Operating Partnership, L.P. and RBC Capital Markets, LLC (incorporated by reference to
Exhibit 1.4 to the Company’s Current Report on Form 8-K filed with the Commission on
February 26, 2020).
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City
Office Operating Partnership, L.P. and B. Riley FBR, Inc. (incorporated by reference to Exhibit 1.5
to the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2020).
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City
Office Operating Partnership, L.P. and D.A. Davidson & Co. (incorporated by reference to Exhibit
1.6 to the Company’s Current Report on Form 8-K filed with the Commission on February 26, 2020).
Equity Distribution Agreement, dated February 26, 2020, by and among City Office REIT, Inc., City
Office Operating Partnership, L.P. and Janney Montgomery Scott LLC (incorporated by reference to
Exhibit 1.7 to the Company’s Current Report on Form 8-K filed with the Commission on
February 26, 2020).
Articles of Amendment and Restatement of the Company, as amended and supplemented
(incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with
the Commission on March 1, 2018).
Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to
the Company’s Current Report on Form 8-K filed with the Commission on March 14, 2017).
Certificate of Common Stock of City Office REIT, Inc. (incorporated by reference to Exhibit 4.1 to
the Company’s Registration Statement on Form S-11/A filed with the Commission on February 18,
2014).
Form of certificate representing the 6.625% Series A Cumulative Redeemable Preferred Stock, $0.01
par value per share (incorporated by reference to Exhibit 4.1 to the Company’s Registration
Statement on Form 8-A filed with the Commission on September 30, 2016).
Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934,
as amended (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form
10-K filed with the Commission on February 26, 2020).
10.1
Form of Indemnification Agreement by and between City Office REIT, Inc. and its directors and
officers (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on
Form S-11/A filed with the Commission on March 25, 2014). *
91
Exhibit
Number
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Description
Amended and Restated Agreement of Limited Partnership of City Office REIT Operating
Partnership, L.P., dated as of April 21, 2014 (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed with the Commission on May 23, 2014).
First Amendment to the Amended and Restated Agreement of Limited Partnership of City Office
REIT Operating Partnership, L.P., dated September 30, 2016 (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 30,
2016).
Second Amendment to the Amended and Restated Agreement of Limited Partnership of City Office
REIT Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on March 14, 2017).
Third Amendment to the Amended and Restated Agreement of Limited Partnership of City Office
REIT Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on June 20, 2017).
Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of City Office
REIT Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on February 26, 2020).
Administrative Services Agreement, dated as of February 1, 2016, by and among City Office
Management Ltd., Second City Capital II Corporation and Second City Real Estate II Corporation
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with
the Commission on February 5, 2016).
First Amendment to the Administrative Services Agreement, dated October 29, 2018 and effective as
of February 1, 2019, by and among City Office Management ULC, Second City Capital II
Corporation and Second City Real Estate II Corporation (incorporated by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 1, 2018).
Equity Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report
on Form 10-Q filed with the Commission on May 23, 2014). *
Amendment No. 1 to the City Officer REIT, Inc. Equity Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 6,
2019).*
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Commission on March 9, 2016). *
Form of Performance Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 28,
2020). *
Executive Employment Agreement, dated as of February 1, 2018, by and between City Office
Management Ltd. and James Farrar (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on February 2, 2018). *
Amendment No. 1 to Executive Employment Agreement, dated as of July 31, 2019, by and between
City Office Management Ltd. and James Farrar (incorporated by reference to Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q filed with the Commission on August 1, 2019). *
Executive Employment Agreement, dated as of February 1, 2018, by and between City Office
Management Ltd. and Gregory Tylee (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed with the Commission on February 2, 2018). *
92
Exhibit
Number
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
21.1
23.1
31.1
Description
Amendment No. 1 to Executive Employment Agreement, dated as of July 31, 2019, by and between
City Office Management Ltd. and Gregory Tylee (incorporated by reference to Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q filed with the Commission on August 1, 2019). *
Executive Employment Agreement, dated as of February 1, 2018, by and between City Office
Management Ltd. and Anthony Maretic (incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K filed with the Commission on February 2, 2018).*
Amendment No. 1 to Executive Employment Agreement, dated as of July 31, 2019, by and between
City Office Management Ltd. and Anthony Maretic (incorporated by reference to Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q filed with the Commission on August 1, 2019). *
Credit Agreement dated as of March 15, 2018 by and among City Office REIT Operating
Partnership, L.P., as borrower, City Office REIT, Inc. and certain of its subsidiaries, as guarantors,
KeyBank National Association, as lender, agent and swing loan lender, the other lending institutions
parties named therein, as lenders, and Keybanc Capital Markets, as sole lead arranger and sole book
manager (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed with the Commission on March 21, 2018).
Administrative Services Agreement, dated July 31, 2019, by and among CIO Administrative
Services, LLC, Clarity Real Estate III GP, Limited Partnership and Clarity Real Estate Ventures GP,
Limited Partnership (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report
on Form 10-Q filed with the Commission on August 1, 2019).
Amended and Restated Credit Agreement dated as of November 16, 2021 by and among City Office
REIT Operating Partnership, L.P., as borrower, City Office REIT, Inc. and certain of its subsidiaries,
as guarantors, KeyBank National Association, as lender, agent and swing loan lender, the other
lending institutions parties named therein, as lenders, and Keybanc Capital Markets, as sole lead
arranger and sole book manager (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the Commission on November 22, 2021).
Amendment No. 2 to Executive Employment Agreement, dated as of August 4, 2021, by and
between City Office Management ULC and James Farrar (incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 5, 2021).*
Amendment No. 2 to Executive Employment Agreement, dated as of August 4, 2021, by and
between City Office Management ULC and Gregory Tylee (incorporated by reference to Exhibit
10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 5,
2021).*
Amendment No. 2 to Executive Employment Agreement, dated as of August 4, 2021, by and
between City Office Management ULC and Anthony Maretic (incorporated by reference to Exhibit
10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 5,
2021).*
Amendment No. 2 to the City Office REIT, Inc. Equity Incentive Plan, dated February 24, 2022,
incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement on
Schedule 14A filed on March 16, 2022.*
Subsidiaries of the Company †
Consent of KPMG LLP †
Certification of Annual Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley
Act of 2002 †
93
Exhibit
Number
31.2
32.1
32.2
Description
Certification of Annual Report by Chief Financial Officer under Section 302 of the Sarbanes-
Oxley Act of 2002 †
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 †
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 †
101.INS
INSTANCE DOCUMENT**
101.SCH
SCHEMA DOCUMENT**
101.CAL
CALCULATION LINKBASE DOCUMENT**
101.LAB
LABELS LINKBASE DOCUMENT**
101.PRE
PRESENTATION LINKBASE DOCUMENT**
101.DEF
DEFINITION LINKBASE DOCUMENT**
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*
Filed herewith.
Compensatory Plan or arrangement
†
*
** Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (eXtensible
Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated
Statements of Comprehensive Income; (iv) Consolidated Statements of Equity; (v) Consolidated Statements of Cash Flows; and
(vi) Notes to Consolidated Financial Statements.
ITEM 16. FORM 10-K SUMMARY
None.
94
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 23, 2023
CITY OFFICE REIT, INC.
By: /s/ James Farrar
James Farrar
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ James Farrar
James Farrar
/s/ Anthony Maretic
Anthony Maretic
/s/ John McLernon
John McLernon
/s/ Mark Murski
Mark Murski
/s/ William Flatt
William Flatt
/s/ John Sweet
John Sweet
/s/ Sabah Mirza
Sabah Mirza
Chief Executive Officer and Director
(Principal Executive Officer)
February 23, 2023
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
February 23, 2023
Independent Director, Chairman of
Board of Directors
February 23, 2023
Independent Director
February 23, 2023
Independent Director
February 23, 2023
Independent Director
February 23, 2023
Independent Director
February 23, 2023
95
[THIS PAGE INTENTIONALLY LEFT BLANK]
Exhibit 31.1
I, James Farrar, certify that:
Certification
1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2022 of City
Office REIT, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of this report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
February 23, 2023
Date
/s/ James Farrar
James Farrar
Chief Executive Officer and Director
(Principal Executive Officer)
Exhibit 31.2
I, Anthony Maretic, certify that:
Certification
1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2022 of City
Office REIT, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of this report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
February 23, 2023
Date
/s/ Anthony Maretic
Anthony Maretic
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Annual Report on Form 10-K for the fiscal year ended December 31, 2022 of City
Office REIT, Inc. (the “Company”) to be filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, James Farrar, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
February 23, 2023
Date
/s/ James Farrar
James Farrar
Chief Executive Officer and Director
(Principal Executive Officer)
This written report is being furnished to the Securities and Exchange Commission as an exhibit to the Report. A
signed original of this written statement required by Section 906 has been provided to City Office REIT, Inc. and
will be retained by City Office REIT, Inc. and furnished to the Securities and Exchange Commission or its staff
upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Annual Report on Form 10-K for the fiscal year ended December 31, 2022 of City
Office REIT, Inc. (the “Company”) to be filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, Anthony Maretic, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
February 23, 2023
Date
/s/ Anthony Maretic
Anthony Maretic
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
This written report is being furnished to the Securities and Exchange Commission as an exhibit to the Report. A
signed original of this written statement required by Section 906 has been provided to City Office REIT, Inc. and
will be retained by City Office REIT, Inc. and furnished to the Securities and Exchange Commission or its staff
upon request.
City Office REIT Tax Treatment of 2022 Distributions
The tax information provided below should not be construed as tax advice and shareholders are encouraged to consult with
their tax advisors as to their specific tax treatment of the Company’s distributions. This information is being provided to assist
shareholders with tax reporting requirements related to dividend distributions of taxable income by the Company. Shareholders
should review their Forms 1099 as well as other 2022 tax statements that they will receive from their brokerage firms or other
institutions to ensure that the statements agree with the information provided below.
The CUSIP number for the Company’s common stock is 178587101.
Record Date
Payment Date
Total Distribution
per Share
Ordinary
Dividends (1)
Capital Gain
Distributions (2)
Unrecaptured Section
1250 Gain (3)
Section 897
Capital Gain (4)
Return of
Capital
Amount Qualifying as a
Section 199A Dividend
01/11/2022
01/25/2022
$ 0.200
$ 0.102810
$ 0.097190
$ 0.029355
$ 0.097190
$ -
$ 0.102810
04/08/2022
04/22/2022
$ 0.200
$ 0.102810
$ 0.097190
$ 0.029355
$ 0.097190
$ -
$ 0.102810
07/08/2022
07/22/2022
$ 0.200
$ 0.102810
$ 0.097190
$ 0.029355
$ 0.097190
$ -
$ 0.102810
10/07/2022
10/21/2022
$ 0.200
$ 0.102810
$ 0.097190
$ 0.029355
$ 0.097190
Form 1099-DIV Box
1a
2a
2b
2f
$ -
3
$ 0.102810
5
The CUSIP number for the Company’s Preferred Stock is 178587200.
Record Date
Payment Date
Total Distribution
per Share
Ordinary
Dividends (1)
Capital Gain
Distributions (2)
Unrecaptured Section
1250 Gain (3)
Section 897
Capital Gain (4)
Return of
Capital
Amount Qualifying as a
Section 199A Dividend
01/11/2022
01/25/2022
$ 0.414063
$ 0.212850
$ 0.201213
$ 0.060774
$ 0.201213
04/08/2022
04/22/2022
$ 0.414063
$ 0.212850
$ 0.201213
$ 0.060774
$ 0.201213
$ -
$ -
$ 0.212850
$ 0.212850
07/08/2022
07/22/2022
$ 0.414063
$ 0.212850
$ 0.201213
$ 0.060774
$ 0.201213
$ -
$ 0.212850
10/07/2022
10/21/2022
$ 0.414063
$ 0.212850
$ 0.201213
$ 0.060774
$ 0.201213
Form 1099-DIV Box
1a
2a
2b
2f
$ -
3
$ 0.212850
5
(1) For U.S. federal income tax purposes, none of the Company’s ordinary dividends are characterized as qualified dividends.
(2) For purposes of Section 1061 and Treasury Regulation §1.1061-6(c), the aggregate “One Year Amounts Disclosure” and “Three Year Amounts Disclosure” are $0 (0% of Box 2a) per share
and $0 (0% of Box 2a) per share, respectively. Such additional information generally pertains to shares held through “applicable partnership interests” subject to Section 1061.
(3) Unrecaptured Section 1250 gains are a subset of, and included in, the total capital gain amount.
(4) These amounts reflect a distribution’s composition of gains from the disposition of “United States real property interests” under Section 897. Generally, such information is relevant only to non-U.S.
shareholders that own more than 10% of the Company’s stock, as determined for purposes of Section 897, and certain entities through which non-U.S. shareholders own the Company’s stock.
C I T Y O F F I C E R E I T , I N C .
E: investorrelations@cioreit.com | T: 604 806 3366
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500 North Akard Street
Dallas, TX 75201
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