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Operator: Good morning, and welcome to the City Office REIT, Inc. Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce you to Tony Maretic, the company’s Chief Financial Officer, Treasurer and Corporate Secretary. Thank you, Mr. Maretic. You may now begin.

Tony Maretic: Good morning. Before we begin, I would like to direct you to our website at cioreit.com where you can view our fourth quarter earnings press release and supplemental information package. The earnings release and supplemental package, both include a reconciliation of non-GAAP measures that will be discussed today to their most directly comparable GAAP financial measures. Certain statements made today that discuss the company’s beliefs or expectations or that are not based on historical fact may constitute forward-looking statements within the meaning of the Federal Securities Laws. While the company believes that these expectations are reflected in such forward-looking statements, are based upon reasonable assumptions.

We can give no assurance that these expectations will be achieved. Please see the forward-looking statements disclaimer in our fourth quarter earnings press release and the company’s filings with the SEC for factors that could cause material differences between forward-looking statements and actual results. The company undertakes no obligation to update any forward-looking statements that may be made in the course of this call. I will review our financial results, after, Jamie Farrar, our Chief Executive Officer discusses some of the quarter’s operational highlights. I will now turn the call over to Jamie.

Jamie Farrar: Good morning, and thanks for joining today. To start our call, I’ll provide a brief summary of our 2022 key accomplishments and then focus on where the company is headed in 2023. In 2022, we achieved the highest annual core FFO per share in the company’s history. The $1.57 per share that we recorded was a 15% increase over the prior year. The main driver of this increase was integrating and stabilizing the 975,000 square feet of acquisitions in Raleigh, Phoenix and Dallas that we completed in December 2021. These three newly constructed highly amenitized properties are performing very well, are 90% occupied and have a weighted average lease term remaining of approximately 10 years. Also contributing to our strong core FFO per share performance in 2022 was the completion of our share repurchase program.

We invested $50 million at an average price of $12.48 per share, which was accretive to both earnings per share and net asset value per share. Another highlight of 2022 was the closing of the sale of our Lake Vista Pointe property in Dallas which generated a $22 million gain. On the operational side, we completed approximately 800,000 square feet of new and renewal leases throughout the year with 108,000 square feet of that amount occurring in the fourth quarter. Our spec suite program also had a positive impact on leasing. During 2022, we signed new leases for 93,000 square feet of spec suites. We also signed new leases for 82,000 square feet of space where we had completed vacancy conditionally. We started to benefit from the investment in this program, but the full extent will be realized over time as suites are leased and free rent burns off.

And one last note on recent events before we move to our 2023 strategy. I’m pleased to report that we announced today some planned succession changes within our Board. John Sweet, who has been an Independent Director since 2017 has become the Chairman of the Board. John’s contributions to our company, extensive industry knowledge base and his prior leadership of a public company board make him an excellent fit as our Chairman. He assumed the position from John McLernon, who will continue as an Independent Director. John McLernon has been our outstanding Chairman since our IPO in 2014. We’re grateful to both of these terrific directors for their continued service to our company. Additionally, we announced that Michael Mazan has been appointed to the Board.

Mike is highly experienced with 30 years as a private equity investor, investment banker and management consultant. Mike also brings an extensive finance and governance background having previously served on 12 boards throughout his career. We look forward to Mike’s involvement. And last, we announced Will Flatt has stepped down from the board after nearly 10 years of service, dating back to our IPO. Will contribute immensely to the company over that time period and we’d like to express our deepest thanks for his positive and thoughtful impact on our company. Now moving to 2023 and beyond, we continue to benefit from the tailwinds associated with our Sunbelt focus portfolio, where population, employment and office occupancy trends are outperforming.

Counter balancing this are the challenges our industry has been facing, including rapidly rising interest rates, volatile conditions in the capital markets and headwinds across the office industry. We’ve spent a considerable amount of time formulating an approach to best position ourselves for strong performance. Our plan continues to balance caution and strategic initiatives. To that end, I’ll lay out our focus areas for 2023 and how we expect that these steps will position us. An important way for us to create long term value is to grow quality net operating income at the property level. We intend to achieve this primarily by completing select renovations and building ready to lease spec suites, both of which we believe optimize our leasing potential and have long term cash flow benefits.

Specifically, we currently have 18,000 square feet of spec suites in our inventory and over 150,000 square feet of spec suites under construction or planned for 2023. We’re also advancing significant renovations at our San Tan and Pima Center properties in Phoenix, as we believe these investments will drive leasing. On a related note, our Pima Center buildings in Scottsdale are set to benefit from a new $80 million entertainment development called which is directly adjacent to our property. This development recently broke ground and is slated to provide a number of walkable restaurants, bars, and entertainment venues that will greatly enhance Pima Center’s amenity offering. It’s an ideal time for us to launch the Pima Center renovation and we’ve already experienced the pickup in leasing activity with approximately 17,000 square feet leased so far in 2023.

Another important element of our strategic plan is selectively pruning our portfolio to optimize alignment with today’s leasing trends and what we believe are the leasing trends of the future. We’ve identified approximately 900,000 square feet of our portfolio that we are targeting to divest over the next few years. This amount could fluctuate up or down depending on opportunities and market conditions. Our guidance reflects a portion of this occurring in 2023 with a range of dispositions assumed to be between $25 million and $75 million. These non-core dispositions when they occur will benefit our already strong liquidity and leverage profile. And enhanced balance sheet will position us to take advantage of future opportunities that drive shareholder value.

So in summary, we will continue to operate with caution while focusing on strategic positioning. This plan will help to maintain a fabulous core portfolio lower overall leverage and enhance our dry powder to take advantage of future opportunities. Given our outlook on our portfolio and strategy, we are not at all satisfied with our current stock price, which we believe is a major discount to the inherent value of our company. As one data point, recall in December of 2021, we sold our life science portfolio in San Diego for $576 million, which generated a $429 million gain. We have reinvested those proceeds into $614 million of best-in-class properties in the top submarkets of Raleigh, Phoenix and Dallas. The aggregate purchase price of these transactions acquainted to about $14 dollars per share at the time and were closed without property level debt.

The magnitude of these acquisitions as compared to the size of our company significantly raised the quality of our portfolio as a whole while reducing risk. Despite challenging capital markets, this profile of premium asset is exactly what investors continue to desire today. We don’t believe that these considerations are reflected in our current stock price. As we look forward, we believe that we carved out an attractive niche of premium Sunbelt properties and that the proactive steps outlined earlier will help unlock value and close the share price gap. I look forward to providing further updates on these initiatives and we’ll hand the call over to Tony Maretic to discuss our financial results and our 2023 guidance.

Tony Maretic: Thanks, Jamie. Our net operating income in the fourth quarter was $27.6 million, which is $500,000 lower than the amount we reported in the third quarter. This decrease is primarily a result of the departure of Toyota from our San Tan property in Phoenix in the middle of the third quarter. While operating expenses have increased as a result of inflation in various categories, the impact on net operating income has been muted as recoveries mostly offset this impact. We reported core FFO of $15.4 million or $0.38 per share, which was $1.1 million lower than in the third quarter. The drivers of that decrease were primarily lower net operating income at our San Tan property due to Toyota’s vacate, along with higher interest rates on our floating rate credit facility.

Our fourth quarter AFFO was $5 million or $0.12 per share The largest single item to impact AFFO was $700,000 of tenant improvement expenses related to a 13,000 square foot new tenant at our Circle Point property in Denver, whose lease commenced in January 2023. As Janie mentioned, we also continue to invest in building out ready to lease spec suites and implementing vacancy conditioning, which is a key part of our business plan. The total investment in spec suites and vacancy condition in the fourth quarter was $1.4 million or 0.03 per share. During the quarter, we recorded a non cash impairment of real estate charge of $13.4 million. This represents a write down of the book values of two of our properties to their estimated fair market values.

Those two properties were 190 Office Center in Dallas and Cascade Station in Portland. The combined 430,000 square feet of these two properties represents approximately half of the anticipated selective pruning of non-core assets that Jamie described. We are considering all of our options at those two properties, both of which advantageously have property level non-recourse debt. For 190 Office Center in particular, our best strategic option maybe to transfer the property to the lender, given our view of the value of the asset relative to its loan balance. That would eliminate approximately $39 million of debt and we anticipate it would also have a positive impact on near term core FFO as interest costs for that property are expected to exceed the property’s NOI.

Moving on to some of our operational metrics. Our fourth quarter same store cash NOI change was in line with our expectations at negative 1.2% or $200,000 lower as compared to the fourth quarter of 2021. Fourth quarter same store cash NOI was impacted by free rent periods associated with new leases at a number of our properties. Our total debt as of December 31 was $69 million. Our net debt, including restricted cash to EBITDA was 6.4 times. We have two small maturities in the fall of 2023 and both of these loans are secured by high quality properties at relatively low leverage levels. We anticipate completing a refinancing later in the year. As far as our liquidity, as of December 31, we had over $95 million of undrawn availability on our credit facility.

We also had cash and restricted cash of $44 million as of quarter end along with highly financeable unencumbered properties as an additional source of liquidity. Subsequent to quarter end, we executed two debt related transactions, which enhance liquidity, reduce our exposure to interest rate fluctuations and give us better visibility into our future earnings. First, we expanded our credit facility by $25 million by entering to a new three year term loan. We enter into a swap that fixed the term loan interest rate at 5.9% and use the term loan proceeds to reduce the floating rate portion of our credit facility. Second, we fixed the majority of our floating rate credit facility at 5.6% by executing a $140 million interest rate swap. After the swap transactions, over 90% of our total debt is effectively fixed as of today.

Moving to guidance. We have provided full year 2023 guidance in our press release. Our guidance is reflective of the 2023 strategic business plan that Jamie outlined. We are projecting core FFO of $1.38 to $1.43 per share. At the midpoint, that would represent a $0.16 per share decline as compared to our 2022 results. Approximately $0.13 of the projected $0.16 decrease is our expectation of higher interest expense year over year. The completion of our recent swap transactions will help mitigate the potential impacts from further movements in the federal funds rate. The balance of the decrease is primarily attributable to expected net dispositions during the year, which will result in operating with lower leverage. We have assumed property dispositions between $25 million and $75 million for the year with no acquisitions.

We expect that our same store cash NOI will grow between a positive 2% and 4% in 2023. The three acquisitions, which we closed in December 2021, will be added to the pool beginning in 2023. Our occupancy guidance reflects relatively flat occupancy throughout the year. We also anticipate continuing to invest in vacancy conditioning and building out high quality spec suites. We expect AFFO will be impacted by up to $10 million if we are successful in completing all that we have planned for 2023. We believe these investments will drive earnings growth primarily commencing in 2024 and beyond. We refer you to the material assumptions and considerations set forth in our earnings press release for further details. That concludes our prepared remarks.

We’ll open up the line for questions. Operator?

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Operator: Our first question for today comes from Robert Stevenson from Janney. Rob, your line is now open. Please go ahead.

Robert Stevenson: Good morning, guys. Tony, just on that last point when you said that AFFO could be impacted by $10 million. Is that versus 2022? Or is that just in general?

Jamie Farrar: Good morning, Rob. So that is in total for 2023, which is higher than what we spent in 2022. I mean, we spent about $1.3 million in Q4 and that was pretty typical, when we’re spending we’re ramping up the program. So it is a significant increase year over year, but it is the total.

Robert Stevenson: Okay. So I guess in aggregate, I mean, you guys between — on the AFFO line between the tenant improvements, incentives, leasing commissions and recurring CapEx did about $35 million in 2022. How should we be thinking given those comments of what that number sort of looks like within reason for 2023 given your plans for the remainder of the year?

Tony Maretic: Yes. So, obviously, a lot of that will depend on leasing activity. So a lot of that is hard to predict for the later part of the year. But what I can say is that we are spending more on spec suites and vacancy conditioning ramping up that program as we just talked about capital expenditures are going to be really in line with what we’ve been spending in the last couple of quarters, maybe even a little bit more as we add amenities at the properties. And then again, TIs and leasing commissions will depend on leasing activity.

Robert Stevenson: Okay. And then what’s the — how are you guys thinking about the sort of ebbs and flows of occupancy throughout the year given the expirations, known move outs, et cetera. You ended at like 86.2% the guidance is 85% to 87%. So the midpoint is right where you sort of ended 2022. I mean, are there quarters where you expect to have sort of peaks and troughs occupancy wise throughout the year? Is it all going to be sort of one washes out the other and it sort of remains sort of in that band pretty narrowly throughout the year. How should we think about that?

Tony Maretic: Yes. I think the best way to think about it is the latter that you just suggested. It’s going to move within that band and kind of maybe bottom out at bottom end of the range. We’re not expecting a significant spikes in either direction. If you look at — we’ve discussed there’s a number of move outs that we have coming in the year, but we also have 167,000 square feet of new leases at December 31, which will be taking occupancy over the year. So they do balance each other out.

Robert Stevenson: Okay. And then the 2% to 4% same store NOI growth, is that — what’s the sort of breakdown there in terms of what you’re expected to be driven by occupancy versus rental rate on renewals, et cetera? Is it mostly occupancy gains?

Tony Maretic: It’s a mixture of both. I mean, a lot of the gain will be coming from the acquisitions that we did in December of 2021, those three properties are being added to the same store pool and that number is a cash basis. And many of those leases that took occupancy during 2022 at free rent periods. So a lot of the increases being driven from those three properties from the burn off of free rent.

Robert Stevenson: All right. And then just one last one for me. Jamie, how is the Board thinking about the common dividend today given the 100% plus AFFO payout ratio but a 60% FFO payout ratio. Is the view more that this is a temporary point in time thinking you’ll be able to grow out of it or more of a secular thing that’s going to eventually need to be addressed?

Jamie Farrar: I think the position we’re in pretty much the same as when we had the discussion last quarter. So we’re completely comfortable with the level of dividend that we’re at today. But the Board is reflecting on challenging operating conditions and we are having a thoughtful dividend discussion each quarter and assessing a number of things, the impact of interest rates, overall conditions on the business. So I think to repeat, we’re comfortable with the dividend level today, but we don’t have a crystal ball on future operating conditions and we’re going to pragmatically look at it each quarter until we’re at a point of being fully covered.

Robert Stevenson: Okay. Thanks guys. I appreciate the time.

Jamie Farrar: Thanks, Rob.

Operator: Thank you. Our next question comes from Craig Kucera from B. Riley Securities. Craig, your line is now open. Please go ahead.

Craig Kucera: Hey, good morning guys. I apologize if I missed this. There’s quite a few calls going on right now, but I just want to go back to your CapEx kind of budget and expectations for 2023. Tony, I think you thought you were or Jamie, I should say I think you thought you maybe would spend $5 million to $10 million at San Tan and a couple million dollars at Pima. But kind of what is your all in sort of breakout between some of those more in-depth projects as well as the spec suites for 2023?

Tony Maretic: So I can address some of those comments, Craig. So if we look at 2023, Pima, as you mentioned, that property is in line with a number that you just threw out there that we’re expecting to play in 2023. San Tan is a little larger, but one thing about San Tan is, we have — what we’re doing there is, there’s two buildings and one has been completely gutted. And as a result, we’ve treated that as a repositioning for 2023. And as a result, it won’t have an AFFO impact. But that number is larger as you indicated. So really the biggest impacts that we’re looking at to AFFO for 2023 is Pima, as you mentioned. CapEx, we’re going to continue to sort of add amenities at some of the other properties in addition to Pima. And then the spec sheet program, which I talked about.

Jamie Farrar: And just to add one thing on that. So San Tan is at a point where we’re trying to finalize the level of renovation that we’re doing. So at the upper end, could be higher than what you position, but we think we could get a premium on rents. And so we’re just assessing whether or not that makes sense to do today.

Craig Kucera: Okay, great. Moving directions. On the disposition front, have you brought any of those assets to market? And I’d be curious as to sort of what kind of appetite you’re seeing out there right now if you have?

Jamie Farrar: So we have not brought any of those to market. I guess I would say the investment sales market remains very slow. And so there’s not a lot of transactions. If you’re looking at premium type assets across our markets, the one transaction that did close, which is public is Highwoods in mid-December bought McKinney and all of an Uptown, Dallas and metrics there you can get from their release, but effectively 5.5% cash cap rate and just over (ph). But there hasn’t been many transactions.

Craig Kucera: Right. And just one more for me. Tony, you’ve got the third, fourth quarter debt maturities. I think they’re priced just over 3%. I guess, kind of what are you seeing currently as far as comparable mortgage debt and kind of how are you thinking about dealing with those two debt maturities?

Tony Maretic: Yes, sure Craig. So both of those mature later this year, September and October expirations. Both of those are with a regional bank. And so, we have started preliminary conversations with them on renewable as well as starting to canvas whether — there might be other lenders of interest. Today, you’re looking at probably refinancing those, I would say, in the low 6s, if you’re looking at a rate, probably 250 basis points whatever the index that you choose. But given both of those assets are pretty buttoned up in terms of occupancy and significant lease term, not anticipating any problems with refinancing those two properties.

Craig Kucera: Okay. Thanks for your time guys.

Tony Maretic: Thanks Craig.

Jamie Farrar: Thanks Craig.

Operator: Thank you. As there are no additional questions, I will turn the call back over to Mr. Farrar to conclude.

Jamie Farrar: Thanks for joining today. We look forward to updating you on our progress next quarter. Goodbye.

Operator: Thank you for joining today’s call. You may now disconnect your lines.