City Office REIT, Inc. (Form: 10-Q, Received: 08/05/2021 06:54:23)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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xbrli:shares

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number:

001-36409

CITY OFFICE REIT, INC.

(Exact name of registrant as specified in its charter)


Maryland		98-1141883
(State or other jurisdiction of incorporation or organization)		(I.R.S. 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:


Title of Each Class	Trading Symbol(s)	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

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

☒ ☐ 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 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.

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 is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes ☐

☒

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at August

, 2021 was 43,554,375.

Table of Contents

City Office REIT, Inc.

Quarterly Report on Form

10-Q

For the Quarter Ended June 30, 2021

Table of Contents


PART I. FINANCIAL INFORMATION			1

Item 1. Financial Statements			1

Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020			1

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020			2

Condensed Consolidated Statements of Comprehensive Income/(Loss) for the Three and Six Months Ended June 30, 2021 and 2020			3

Condensed Consolidated Statements of Changes in Equity for the Three and Six Months Ended June 30, 2021 and 2020			4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020			5

Notes to Condensed Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15

Item 3. Quantitative and Qualitative Disclosures about Market Risk			25

Item 4. Controls and Procedures			25

PART II. OTHER INFORMATION			26

Item 1. Legal Proceedings			26

Item 1A. Risk Factors			26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26

Item 3. Defaults Upon Senior Securities			26

Item 4. Mine Safety Disclosures			26

Item 5. Other Information			26

Item 6. Exhibits			27

Signatures			28

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

City Office REIT, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except par value and share data)


	June 30, 2021			December 31, 2020
Assets
Real estate properties
Land	$	241,582		$	204,289
Building and improvement		783,264			777,184
Tenant improvement		106,876			104,694
Furniture, fixtures and equipment		669			642

		1,132,391			1,086,809
Accumulated depreciation		(149,087	)		(131,220	)

		983,304			955,589

Cash and cash equivalents		13,394			25,305
Restricted cash		22,929			20,646
Rents receivable, net		32,448			32,968
Deferred leasing costs, net		20,253			16,829
Acquired lease intangible assets, net		37,363			44,143
Other assets		18,461			15,758
Assets held for sale		—			46,054

Total Assets	$	1,128,152		$	1,157,292

Liabilities and Equity
Liabilities:
Debt	$	612,510		$	677,242
Accounts payable and accrued liabilities		21,668			25,414
Deferred rent		10,208			7,295
Tenant rent deposits		5,921			4,801
Acquired lease intangible liabilities, net		5,352			6,035
Other liabilities		19,069			18,099
Liabilities related to assets held for sale		—			531

Total Liabilities		674,728			739,417

Commitments and Contingencies (Note 9)
Equity:
6.625% Series A Preferred stock, $0.01 par value per share, 5,600,000 shares authorized, 4,480,000 shares issued and outstanding as of June 30, 2021 and December 31, 2020		112,000			112,000
Common stock, $0.01 par value per share, 100,000,000 shares authorized, 43,554,375 and 43,397,117 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		435			433
Additional paid-in capital		480,629			479,411
Accumulated deficit		(139,358	)		(172,958	)
Accumulated other comprehensive loss		(1,191	)		(1,960	)

Total Stockholders’ Equity		452,515			416,926
Non-controlling interests in properties		909			949

Total Equity		453,424			417,875

Total Liabilities and Equity	$	1,128,152		$	1,157,292

The accompanying notes are an integral part of these condensed consolidated financial statements

Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020

Rental and other revenues	$	39,964		$	39,617		$	79,480		$	79,739
Operating expenses:
Property operating expenses		14,179			14,084			28,297			28,780
General and administrative		3,068			2,697			5,868			5,480
Depreciation and amortization		14,954			15,080			29,369			30,032

Total operating expenses		32,201			31,861			63,534			64,292

Operating income		7,763			7,756			15,946			15,447
Interest expense:
Contractual interest expense		(5,639	)		(6,792	)		(11,883	)		(13,153	)
Amortization of deferred financing costs and debt fair value		(272	)		(341	)		(602	)		(665	)

		(5,911	)		(7,133	)		(12,485	)		(13,818	)
Net gain on sale of real estate property		—			—			47,400			—

Net income		1,852			623			50,861			1,629
Less:
Net income attributable to non-controlling interests in properties		(190	)		(179	)		(382	)		(361	)

Net income attributable to the Company		1,662			444			50,479			1,268
Preferred stock distributions		(1,855	)		(1,855	)		(3,710	)		(3,710	)

Net (loss)/income attributable to common stockholders	$	(193	)	$	(1,411	)	$	46,769		$	(2,442	)

Net (loss)/income per common share:
Basic	$	0.00		$	(0.03	)	$	1.08		$	(0.05	)

Diluted	$	0.00		$	(0.03	)	$	1.06		$	(0.05	)

Weighted average common shares outstanding:
Basic		43,482			47,542			43,440			50,993

Diluted		43,482			47,542			44,080			50,993

Dividend distributions declared per common share	$	0.15		$	0.15		$	0.30		$	0.30

The accompanying notes are an integral part of these condensed consolidated financial statements

Table of Contents

City Office REIT, Inc.

Condensed Consolidated Statements of Comprehensive Income/(Loss)

(Unaudited)

(In thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Net income	$	1,852		$	623		$	50,861		$	1,629
Other comprehensive income/(loss):
Unrealized cash flow hedge (loss)/gain		(47	)		(394	)		480			(3,084	)
Amounts reclassified to interest expense		147			96			289			45

Other comprehensive income/(loss)		100			(298	)		769			(3,039	)

Comprehensive income/(loss)		1,952			325			51,630			(1,410	)
Less:
Comprehensive income attributable to non-controlling interests in properties		(190	)		(179	)		(382	)		(361	)

Comprehensive income/(loss) attributable to the Company	$	1,762		$	146		$	51,248		$	(1,771	)

The accompanying notes are an integral part of these condensed consolidated financial statements

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City Office REIT, Inc.

Condensed Consolidated Statements of Changes in Equity

(Unaudited)

(In thousands)


	Number of shares of preferred stock		Preferred stock		Number of shares of common stock			Common stock			Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive loss			Total stockholders’ equity			Non-controlling interests in properties			Total equity
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		—		—		—			—			695			(50	)		—			645			—			645
Common stock dividend distribution declared		—		—		—			—			—			(6,510	)		—			(6,510	)		—			(6,510	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855	)		—			(1,855	)		—			(1,855	)
Distributions		—		—		—			—			—			—			—			—			(220	)		(220	)
Net income		—		—		—			—			—			48,817			—			48,817			192			49,009
Other comprehensive income		—		—		—			—			—			—			669			669			—			669

Balance—March 31, 2021		4,480	$	112,000		43,397		$	433		$	480,106		$	(132,556	)	$	(1,291	)	$	458,692		$	921		$	459,613


Restricted stock award grants and vesting		—		—		157			2			523			(76	)		—			449			—			449
Common stock dividend distribution declared		—		—		—			—			—			(6,533	)		—			(6,533	)		—			(6,533	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855	)		—			(1,855	)		—			(1,855	)
Contributions		—		—		—			—			—			—			—			—			2			2
Distributions		—		—		—			—			—			—			—			—			(204	)		(204	)
Net income		—		—		—			—			—			1,662			—			1,662			190			1,852
Other comprehensive income		—		—		—			—			—			—			100			100			—			100

Balance—June 30, 2021		4,480	$	112,000		43,554		$	435		$	480,629		$	(139,358	)	$	(1,191	)	$	452,515		$	909		$	453,424


	Number of shares of preferred stock		Preferred stock		Number of shares of common stock			Common stock			Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive loss			Total stockholders’ equity			Non-controlling interests in properties			Total equity
Balance—December 31, 2019		4,480	$	112,000		54,591		$	545		$	577,131		$	(142,383	)	$	715		$	548,008		$	1,124		$	549,132
Restricted stock award grants and vesting		—		—		35			—			599			(79	)		—			520			—			520
Common stock repurchased		—		—		(1,451	)		(14	)		(11,608	)		—			—			(11,622	)		—			(11,622	)
Common stock dividend distribution declared		—		—		—			—			—			(7,771	)		—			(7,771	)		—			(7,771	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855	)		—			(1,855	)		—			(1,855	)
Contributions		—		—		—			—			—			—			—			—			3			3
Distributions		—		—		—			—			—			—			—			—			(200	)		(200	)
Net income		—		—		—			—			—			824			—			824			182			1,006
Other comprehensive loss		—		—		—			—			—			—			(2,741	)		(2,741	)		—			(2,741	)

Balance—March 31, 2020		4,480	$	112,000		53,175		$	531		$	566,122		$	(151,264	)	$	(2,026	)	$	525,363		$	1,109		$	526,472


Restricted stock award grants and vesting		—		—		135			2			659			(66	)		—			595			—			595
Common stock repurchased		—		—		(8,799	)		(88	)		(77,961	)		—			—			(78,049	)		—			(78,049	)
Common stock dividend distribution declared		—		—		—			—			—			(6,649	)		—			(6,649	)		—			(6,649	)
Preferred stock dividend distribution declared		—		—		—			—			—			(1,855	)		—			(1,855	)		—			(1,855	)
Distributions		—		—		—			—			—			—			—			—			(184	)		(184	)
Net income		—		—		—			—			—			444			—			444			179			623
Other comprehensive loss		—		—		—			—			—			—			(298	)		(298	)		—			(298	)

Balance—June 30, 2020		4,480	$	112,000		44,511		$	445		$	488,820		$	(159,390	)	$	(2,324	)	$	439,551		$	1,104		$	440,655

The accompanying notes are an integral part of these condensed consolidated financial statements

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City Office REIT, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Six Months Ended June 30,
	2021			2020
Cash Flows from Operating Activities:
Net income	$	50,861		$	1,629
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		29,369			30,032
Amortization of deferred financing costs and debt fair value		602			665
Amortization of above and below market leases		301			(47	)
Straight-line rent/expense		85			(1,002	)
Non-cash stock compensation		1,310			1,157
Net gain on sale of real estate property		(47,400	)		—
Changes in non-cash working capital:
Rents receivable, net		635			6
Other assets		(1,048	)		(673	)
Accounts payable and accrued liabilities		(2,757	)		(567	)
Deferred rent		2,850			436
Tenant rent deposits		877			(300	)

Net Cash Provided By Operating Activities		35,685			31,336

Cash Flows from/(to) Investing Activities:
Additions to real estate properties		(9,499	)		(15,140	)
Acquisition of real estate.		(43,256	)		—
Net proceeds from sale of real estate.		93,303			—
Deferred leasing costs		(3,131	)		(3,056	)

Net Cash Provided By/(Used In) Investing Activities		37,417			(18,196	)

Cash Flows to Financing Activities:
Proceeds from borrowings		98,000			130,000
Repayment of borrowings		(163,363	)		(33,116	)
Dividend distributions paid to stockholder s		(16,729	)		(24,310	)
Distributions to non-controlling interests in properties		(424	)		(384	)
Shares withheld for payment of taxes on restricted stock unit vesting		(216	)		(42	)
Contributions from non-controlling interests in properties .		2			3
Repurchases of common stoc k		—			(89,671	)
Net Cash Used In Financing Activities		(82,730	)		(17,520	)

Net Decrease in Cash, Cash Equivalents and Restricted Cash		(9,628	)		(4,380	)
Cash, Cash Equivalents and Restricted Cash, Beginning of Period		45,951			87,523

Cash, Cash Equivalents and Restricted Cash, End of Period	$	36,323		$	83,143

Reconciliation of Cash, Cash Equivalents and Restricted Cash:
Cash and Cash Equivalents, End of Period		13,394			67,039
Restricted Cash, End of Period		22,929			16,104

Cash, Cash Equivalents and Restricted Cash, End of Period	$	36,323		$	83,143

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	11,955		$	13,393
Purchase of additions in real estate properties included in accounts payable	$	4,233		$	6,487
Purchase of deferred leasing costs included in accounts payable	$	2,164		$	550

The accompanying notes are an integral part of these condensed consolidated financial statements

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City Office REIT, Inc.

Notes to the Condensed 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, eli

inating 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 tax years beginning before 2018, any applicable alternative minimum tax.

2. Summary of Significant Accounting Policies

Basis of Preparation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial stateme

ts have been prepared by the Company in accordance with Securities and Exchange Commission (“SEC”) rules and regulations and generally accepted accounting principles in the United States of America (“US GAAP”) and in the opinion of management contain all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on

Form 10-K

for the year ended December 31, 2020.

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 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

(“ASU

2021-01”),

Topic 848, Reference Rate Reform (“Topic 848”). ASU

2021-01

clarifies 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. 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

and ASU

2021-01

on its condensed consolidated financial statements and may elect optional expedients in future periods as reference rate reform activities occur.

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3. Real Estate Investments

Acquisitions

During the six months ended June 30, 2021 and 2020 the Company acquired the following properties:


Property	Date Acquired		Percentage Owned
5910 Pacific Center and 9985 Pacific Heights (1)		May 2021		100	%

(1)

5910 Pacific Center and 9985 Pacific Heights have been added to the existing Sorrento Mesa portfolio of properties (collectively “Sorrento Mesa”).

The foregoing acquisition was accounted for as an asset acquisition.

The following table summarizes the Company’s allocation of the purchase price of assets acquired and liabilities assumed during the six months ended June 30, 2021 (in thousands):


	5910 Pacific Center and 9985 Pacific Heights
Land	$	37,294
Building and improvement		2,979
Tenant improvement		917
Lease intangible assets		2,469
Other assets		19
Accounts payable and other liabilities		(319	)
Lease intangible liabilities		(103	)

Net assets acquired	$	43,256

Sale of Real Estate Property

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, which has been classified as net gain on sale of real estate property in the condensed consolidated statements of operations.

Assets Held for Sale

On November 18, 2020, the Company entered into a purchase and sale agreement to sell the Cherry Creek property for a gross sales price of

$95.0 million. The Company determined that the property met the criteria for classification as held for sale as of December 31, 2020. On February 10, 2021, the Company completed the sale of the Cherry Creek property.

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The property was classified as held for sale as of December 31, 2020 (in thousands):


Cherry Creek	December 31, 2020
Real estate properties, net	$	40,849
Deferred leasing costs, net		150
Acquired lease intangible assets, net		2,256
Rents receivable, prepaid expenses and other assets		2,799

Assets held for sale	$	46,054

Accounts payable, accrued expenses, deferred rent and tenant rent deposits	$	(531)

Liabilities related to assets held for sale	$	(531)

4. Lease Intangibles

Lease intangibles and the value of assumed lease obligation

as of June 30, 2021 and December 31, 2020 were comprised of the following (in thousands):


	Lease Intangible Assets												Lease Intangible Liabilities
June 30, 2021	Above Market Leases			In Place Leases			Leasing Commissions			Total			Below Market Leases			Below Market Ground Lease			Total
Cost	$	14,489		$	79,885		$	30,097		$	124,471		$	(13,184	)	$	(138	)	$	(13,322	)
Accumulated amortization		(8,930	)		(59,541	)		(18,637	)		(87,108	)		7,924			46			7,970

	$	5,559		$	20,344		$	11,460		$	37,363		$	(5,260	)	$	(92	)	$	(5,352	)


	Lease Intangible Assets												Lease Intangible Liabilities
December 31, 2020	Above Market Leases			In Place Leases			Leasing Commissions			Total			Below Market Leases			Below Market Ground Lease			Total
Cost	$	14,894		$	80,259		$	30,284		$	125,437		$	(13,093	)	$	(138	)	$	(13,231	)
Accumulated amortization		(8,497	)		(55,636	)		(17,161	)		(81,294	)		7,152			44			7,196

	$	6,397		$	24,623		$	13,123		$	44,143		$	(5,941	)	$	(94	)	$	(6,035	)

The estimated aggregate amortization expense for lease intangibles for the next five years and in the aggregate are as follows (in thousands):


2021	$	6,112
2022		8,941
2023		5,914
2024		3,118
2025		2,720
Thereafter		5,206

	$	32,011

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5. Debt

The following table summarizes the indebtedness as of June 30, 2021 and December 31, 2020 (dollars in thousands):


Property	June 30, 2021			December 31, 2020			Interest Rate as of June 30, 2021 (1)			Maturity
Unsecured Credit Facility (2)(3)	$	96,000		$	75,000			LIBOR +1.40	% (4)		March 2022
Term Loan (3)		50,000			50,000			LIBOR +1.25	% (4)		September 2024
Mission City		47,000			47,000			3.78	%		November 2027
Canyon Park (5)		40,782			40,950			4.30	%		March 2027
190 Office Center		39,910			40,236			4.79	%		October 2025
Circle Point		39,650			39,650			4.49	%		September 2028
SanTan		33,129			33,444			4.56	%		March 2027
Intellicenter		32,164			32,442			4.65	%		October 2025
The Quad		30,600			30,600			4.20	%		September 2028
FRP Collection		27,901			28,263			3.10	%		September 2023

2525 McKinnon		27,000			27,000			4.24	%		April 2027
Greenwood Blvd		22,175			22,425			3.15	%		December 2025
Cascade Station		21,767			21,952			4.55	%		May 2024
5090 N. 40th St		21,439			21,640			3.92	%		January 2027
AmberGlen		20,000			20,000			3.69	%		May 2027
Lake Vista Pointe		17,198			17,375			4.28	%		August 2024
Central Fairwinds		16,918			17,127			3.15	%		June 2024
FRP Ingenuity Drive		16,597			16,736			4.44	%		December 2024
Carillon Point		15,387			15,585			3.10	%		October 2023
Midland Life Insurance (6)		—			83,537			—			—

Total Principal		615,617			680,962
Deferred financing costs, net		(3,511	)		(4,195	)
Unamortized fair value adjustments		404			475

Total	$	612,510		$	677,242

(1)	All interest rates are fixed interest rates with the exception of the Unsecured Credit Facility (the “Unsecured Credit Facility”) and the Term Loan (the “Term Loan”), as explained in footnotes 2 and 3 below.

(2)

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. The Unsecured Credit Facility matures in March 2022 and may be extended to March 2023 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 140 to 225 basis points depending upon the Company’s consolidated leverage ratio. As of June 30, 2021, the Unsecured Credit Facility had $96.0 million drawn and $4.8 million of letters of credit to satisfy escrow requirements for mortgage lenders. The Unsecured Credit Facility requires the Company to maintain a fixed charge coverage ratio of no less than 1.50x.

(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 a five-year interest rate swap for a notional amount of $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

LIBOR payments.

(4)	As of June 30, 2021, the one-month LIBOR rate was 0.10%.

(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.

(6)	The mortgage loan was cross-collateralized by Cherry Creek, City Center and 7595 Tech (formerly “DTC Crossroads”). In February 2021, the loan balance of $83.5 million was repaid in full.

The scheduled principal repayments of debt as of June 30, 2021 are as follows (in thousands):


2021	$	2,967
2022		102,539
2023		48,539
2024		124,736
2025		91,997
Thereafter		244,839

	$	615,617

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6. 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 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. Accordingly, the fair value of the Interest Rate Swap has been classified as a Level 2 fair value measurement.

The Interest Rate Swap has been designated and qualifies as a cash flow hedge and has been recognized on the condensed consolidated balance sheets at fair value. 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/(loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.

As of June 30, 2021, the Interest Rate Swap was reported as a liabili

y at its fair value of approximately $1.2 million, which is included in other liabilities on the Company’s condensed consolidated balance sheet. For the six months ended June 30, 2021

approximately $0.3 million of realized losses were reclassified to interest expense due to payments made to the swap counterparty. For the six months ended June 30, 2020

the amount of realized losses reclassified to interest expense due to payments received by the swap counterparty were nominal.

As of December 31, 2020, the Interest Rate Swap was reported as a liability at its fair value of approximately $2.0 million, which is included in other liabilities on the Company’s condensed consolidated balance sheet.

Cash, 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.

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 $476.4 million and $573.6 million (compared to a carrying value of $469.6 million and $556.0 million) as of June 30, 2021 and December 31, 2020, respectively. Accordingly, the fair value of mortgage loans payable have been classified as Level 3 fair value measurements

7. Related Party Transactions

Administrative Services Agreement

For the six months ended June 30, 2021 and 2020, the Company earned $0.3 million and $0.3 million, respectively, in administrative services performed for Second City Real Estate II Corporation (“Second City”), Clarity Real Estate Ventures GP, Limited Partnership (“Clarity”) and their affiliates.

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8. 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.

The Company recognized fixed and variable lease payments for the three and six months ended June 30, 2021 and the three and six months ended June 30, 2020 as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Fixed payments	$	34,311	$	33,907	$	67,862	$	67,999
Variable payments		5,629		5,697		11,536		11,713

	$	39,940	$	39,604	$	79,398	$	79,712

Future minimum lease payments to be received by the Company as of June 30, 2021 under

non-cancellable

operating leases for the next five years and thereafter are as follows (in thousands):


2021	$	61,009
2022		108,545
2023		88,167
2024		68,482
2025		55,089
Thereafter		160,172

	$	541,464

The Company’s leases may include various provisions such as scheduled rent increases, renewal 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 June 30, 2021, these leases had remaining terms of 1 to 67 years and a weighted average remaining lease term of 49 years.

Right-of-use

assets and lease liabilities have been included within other assets and other liabilities on the Company’s condensed consolidated balance sheet as follows (in thousands):


	June 30, 2021		December 31, 2020
Right-of-use asset – operating leases	$	14,362	$	12,739
Lease liability – operating leases	$	9,447	$	7,719
Right-of-use asset – financing leases	$	43	$	55
Lease liability – financing leases	$	43	$	55

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.

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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 expenses for the three and six months ended June 30, 2021 were $0.3 million and $0.5 million

respectively. Operating lease expenses for the three and six months ended June 30, 2020 were $0.2 million and $0.4 million

respectively. Financing lease expenses for the three and six months ended June 30, 2021 and 2020 were nominal.

Future minimum lease payments to be paid by the Company as a lessee for operating and financing leases as of June 30, 2021 for the next five years and thereafter are as follows (in thousands):


	Operating Leases			Financing Leases
2021	$	301		$	14
2022		971			27
2023		836			4
2024		770			—
2025		770			—
Thereafter		27,875			—

Total future minimum lease payments		31,523			45
Discount		(22,076	)		(2	)

Total	$	9,447		$	43

9. Commitments and Contingencies

The Company is obligated under certain tenant leases to fund tenant improvements and the expansi

n 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 June 30, 2021, 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.

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10. Stockholders’ Equity

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. 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 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.

There were no shares repurchased during the six months ended June 30, 2021. During the six months ended June 30, 2020, the Company completed the repurchase of 10,249,655 shares of its common stock for approximately $89.3 million

Common Stock and Common Unit Distributions

On June 15, 2021, the Company’s Board of Directors approved and the Company declared a cash dividend distribution of $0.15 per common share for the quarterly period ended June 30, 2021. The dividend was paid subsequent to quarter end on July 23, 2021 to common stockholders and common unitholders of record as of the close of business on July 9, 2021, resulting in an aggregate payment of $6.5 million.

Preferred Stock Distributions

On June 15, 2021, the Company’s Board of Directors approved and the Company declared a cash dividend distribution of $0.4140625 per share of the Company’s 6.625% Series A Preferred Stock (“Series A Preferred Stock”) for an aggregate amount of $1.9 million for the quarterly period ended June 30, 2021. The dividend was paid subsequent to quarter end on July 23, 2021 to the holders of record of Series A Preferred Stock as of the close of business on July 9, 2021.

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”). 2,263,580 shares of common stock may be issued under the Equity Incentive Plan.

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, 2020 and ending on December 31, 2022 (the “Measurement Period”) relative to the TSR of the companies in the SNL US REIT Office index as of January 2, 2020 (the “2020 RSU Peer Group”). The payouts under the Performance RSU Awards are evaluated on a sliding scale as follows: TSR below the 30th percentile of the 2020 RSU Peer Group would result in a 50% payout; TSR at the 50th percentile of the 2020 RSU Peer Group would result in a 100% payout; and TSR at or above the 75th percentile of the 2020 RSU 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.

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During the six months ended June 30, 2021, 169,500 restricted stock units (“RSUs”) were granted to executive officers, directors and certain

non-executive

employees with a fair value of $1.6 million. The RSU awards will vest in three equal, annual installments on each of the first three anniversaries of the date of grant. For the three and six months ended June 30, 2021, the Company recognized net compensation expense of $0.5 million and $0.9 million, respectively, related to the RSUs. For the three and six months ended June 30, 2020, the Company recognized net compensation expense of $0.5

million and

$1.0 million, respectively, related to the RSUs.

During the six months ended June 30, 2021, 120,000 Performance RSU Awards were granted to executive officers with a fair value of $1.2 million. The Performance RSU Awards will vest on the last day of the three-year measurement period of January 1, 2021 through December 31, 2023. For the three and six months ended June 30, 2021, the Company recognized net compensation expense of $0.2

million and

$0.4 million, respectively, related to the Performance RSU Awards. For the three and six months ended June 30, 2020, the Company recognized net compensation expense of $0.1 million and $0.2 million, respectively, related to the Performance RSU Awards.

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Item 2. 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 condensed consolidated financial statements and the related notes thereto of the City Office REIT, Inc. contained in this Quarterly Report on Form

10-Q

(this “Report”).

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.

Cautionary Statement Regarding Forward-Looking Statements

This Report, including “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition,” contains both historical and forward-looking statements. All statements, other than statements of historical fact are, or may be deemed to be, forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 Report. 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:

•

adverse economic or real estate developments in the office sector or the markets in which we operate;

•

changes in local, regional, national and international economic conditions, including as a result of the ongoing coronavirus disease 2019

(“COVID-19”)

pandemic;

•

requests from tenants for rent deferrals, rent abatement or relief from other contractual obligations, or a failure to pay rent, as a result of changes in business behavior stemming from the ongoing

COVID-19

pandemic or the availability of government assistance programs;

•

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;

•

defaults on or

non-renewal

of leases by tenants, including as a result of the ongoing

COVID-19

pandemic;

•

increased interest rates and any resulting increase in financing or operating costs;

•

decreased rental rates or increased vacancy rates, including as a result of the ongoing

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;

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•

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 qualify and maintain our status as a real estate investment trust (“REIT”);

•

government approvals, actions and initiatives, including the need for compliance with environmental requirements or actions in response to the

COVID-19

pandemic;

•

outcome of claims and litigation involving or affecting us;

•

financial market fluctuations;

•

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

•

other factors described in our news releases and filings with the SEC, including but not limited to those described in our Annual Report on Form

10-K

for the year ended December 31, 2020 under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and in our subsequent reports filed with the SEC.

The forward-looking statements contained in this Report 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 our news releases and filings with the SEC, including but not limited to those described in our Annual Report on Form

10-K

for the year ended December 31, 2020 under the heading “Risk Factors” and in our subsequent reports filed with the SEC, many of which are beyond our control. 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 Report speaks only as of the date of this Report. 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.

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.

Revenue Base

As of June 30, 2021, we owned 24 properties comprised of 64 office buildings with a total of approximately 5.6 million square feet of net rentable area (“NRA”). As of June 30, 2021, our properties were approximately 89.7% leased.

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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. All tenants in the Lake Vista Pointe, Superior Pointe, 2525 McKinnon and Canyon Park properties have triple net leases. Certain tenants at AmberGlen, Florida Research Park, Circle Point, The Quad, Cascade Station, Denver Tech and Sorrento Mesa have leases on a triple net basis. We are also a lessor for a fee simple ground lease at the AmberGlen property. All of our remaining leases are predominately full-service gross leases.

Factors That May Influence Our Operating Results and Financial Condition

COVID-19

During the first quarter of 2020, the World Health Organization declared the

COVID-19

outbreak a pandemic. There have been mandates from international, federal, state and local authorities requiring forced closures of businesses and other facilities, and most of the markets in which our buildings are located have been or are subject to some form of pandemic-related restrictions. These forced closures and restrictions have had a material adverse effect on the global economy and the regional U.S. economies in which we operate, including negatively impacting some of our tenants’ ability to pay their rent.

All of our buildings are open and continue to operate. We adopted new policies and procedures to incorporate best practices for the safety of our tenants, our vendors and our employees. However, the usage of our assets in the second quarter 2021 was significantly lower than normal. Usage of our assets in the near future depends on the duration of the pandemic, the continued implementation and effectiveness of

COVID-19

vaccines and other therapeutics and corporate and individual decisions regarding return to usage of office space, which is impossible to estimate.

We continue to closely monitor the impact of the

COVID-19

pandemic on all aspects of our business and geographies. While we did not experience any significant disruptions during the three months ended June 30, 2021, as a result of

COVID-19

or governmental or tenant actions in response thereto, the Company granted rent relief to two tenants comprising approximately 0.1% of the Company’s occupied NRA, most often in the form of a rent deferral or rent abatement. Although the rent deferrals and rent abatements granted to date did not have a material impact on our net rental revenue, the long-term impact of the pandemic on our tenants and the world-wide economy is uncertain and impossible to estimate, and will depend on the scope, severity and duration of the pandemic.

We have collected over 99% of contractually required base rents from our tenants for the three months ended June 30, 2021 and granted rent relief for another approximately 0.1% of contractually required base rents from our tenants for the three months ended June 30, 2021. We may incur losses in future periods due to tenants that default on their leases, file for bankruptcy and/or otherwise experience significant financial difficulty as a result of the duration of the

COVID-19

pandemic, but the extent of those losses is impossible to predict given the fluidity of the pandemic and its uncertain impact on economic activity.

Leasing activity has generally been slow, with the exception of the life science sector, and we believe leasing activity will continue to be impacted by

COVID-19.

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 potentially impact the pricing and competitiveness for lease office space in our markets.

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We believe economic conditions, leasing activity and acquisition prospects have improved substantially since the initial phase of the

COVID-19

pandemic and we will continue to actively evaluate business operations and strategies to optimally position ourselves. For a discussion of the impact of the

COVID-19

pandemic on our liquidity and balance sheet, see “Liquidity and Capital Resources” below.

The situation surrounding

COVID-19

and additional variants that may spread remains fluid and as certain restrictions are lifted in various geographical locations throughout the U.S., we will continue to monitor and actively manage our response in collaboration with tenants, government officials and other third parties to optimally position the Company.

Business and Strategy

We focus on owning and acquiring office properties in our target markets. Our target markets generally possess what we believe are 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 utilize our management’s market-specific knowledge and relationships as well as the expertise of local real estate operators and our investment partners to identify acquisition opportunities that we believe will offer cash flow stability and long-term value appreciation. Our target markets are attractive, among other reasons, because we believe that ownership is often concentrated among local real estate operators that typically do not benefit from the same access to capital as public REITs and there is a relatively low level of participation of large institutional investors. We believe that these factors result in attractive pricing levels and risk-adjusted returns. The long-term impact of the

COVID-19

pandemic on these markets is uncertain and impossible to estimate, and will depend on the scope, severity and duration of the

COVID-19

pandemic.

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. We believe that the average rental rates for our portfolio of properties are generally

in-line

or slightly below the current average quoted market rates. Negative trends in one or more of these factors could 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 the

COVID-19

pandemic, 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.

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Our Properties

As of June 30, 2021, we owned 24 properties comprised of 64 office buildings with a total of approximately 5.6 million square feet of NRA in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, San Diego, Seattle and Tampa. The following table presents an overview of our portfolio as of June 30, 2021.


Metropolitan Area	Property	Economic Interest			NRA (000s Square Feet)		In Place Occupancy			Annualized Base Rent per Square Foot		Annualized Gross Rent per Square Foot (1)		Annualized Base Rent (2) ($000s)
Phoenix, AZ (21.8% of NRA)	Pima Center		100.0	%		272		67.9	%	$	27.87	$	27.87	$	5,145
	SanTan		100.0	%		267		97.5	%	$	29.68	$	29.68	$	7,713
	5090 N 40 th St		100.0	%		175		90.5	%	$	30.27	$	30.27	$	4,799
	Camelback Square		100.0	%		174		77.3	%	$	32.19	$	32.19	$	4,332
	The Quad		100.0	%		163		100.0	%	$	30.37	$	30.68	$	4,950
	Papago Tech		100.0	%		163		96.3	%	$	23.29	$	23.29	$	3,650
Tampa, FL (18.7%)	Park Tower		94.8	%		470		87.4	%	$	27.16	$	27.16	$	11,155
	City Center		95.0	%		243		93.0	%	$	27.03	$	27.03	$	6,102
	Intellicenter		100.0	%		204		100.0	%	$	25.09	$	25.09	$	5,105
	Carillon Point		100.0	%		124		100.0	%	$	29.39	$	29.39	$	3,650
Denver, CO (14.5%)	Denver Tech (3)		100.0	%		383		93.8	%	$	23.41	$	27.52	$	8,349
	Circle Point		100.0	%		272		81.6	%	$	18.75	$	32.62	$	4,162
	Superior Pointe		100.0	%		152		94.0	%	$	18.18	$	31.18	$	2,592
Orlando, FL (12.9%)	Florida Research Park (4)		96.6	%		397		95.2	%	$	23.96	$	27.45	$	9,026
	Central Fairwinds		97.0	%		168		90.5	%	$	26.36	$	26.36	$	4,012
	Greenwood Blvd		100.0	%		155		100.0	%	$	23.75	$	23.75	$	3,682
San Diego, CA (12.2%)	Sorrento Mesa (5)		100.0	%		400		83.5	%	$	33.30	$	38.60	$	11,112
	Mission City		100.0	%		281		75.8	%	$	37.28	$	37.28	$	7,951
Dallas, TX (10.3%)	190 Office Center		100.0	%		303		76.1	%	$	26.63	$	26.63	$	6,146
	Lake Vista Pointe		100.0	%		163		100.0	%	$	17.00	$	26.00	$	2,777
	2525 McKinnon		100.0	%		111		91.6	%	$	29.28	$	48.28	$	2,987
Portland, OR (5.9%)	AmberGlen		76.0	%		203		98.4	%	$	22.66	$	25.20	$	4,517
	Cascade Station		100.0	%		128		95.5	%	$	27.80	$	29.81	$	3,385
Seattle, WA (3.7%)	Canyon Park		100.0	%		207		100.0	%	$	22.49	$	27.49	$	4,650

Total / Weighted Average – June 30, 2021 (6)						5,578		89.7	%	$	26.40	$	29.35	$	131,949

(1)	Annualized gross rent per square foot includes adjustment for estimated expense reimbursements of triple net leases.

(2)	Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents before abatements) for the month ended June 30, 2021 by (ii) 12.

(3)	Denver Tech is comprised of 7601 Tech and 7595 Tech (formerly “DTC Crossroads”).

(4)	Florida Research Park is comprised of FRP Collection and FRP Ingenuity Drive.

(5)	Sorrento Mesa includes 5910 Pacific Center and 9985 Pacific Heights, which were acquired during the second quarter of 2021.

(6)	Averages weighted based on the property’s NRA, adjusted for occupancy.

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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.

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. In addition, the recent

COVID-19

pandemic has caused significant disruption in global financial markets and economies. This global disruption could have a material impact on the markets in which we operate, our tenants and our ability to successfully execute our business strategy. The extent to which

COVID-19

will impact the Company is highly uncertain and is not reasonably estimable at this time.

Summary of Significant Accounting Policies

The interim condensed consolidated financial statements follow the same policies and procedures as outlined in the audited consolidated financial statements for the year ended December 31, 2020 included in our Annual Report on Form

10-K

for the year ended December 31, 2020.

Results of Operations

Comparison of Three Months Ended June 30, 2021 to Three Months Ended June 30, 2020

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 $0.4 million, or 1%, to $40.0 million for the three months ended June 30, 2021 compared to $39.6 million for the three months ended June 30, 2020. Of this increase, $0.4 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. Revenue increased by $0.5 million at our 7595 Tech property within the Denver Tech portfolio and by $0.6 million at our existing Sorrento Mesa property due to significant leasing transactions during the prior year, which lifted occupancy and rental income. Revenue also increased due to significant termination fee income at our SanTan and Park Tower properties which increased revenue by $0.6 million and $0.3 million, respectively. Offsetting these increases was the disposition of Cherry Creek in February 2021, which resulted in a $2.1 million decrease in revenue. The remaining properties’ rental and other revenues were 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 $0.3 million, or 1%, to $32.2 million for the three months ended June 30, 2021, from $31.9 million for the three months ended June 30, 2020. Of this increase, $0.4 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. Higher operating expenses at Mission City also contributed to a $0.6 million increase. General and administrative expenses also increased $0.4 million due to higher professional fees. The disposition of Cherry Creek resulted in a $1.3 million decrease in total operating expenses. The remaining expenses were marginally higher in comparison to the prior period.

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 $0.1 million, or 1%, to $14.2 million for the three months ended June 30, 2021, from $14.1 million in the same period in the prior year. Of this increase, $0.1 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. Higher operating expenses at Mission City also contributed to a $0.3 million increase. Offsetting these increases was the disposition of Cherry Creek which resulted in a $0.7 million decrease in property operating expenses. The remaining expenses were marginally higher in comparison to the prior period.

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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 increased $0.4 million, or 14%, to $3.1 million for the three months ended June 30, 2021, from $2.7 million reported for the same period in 2020. The increase is due to higher professional fees in the quarter.

Depreciation and Amortization.

Depreciation and amortization decreased $0.1 million, or 1%, to $15.0 million for the three months ended June 30, 2021, from $15.1 million reported for the same period in the prior year. The disposition of Cherry Creek resulted in a $0.6 million decrease to depreciation and amortization which was offset by a $0.3 million increase attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio during the quarter. The remaining properties were relatively unchanged.

Other Expense (Income)

Interest Expense.

Interest expense decreased $1.2 million, or 17%, to $5.9 million for the three months ended June 30, 2021, from $7.1 million for the three months ended June 30, 2020. The decrease was primarily attributable to the sale of Cherry Creek during the period as the proceeds of the sale were used to repay debt.

Comparison of Six Months Ended June 30, 2021 to Six Months Ended June 30, 2020

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 decreased $0.2 million, or 0%, to $79.5 million for the six months ended June 30, 2021 compared to $79.7 million for the six months ended June 30, 2020. The disposition of Cherry Creek in February 2021 contributed $3.2 million to the decrease in revenue. Revenue also decreased at 190 Office Center and Pima Center by $0.5 million and $0.6 million, respectively, due to a decrease in occupancy year over year. Offsetting these decreases, an increase of $0.4 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. Revenue increased by $0.9 million at our 7595 Tech property within the Denver Tech portfolio, $1.2 million at our existing Sorrento Mesa property and $0.3 million at City Center due to significant leasing transactions which lifted occupancy and rental income. Revenue also increased due to significant rent termination income at our SanTan and Park Tower properties which increased rental income by $0.8 million and $0.1 million, respectively. The remaining properties’ rental and other revenues were 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 decreased by $0.8 million, or 1%, to $63.5 million for the six months ended June 30, 2021, from $64.3 million for the six months ended June 30, 2020. The disposition of Cherry Creek resulted in a $2.1 million decrease in expenses. Offsetting this decrease, an increase of $0.4 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021 and an increase of $0.4 million was attributable to the Denver Tech portfolio due to a combination of higher property operating expenses and depreciation and amortization. General and administrative expenses also increased $0.4 million due to higher professional fees. The remaining expenses were marginally higher in comparison to the prior period.

Property Operating Expenses.

re-leasing

costs. Property operating expenses decreased by $0.5 million, or 2%, to $28.3 million for the six months ended June 30, 2021, compared to $28.8 million for the six months ended June 30, 2020. The disposition of Cherry Creek resulted in a $1.0 million decrease in expenses. Offsetting these decreases, an increase of $0.1 million was attributable to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio in May 2021. The remaining expenses were marginally higher in comparison to the prior period.

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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 increased $0.4 million, or 7%, to $5.9 million for the six months ended June 30, 2021, from $5.5 million reported for the same period in 2020. The increase is due to higher professional fees in the quarter.

Depreciation and Amortization.

Depreciation and amortization decreased $0.6 million, or 2%, to $29.4 million for the six months ended June 30, 2021, from $30.0 million reported for the same period in 2020. The disposition of Cherry Creek resulted in a $1.1 million decrease to depreciation and amortization which was offset by the depreciation related to the acquisitions of two additional buildings adjacent to our Sorrento Mesa portfolio during the quarter. The remaining properties were relatively unchanged.

Other Expense (Income)

Interest Expense.

Interest expense decreased $1.3 million, or 10%, to $12.5 million for the six months ended June 30, 2021, from $13.8 million for the six months ended June 30, 2020. The decrease was primarily attributable to the sale of Cherry Creek during the period as the proceeds of the sale were used to repay debt.

Net Gain on the Sale of Real Estate Property.

We recorded a net gain on the sale of real estate property of $47.4 million for the six months ended June 30, 2021 related to the sale of our Cherry Creek property in February 2021.

Cash Flows

Comparison of Six Months Ended June 30, 2021 to Six Months Ended June 30, 2020

Cash, cash equivalents and restricted cash were $36.3 million and $83.1 million as of June 30, 2021 and June 30, 2020, respectively.

Cash flow from operating activities.

Net cash provided by operating activities increased by $4.4 million to $35.7 million for the six months ended June 30, 2021 compared to $31.3 million for the same period in 2020. The increase was primarily attributable to changes in working capital.

Cash flow from investing activities.

Net cash provided by investing activities increased by $55.6 million to $37.4 million for the six months ended June 30, 2021 compared to $18.2 million used in investing activities for the same period in 2020. The increase in cash provided by investing activities was primarily due to the proceeds from the sale of the Cherry Creek property in 2021, partially offset by the acquisition of two additional buildings adjacent to our Sorrento Mesa portfolio in 2021.

Cash flow to financing activities.

Net cash used in financing activities increased by $65.2 million to $82.7 million for the six months ended June 30, 2021 compared to $17.5 million for the same period in 2020. The increase in cash used in financing activities was primarily due to higher repayment of borrowings, including the Midland Life Insurance loan, and lower net proceeds from borrowing for the six months ended June 30, 2021.

Liquidity and Capital Resources

Analysis of Liquidity and Capital Resources

We had approximately $13.4 million of cash and cash equivalents and $22.9 million of restricted cash as of June 30, 2021.

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On March 15, 2018, the Company entered into a credit agreement for the Unsecured Credit Facility (our “Unsecured Credit Facility”) that provided 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. The Company’s previous secured credit facility was replaced and repaid in full from the proceeds of our Unsecured Credit Facility. Our Unsecured Credit Facility matures in March 2022 and may be extended to March 2023 at the Company’s option upon meeting certain conditions. Borrowings under our Unsecured Credit Facility bear interest at a rate equal to the LIBOR rate plus a margin of between 140 to 225 basis points depending upon the Company’s consolidated leverage ratio. As of June 30, 2021, we had approximately $96.0 million outstanding under our Unsecured Credit Facility and a $4.8 million letter of credit to satisfy escrow requirements for a mortgage lender.

On September 27, 2019, the Company entered into the five-year $50 million Term Loan (the “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 (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

LIBOR payments.

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 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. notice of termination of the Agreements with D.A. Davidson & Co., which termination became effective on May 7, 2021. The Company did not issue any shares of common stock or Series A Preferred Stock under the ATM Program during the six months ended June 30, 2021.

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, reserves established from existing cash, proceeds from our public offerings, including under our at the market issuance 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, 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.

Contractual Obligations and Other Long-Term Liabilities

The following table provides information with respect to our commitments as of June 30, 2021, including any guaranteed or minimum commitments under contractual obligations. The table does not reflect available debt extension options.

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	Payments Due by Period (in thousands)
Contractual Obligations	Total		2021		2022-2023		2024-2025		More than 5 years
Principal payments on mortgage loans	$	615,617	$	2,967	$	151,078	$	216,733	$	244,839
Interest payments (1)		100,122		11,011		40,538		30,751		17,822
Tenant-related commitments		20,196		19,984		212		—		—
Lease obligations		31,568		315		1,838		1,540		27,875

Total	$	767,503	$	34,277	$	193,666	$	249,024	$	290,536

(1)

Contracted interest on the floating rate borrowings under our Unsecured Credit Facility was calculated based on the balance and interest rate at June 30, 2021. 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%.

Off-Balance

Sheet Arrangements

As of June 30, 2021, we had a $4.8 million letter of credit outstanding under our Unsecured Credit Facility to satisfy escrow requirements for a mortgage lender.

Inflation

Substantially all of our office leases provide for real estate tax and operating expense escalations. In addition, most of the leases provide for fixed annual rent increases. We believe that inflationary increases may be at least partially offset by these contractual rent increases and expense escalations.

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Item 3. 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 interest rates. We have used, and will 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. See Note 6 to our condensed consolidated financial statements in Item 1 of this Report 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. We consider our interest rate exposure to be minimal, because as of June 30, 2021, approximately $469.6 million, or 76.3%, of our debt had fixed interest rates and approximately $146.0 million, or 23.7%, had variable interest rates. Of the $146.0 million variable rate debt, $50.0 million 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. When factoring in the Term Loan as fixed rate debt through the Interest Rate Swap, approximately 84.4% of our debt was fixed rate debt and 15.6% was variable rate debt as of June 30, 2021. A 10% increase in LIBOR would result in a nominal increase to our annual interest costs on debt outstanding as of June 30, 2021, 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 10% decrease in LIBOR would result in a nominal decrease to our annual interest costs on debt outstanding as of June 30, 2021 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 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. In addition, the uncertainty that exists with respect to the economic impact of the

COVID-19

pandemic introduced significant volatility in global financial markets and economies during and subsequent to the six months ended June 30, 2021. The long-term impacts of such volatility on the Company are uncertain and impossible to estimate, and will depend on the scope, severity and duration of the pandemic.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on the most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer determined that the Company’s disclosure controls and procedures (as defined in Rules

13a-15(e)

and

15d-15(e)

under the Securities and Exchange Act of 1934, as amended) were effective as of June 30, 2021.

Management’s Report on Internal Control Over Financial Reporting

There have been no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of business. As of June 30, 2021, management does not believe that any such litigation will have a material adverse effect, individually or in the aggregate, on our financial position or results of operations.

Item 1A. Risk Factors

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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. 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 Securities and Exchange Commission 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.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

On August 4, 2021, City Office REIT, Inc. (the “Company”), through a wholly-owned subsidiary, entered into Amendment No. 2 to the Company’s employment agreements (collectively, the “Employment Agreement Amendments”) with each of James Farrar, the Company’s Chief Executive Officer, Greg Tylee, the Company’s President and Chief Operating Officer, and Anthony Maretic, the Company’s Chief Financial Officer, Secretary and Treasurer. The Employment Agreement Amendments clarify certain provisions pertaining to the vesting of equity awards of upon the death or disability of the Company’s executive officers.

The Compensation Committee of the Company’s Board of Directors approved the Company’s entry into the Employment Agreement Amendments. The foregoing descriptions of the Employment Agreement Amendments are not complete. Reference is made to the full text of each of the Employment Agreement Amendments filed as Exhibit 10.1, 10.2 and 10.3 to this Quarterly Report on Form 10-Q.

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Item 6. Exhibits


Exhibit Number		Description

3.1		Articles of Amendment and Restatement of City Office REIT, Inc., as amended and supplemented (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on March 1, 2018).

3.2		Second Amended and Restated Bylaws of City Office REIT, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 14, 2017).

4.1		Certificate of Common Stock of City Office REIT, Inc. (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-11/A filed with the Commission on February 18, 2014).

4.2		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).

10.1		Amendment No. 2 to Executive Employment Agreement, dated as of August 4, 2021, by and between City Office Management ULC and James Farrar. †**

10.2		Amendment No. 2 to Executive Employment Agreement, dated as of August 4, 2021, by and between City Office Management ULC and Gregory Tylee. †**

10.3		Amendment No. 2 to Executive Employment Agreement, dated as of August 4, 2021, by and between City Office Management ULC and Anthony Maretic. †**

31.1		Certification by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †

31.2		Certification by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †

32.1		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. †

32.2		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.

*		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 Income; (iii) Consolidated Statements of Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

**		Compensatory Plan or arrangement.

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SIGNATURES

Pursuant to the requirements 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.

CITY OFFICE REIT, INC.

Date: August 5, 2021


By:		/s/ James Farrar
		James Farrar

		Chief Executive Officer and Director (Principal Executive Officer)

Date: August 5, 2021


By:		/s/ Anthony Maretic
		Anthony Maretic

		Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)

Exhibit 10.1

AMENDMENT NO. 2

EXECUTIVE EMPLOYMENT AGREEMENT

CITY OFFICE REIT, INC.

This Amendment No. 2 (the “Amendment”), dated as of August 4, 2021, to the Executive Employment Agreement (the “Agreement”) between City Office Management ULC (the “Company”), a wholly-subsidiary of City Office REIT, Inc. (the “REIT”), and Mr. James Farrar, as Chief Executive Officer of the REIT, dated as of February 1, 2018, is entered into by the Company pursuant to Section 17 of the Agreement. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Agreement. Unless otherwise indicated, all section references in this Amendment refer to sections of the Agreement.

WHEREAS, the Committee determined that it is advisable and in the best interest of the REIT that the Agreement between the Company and Mr. Farrar, as Chief Executive Officer, be amended as set forth below in order to clarify certain provisions of the Agreement;

NOW, THEREFORE, for good and adequate consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Mr. Farrar hereby agree as follows:

1.01 Amendment of Agreement. The Agreement is hereby amended as follows:

Section 9(c) is hereby amended and restated in its entirety as follows:

Voluntary Termination by the Executive without Good Reason. If the Executive resigns or otherwise voluntarily terminated his employment (other than for Good Reason), the Executive shall be entitled to receive, and the Company shall pay or provide the Executive, the Accrued Obligations but shall not be entitled to receive any other compensation or benefits on or after the date of termination, other than as expressly set forth in Section 9(d).

Section 9(d) is hereby amended and restated in its entirety as follows:

Death or HRC Disability. (i) If the Executive dies before the termination of the Executive’s employment as provided herein, the Executive’s surviving spouse or if there is no surviving spouse, the Executive’s estate, shall be entitled to receive, and the Company shall pay or provide the Executive’s surviving spouse or if there is no surviving spouse, the Executive’s estate, the Accrued Obligations. In addition, if the administrator of the Executive’s estate provides a release and waiver of claims in a form reasonably prescribed by the Company, outstanding options, restricted stock units and other awards granted under the Plan shall become fully vested and, in the case of options, exercisable, in whole or in part, notwithstanding the terms of the Plan relating to the vesting of awards. (ii) If the Executive becomes unable to perform his employment obligations as a result of a Disability which cannot be reasonably accommodated in accordance with obligations

under the British Columbia Human Rights Code (an “HRC Disability”), the Executive shall be entitled to receive, and the Company shall pay the Accrued Obligations. In addition, if the Executive or the Executive’s legal guardian (applicable in the event that the Executive becomes legally incapacitated as a result of an HRC Disability) provides a release and waiver of claims in a form reasonably prescribed by the Company, outstanding options, restricted stock units and other awards granted under the Plan shall continue to vest as though the Executive remained actively employed with the Company throughout such Disability, provided, however, that if the Executive becomes employed as an officer with another employer engaged in the Business, then (A) all continued vesting shall cease as of the date the Executive becomes employed with such employer (such date being determined in the sole discretion of the Company without any duty of inquiry imposed upon the Company), and (B) to the extent the Executive received a benefit in contradiction of the foregoing (A), then the Company has the unilateral right to effectuate a clawback (and offset of other compensation or property otherwise owned by the Executive or owed by the Company to the Executive) of such ill-gotten benefit.

2.01 Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute an agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart.

3.01 Ratification. Except as expressly amended by this Amendment, the Agreement is in all respects ratified and confirmed and all of the terms and conditions and provisions of the Agreement shall remain in full force and effect.

4.01 Applicable Law. This Amendment shall be construed in accordance with and governed by the laws of the province of British Columbia, without regard to the principles of conflicts of law.

[Signature Pages Follow.]

IN WITNESS WHEREOF, the parties hereto execute this Amendment, to be effective as of the date first set forth above.


CITY OFFICE MANAGEMENT ULC

By:		City Office REIT, Inc.

By:		/s/ John McLernon
Name:		John McLernon
Title:		Chairman of the Board of Directors

/s/ James Farrar

James Farrar

[Signature Page to Amendment No. 2 to the Executive Employment Agreement of City Office REIT, Inc.]

Exhibit 10.2

AMENDMENT NO. 2

EXECUTIVE EMPLOYMENT AGREEMENT

CITY OFFICE REIT, INC.

This Amendment No. 2 (the “Amendment”), dated as of August 4, 2021, to the Executive Employment Agreement (the “Agreement”) between City Office Management ULC (the “Company”), a wholly-subsidiary of City Office REIT, Inc. (the “REIT”), and Mr. Greg Tylee, as Chief Operating Officer and President of the REIT, dated as of February 1, 2018, is entered into by the Company pursuant to Section 17 of the Agreement. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Agreement. Unless otherwise indicated, all section references in this Amendment refer to sections of the Agreement.

WHEREAS, the Committee determined that it is advisable and in the best interest of the REIT that the Agreement between the Company and Mr. Tylee, as Chief Operating Officer and President, be amended as set forth below in order to clarify certain provisions of the Agreement;

NOW, THEREFORE, for good and adequate consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Mr. Tylee hereby agree as follows:

1.01 Amendment of Agreement. The Agreement is hereby amended as follows:

Section 9(c) is hereby amended and restated in its entirety as follows:

Section 9(d) is hereby amended and restated in its entirety as follows:

4.01 Applicable Law. This Amendment shall be construed in accordance with and governed by the laws of the province of British Columbia, without regard to the principles of conflicts of law.

[Signature Pages Follow.]

IN WITNESS WHEREOF, the parties hereto execute this Amendment, to be effective as of the date first set forth above.


CITY OFFICE MANAGEMENT ULC

By:		City Office REIT, Inc.

By:		/s/ John McLernon
Name:		John McLernon
Title:		Chairman of the Board of Directors

/s/ Greg Tylee

Greg Tylee

[Signature Page to Amendment No. 2 to the Executive Employment Agreement of City Office REIT, Inc.]

Exhibit 10.3

AMENDMENT NO. 2

EXECUTIVE EMPLOYMENT AGREEMENT

CITY OFFICE REIT, INC.

This Amendment No. 2 (the “Amendment”), dated as of August 4, 2021, to the Executive Employment Agreement (the “Agreement”) between City Office Management ULC (the “Company”), a wholly-subsidiary of City Office REIT, Inc. (the “REIT”), and Mr. Anthony Maretic, as Chief Financial Officer, Secretary and Treasurer of the REIT, dated as of February 1, 2018, is entered into by the Company pursuant to Section 17 of the Agreement. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Agreement. Unless otherwise indicated, all section references in this Amendment refer to sections of the Agreement.

WHEREAS, the Committee determined that it is advisable and in the best interest of the REIT that the Agreement between the Company and Mr. Maretic, as Chief Financial Officer, Secretary and Treasurer, be amended as set forth below in order to clarify certain provisions of the Agreement;

NOW, THEREFORE, for good and adequate consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Mr. Maretic hereby agree as follows:

1.01 Amendment of Agreement. The Agreement is hereby amended as follows:

Section 9(c) is hereby amended and restated in its entirety as follows:

Voluntary Termination by the Executive without Good Reason. If the Executive resigns or otherwise voluntarily terminated his employment (other than for Good Reason), the Executive shall be entitled to receive, and the Company shall pay or provide the Executive, the Accrued Obligations but shall not be entitled to receive any other compensation or benefits on or after the date of termination, other than as expressly set forth in Section 9(d).

Section 9(d) is hereby amended and restated in its entirety as follows:

Death or HRC Disability. (i) If the Executive dies before the termination of the Executive’s employment as provided herein, the Executive’s surviving spouse or if there is no surviving spouse, the Executive’s estate, shall be entitled to receive, and the Company shall pay or provide the Executive’s surviving spouse or if there is no surviving spouse, the Executive’s estate, the Accrued Obligations. In addition, if the administrator of the Executive’s estate provides a release and waiver of claims in a form reasonably prescribed by the Company, outstanding options, restricted stock units and other awards granted under the Plan shall become fully vested and, in the case of options, exercisable, in whole or in part, notwithstanding the terms of the Plan relating to the vesting of awards. (ii) If the Executive becomes unable to perform his employment obligations as a result of a Disability

which cannot be reasonably accommodated in accordance with obligations under the British Columbia Human Rights Code (an “HRC Disability”), the Executive shall be entitled to receive, and the Company shall pay the Accrued Obligations. In addition, if the Executive or the Executive’s legal guardian (applicable in the event that the Executive becomes legally incapacitated as a result of an HRC Disability) provides a release and waiver of claims in a form reasonably prescribed by the Company, outstanding options, restricted stock units and other awards granted under the Plan shall continue to vest as though the Executive remained actively employed with the Company throughout such Disability, provided, however, that if the Executive becomes employed as an officer with another employer engaged in the Business, then (A) all continued vesting shall cease as of the date the Executive becomes employed with such employer (such date being determined in the sole discretion of the Company without any duty of inquiry imposed upon the Company), and (B) to the extent the Executive received a benefit in contradiction of the foregoing (A), then the Company has the unilateral right to effectuate a clawback (and offset of other compensation or property otherwise owned by the Executive or owed by the Company to the Executive) of such ill-gotten benefit.

4.01 Applicable Law. This Amendment shall be construed in accordance with and governed by the laws of the province of British Columbia, without regard to the principles of conflicts of law.

[Signature Pages Follow.]

IN WITNESS WHEREOF, the parties hereto execute this Amendment, to be effective as of the date first set forth above.


CITY OFFICE MANAGEMENT ULC

By: City Office REIT, Inc.

By:		/s/ John McLernon
Name: John McLernon
Title: Chairman of the Board of Directors

/s/ Anthony Maretic

ANTHONY MARETIC

[Signature Page to Amendment No. 2 to the Executive Employment Agreement of City Office REIT, Inc.]

Exhibit 31.1

Certification

I, James Farrar, certify that:

I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2021 of City Office REIT, Inc.;

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;

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;

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:

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;

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;

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

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 an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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):

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

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.

Exhibit 31.2

Certification

I, Anthony Maretic, certify that:

I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2021 of City Office REIT, Inc.;

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.

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 Quarterly Report on Form 10-Q for the period ended June 30, 2021 of City Office REIT, Inc. (the “Company”) as 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.

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 Quarterly Report on Form 10-Q for the period ended June 30, 2021 of City Office REIT, Inc. (the “Company”) as 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.