Earnings call transcript: City Office Q1 2025 reveals major EPS miss

City Office REIT reported its Q1 2025 earnings, revealing a significant miss on earnings per share (EPS) expectations. The company posted an EPS of -2.66, a stark contrast to the forecasted -0.1033, marking a 2475.02% surprise. Despite this, the stock showed resilience with a minor pre-market price increase of 0.14%, closing at $6.93. According to InvestingPro data, the stock has demonstrated strong momentum, with a remarkable 41.5% return over the past six months and is currently trading near its 52-week high of $6.99.

Key Takeaways

• EPS significantly missed expectations, with a 2475.02% surprise.
• Revenue slightly surpassed forecasts, reflecting operational strength.
• Stock price remained stable despite the earnings miss.
• Strong leasing performance in Sunbelt markets.
• High debt levels remain a concern.

Company Performance

City Office REIT’s performance in Q1 2025 was a mixed bag. While the company faced a substantial EPS miss, its revenue slightly exceeded expectations. The company demonstrated strong leasing activity, particularly in the Sunbelt markets, which continue to outperform.

Financial Highlights

• Revenue: $42.34 million, slightly above the forecast of $42.27 million.
• Earnings per share: -2.66, significantly below expectations.
• Net Operating Income: $26 million, up $500,000 from Q4.
• Core FFO: $12.3 million or $0.30 per share.
• AFFO: $6.5 million or $0.16 per share.

Earnings vs. Forecast

The company recorded an EPS of -2.66, a substantial deviation from the forecasted -0.1033. This miss reflects a significant challenge for the company, as such a large discrepancy is uncommon and may indicate underlying financial issues.

Market Reaction

The stock price remained relatively stable, increasing by 0.14% to $6.93. This stability suggests that investors may have anticipated the earnings miss, or that other positive factors, such as strong leasing performance, mitigated the negative impact. Based on InvestingPro’s Fair Value analysis, the stock appears to be slightly undervalued at current levels, despite trading near its 52-week high.

Outlook & Guidance

City Office REIT expects year-end occupancy to range between 85-87%. The company continues to focus on its development projects, such as the Waldorf Astoria Residences in St. Petersburg, aiming to capitalize on the high demand for luxury condos.

Executive Commentary

CEO Jamie Ferrer highlighted the transformation in Downtown St. Petersburg, emphasizing the demand for luxury condo development. Ferrer also noted the strategic advantage of partnering with experienced developers like Property Markets Group.

Risks and Challenges

• Significant EPS miss raises concerns about financial management.
• High debt levels, with $646 million total debt, could impact future liquidity.
• Lower-than-expected occupancy rates may affect revenue streams.
• Macroeconomic factors could impact office leasing demand.
• Ongoing construction projects may face delays or cost overruns.

Q&A

During the earnings call, analysts inquired about the St. Petersburg development project and the occupancy trajectory for 2024. Executives clarified their focus on Sunbelt market leasing and tenant transitions at the Greenwood Boulevard property.

Full transcript - City Office (CIO) Q1 2025:

Conference Operator: Good morning, and welcome to the Citi Office REIT First Quarter twenty twenty five Earnings Conference Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce you to Tony Maratik, the company’s Chief Financial Officer, Treasurer and Corporate Secretary. Thank you. Mr.

Muratik, you may begin.

Tony Maratik, Chief Financial Officer, Treasurer and Corporate Secretary, Citi Office REIT: Good morning. Before we begin, I’d like to direct you to our website at cioreit.com, where you can view our first quarter earnings press release and supplemental information package. The earnings release and supplemental package both include a reconciliation of non GAAP measures that will be discussed today to their most directly comparable GAAP financial measures. Certain statements made today that discuss the company’s beliefs or expectations or that are not based on historical fact may constitute forward looking statements within the meaning of the federal securities laws. While the company believes that these expectations reflected in such forward looking statements are based upon reasonable assumptions and give no assurance that these expectations will be achieved.

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

Jamie Ferrer, Chief Executive Officer, Citi Office REIT: Good morning. I wanted to start today with a status update on the planned redevelopment of our city center property in downtown St. Petersburg, Florida. On our last call, we mentioned that we received site plan application approval from the City of St. Petersburg.

This plan was for the redevelopment of City Center’s existing parking structure into a 49 storey residential condominium and mixed use tower. We’re excited to announce that after quarter end, we entered into an agreement with Property Markets Group or PMG to lead the development. PMG is a very experienced developer who is currently building the Waldorf Astoria Residences in Miami. That project will rank as one of Miami’s tallest residential towers upon completion. Our project is also expected to be sold under the luxury Waldorf Astoria Residences brand and capitalizes on our site’s incredible water views and exposure.

The agreement with PMG charges them with responsibility for all predevelopment activities and the associated costs, which we anticipate will require them to invest $17,000,000 of cash. There are various preconditions to be completed prior to the contribution of our land to the venture, including achievement of presales, financing and return on cost targets. Upon contribution of our parking structure land to the development venture, we would receive a 50% interest in the partnership. Today, the project sales center is nearing completion at City Center, and we expect that presales will commence shortly. Upon achieving the conditions to commence construction, we anticipate a construction period of approximately three years.

Downtown St. Pete has seen a dramatic transformation over the past ten years with luxury condo development in high demand and neighboring projects selling out quickly. We believe the announcement of this project is set to meet that demand as one of the premier offerings in the marketplace. In sum, we’ve created a unique venture that positions us to benefit alongside a highly experienced development partner. This exciting project has tremendous longer term value creation potential

Tony Maratik, Chief Financial Officer, Treasurer and Corporate Secretary, Citi Office REIT: for our shareholders.

Jamie Ferrer, Chief Executive Officer, Citi Office REIT: Turning to other highlights of the first quarter. We continue to see a positive trend in overall office real estate fundamentals. Nationally, office leasing volume was 15% higher than a year ago. JLL estimate that office leasing volume has returned to approximately 89% of typical pre pandemic levels. Higher quality office spaces in Sunbelt markets continue to outperform.

Moving to our leasing activity, the first quarter is typically one of the slowest quarters of the year. Despite this, we completed a healthy 144,000 square feet of new and renewal leasing. Our largest lease completed during the quarter was a 34,000 square foot new lease at our Papago Tech property in Phoenix. This lease represents the last vacancy that we have at that property. Subsequent to quarter end, we achieved another impactful new lease.

Our Greenwood Boulevard property in Orlando was 100% leased to a single tenant with a lease expiration in 2028. We were successful in negotiating a transaction to bring a new 66,000 square foot tenant into the building prior to that existing tenant’s expiration. The new tenant signed a ten year lease expected to commence in the fourth quarter of this year. The current tenant will vacate that space and pay a sizable termination fee. On the remaining 89,000 square feet in the building, the current tenant will keep its 2028 expiration on 31,000 square feet and agreed to extend the remaining 58,000 square feet on a longer term basis to 02/1933.

Overall, these were very important lease transactions that provide certainty around this asset’s long term cash flow. The transactions also position us favorably to extend the property’s upcoming loan maturity, which is expected to be achieved in the second quarter. Portfolio wide, we continue to see rent growth upon renewals and have realized an 8.5% positive cash re leasing spread on our renewals over the last twelve months. Our same store cash NOI also increased 4.4% in the first quarter as compared to the prior year. As far as our overall earnings and occupancy trends for the year, we are still on track within the guidance ranges we provided at the February.

With that, I’ll turn the call over to Tony to discuss our financial results in more detail.

Tony Maratik, Chief Financial Officer, Treasurer and Corporate Secretary, Citi Office REIT: Thanks, Jamie. Our net operating income in the first quarter was $26,000,000 which is $500,000 higher than the amount we reported in the fourth quarter. Higher revenue, partially driven by strong same store results, combined with lower operating expenses was the primary driver of the NOI increase. We also reported core FFO of $12,300,000 or $0.30 per share for the first quarter. Core FFO was $600,000 higher than the amount we reported in the fourth quarter for the same reasons NOI was higher.

Our first quarter AFFO was £6,500,000 or $0.16 per share. There was no single TI or LC amount that impacted AFFO by more than 500,000 Our spending on property renovations also decreased in the first quarter relative to last year as we completed several property renovation projects and amenity upgrades in the fourth quarter. Moving on to some of our operational metrics. Our same store cash NOI trended higher in the first quarter. There was a healthy increase of 4.4% or $1,100,000 as compared to the first quarter of twenty twenty four.

The largest contributor to that was Raleigh again, where NOI continues to materially increase at Block 83 as signed leases take occupancy. Our portfolio occupancy ended the quarter at 84.9%. This was slightly lower than the prior quarter, which we expected as a result of a couple of known vacates at our Denver Tech and 2,525 McKinnon properties. These vacates occurred later in the quarter and as a result did not have a significant impact to NOI. We expect occupancy will decrease in the second quarter.

This will be driven by the existing tenant at Greenwood Boulevard downsizing by 66,000 square feet that Jamie described prior to the commencement of a new tenant later this year. And also due to a 72,000 square foot tenant that vacated their Amberglint property in Portland after quarter end on April 1 as expected. At quarter end, we had 143,000 square feet of signed leases that have not yet commenced. As those signed leases take occupancy, we expect occupancy will increase and therefore we still anticipate year end occupancy will end within the 85% to 87% range contained within our original guidance. Our total debt as of March 31 was $646,000,000 Our net debt, including restricted cash to EBITDA was 6.7 times.

As of March 31, we had approximately $42,000,000 undrawn and authorized on our credit facility. We also had cash and restricted cash of £37,000,000 as of quarter end. Our credit facility matures in November 2025 with an ability to extend it to November 2026. That option can be exercised in August, ’90 days prior to the maturity as long as we remain in compliance with our debt covenants, which we are comfortably projected to be. As such, we expect to exercise that option and continue discussions on a longer term renewal.

We have two property debt maturities in 2025. The loans for both Greenwood Boulevard in Orlando and IntelliCenter in Tampa mature in the fourth quarter. We are at an advanced stage of discussions on a three year term extension with the existing lender for Greenwood Boulevard and have initiated discussions on a short term extension with the existing lender in IntelliCentre. We expect to provide an update on next quarter’s call. Last, we also have two high value properties, Block A3 in Raleigh and City Center in Tampa, that are completely unencumbered.

As the office debt capital markets continue to come back, we may explore options to add financing to those properties to generate additional liquidity. That concludes our prepared remarks and we’ll open up the line for questions. Operator?

Conference Operator: Thank you very much. Our first question comes from Upal Rana with KeyBanc Capital Markets. Upal, your line is now open. Please go ahead.

Upal Rana, Analyst, KeyBanc Capital Markets: Great. Thank you. I was wondering, was this new development project, how did that come about? Was this something that you seek out? Or was it something you’re approached on?

Jamie Ferrer, Chief Executive Officer, Citi Office REIT: Sure. It’s Jamie here. So this is something we started about two years ago recognizing how strong the Downtown St. Petersburg market was for development. And so we did a fairly deep canvas on options and how to best execute.

And we landed on, I think, a great structure that will generate significant value over time for us. And actually on that point, for more information, Forbes actually published an article earlier this week, which has a lot of good information. So you could search Forbes Waldorf Astoria, Saint Petersburg and and get a really good summary of the project.

Upal Rana, Analyst, KeyBanc Capital Markets: Okay, great. And then I understand there’s a lot of work still needs to be done, probably the shovels in the ground. But can you give a sense of timing and what that looks like and how it’s shaping up to be? You did mention three years of construction in your prepared remarks, but I wonder if there’s any other color you can provide us.

Jamie Ferrer, Chief Executive Officer, Citi Office REIT: Sure. So presales are about to commence. We’re building out a sales center within the Ground Floor of City Centre that’s almost finished. So internally, we think it will be about a year plus or minus of presales and then three years construction. So, you know, if things go according to plan, it’s probably four years for the full project.

Upal Rana, Analyst, KeyBanc Capital Markets: Okay. And will there be any disruption to the existing property that use that garage space?

Jamie Ferrer, Chief Executive Officer, Citi Office REIT: So we’ve, we’ve been working on alternative parking arrangements. We’ve been keeping all of our tenants up to speed on what’s gonna happen. So there’ll be a period of time where tenants are are offered, alternative arrangements, including valet. And when the structure is done, it replaces the parking for the office building.

Upal Rana, Analyst, KeyBanc Capital Markets: Okay. Great. Just last one for me. You’re currently just below the low end of your occupancy guidance here. Could you give us some color on the pace of occupancy this year in order to get you to the midpoint of 86%?

I know you do have about 300,000 square feet expiring over the next couple of quarters here. So that would great. Thank you.

Tony Maratik, Chief Financial Officer, Treasurer and Corporate Secretary, Citi Office REIT: Yes. Sure. Paul, this is Tony. Yes. So we have 143,000 square feet of leases at March 31 that have yet to take occupancy.

That represents about 2.7% of our portfolio. So that’s where the bulk of that’s going to come from. The majority of that will move in over the next two quarters. And then beyond that, we have the move out that I mentioned on my prepared remarks at in Portland. And then we have the activity that’s happening at Greenwood Boulevard, is a net positive, but will result in kind of occupancy dipping through the first two quarters, but we expect that new tenant will take occupancy before the end of the year to get us back within that range.

Upal Rana, Analyst, KeyBanc Capital Markets: Okay, great. Thank you.

Conference Operator: Our next question comes from Craig Kucera with Lucid Capital Markets. Craig, your line is now open. Please go ahead.

Craig Kucera, Analyst, Lucid Capital Markets: Hey, good morning guys. I just want to circle back to the Greenwood Boulevard transaction. I wasn’t able to do the math quick enough in my head, but is there going to be ultimately any vacancy in that asset or just a new tenant taking,

Jamie Ferrer, Chief Executive Officer, Citi Office REIT: you know, the

Craig Kucera, Analyst, Lucid Capital Markets: the remaining space and the other tenant just downsizing and extending their lease? Thank you.

Tony Maratik, Chief Financial Officer, Treasurer and Corporate Secretary, Citi Office REIT: Yeah. Yeah. Hey, Greg. Hey. It’s Tony here.

Yeah. It’s the latter. They’re it’s gonna take the occupancy. It’s currently a %. It’ll dip down for this vacate and then get back to 100% before the end of the year.

But what it does do is it dramatically extends the walls of the property as, you know, that maturity was scheduled for 2028. And now the bulk of the space has been extended out. The new lease that we have is a one hundred and thirty month, so over just over ten years, ten year term, and the existing tenant is extending their space out by five years on two of the three floors. So it’s a big win for the property.

Craig Kucera, Analyst, Lucid Capital Markets: Right. And as far as the rent there, think the existing tenant was paying $25.75 Were there any changes in the rent per square foot either for the new tenant or for the existing tenant?

Jamie Ferrer, Chief Executive Officer, Citi Office REIT: So for the new tenant, it kind of steps back up over a period of time and gets back slightly above where the current rent is. So it’ll dip down a little bit and then be back.

Craig Kucera, Analyst, Lucid Capital Markets: Okay. Fair enough. Just one more for me. I mean, heading into this year, I think your expectation was that you would see the most leasing activity and traffic in Phoenix, and congrats on the lease at Papago. But I just would be curious to hear your read on sort of how your top Sunbelt markets are performing and with Phoenix in particular, if that’s helpful.

Thank you.

Jamie Ferrer, Chief Executive Officer, Citi Office REIT: Sure. I’ll start. Tony might have some comments as well. If you actually have our investor presentation on Slide three shows the maps of really where our current markets are and our overall value. And I think what you can see is the bulk of our value is in the Sunbelt markets.

And we’re feeling really good about leasing there. So when Tony mentioned about some occupancy dipping down in Portland, that’s unfortunate, but that’s not a market that we’re looking to invest capital in. Where we’re investing capital is in the Sunbelt where we’re creating the most value. And Phoenix has been very strong. In fact, a significant portion of the leasing this quarter was in Phoenix.

So we continue to feel really good there and across the other Sunbelt markets that we have. Yes. Just to echo some of

Tony Maratik, Chief Financial Officer, Treasurer and Corporate Secretary, Citi Office REIT: Jamie’s comments, the bulk of the leasing activity this quarter, the 144,000 square feet of leasing this quarter was in Phoenix. And if you look at where the cash spreads are this quarter, you can see how strong that is and that was largely driven by that activity in Phoenix.

Jamie Ferrer, Chief Executive Officer, Citi Office REIT: Thanks for the question, Craig.

Upal Rana, Analyst, KeyBanc Capital Markets: Thanks, Craig.

Conference Operator: We currently have no further questions. So I will hand back over to Jamie for any closing remarks.

Jamie Ferrer, Chief Executive Officer, Citi Office REIT: Thank you for joining today. We look forward to updating you further next quarter. Goodbye.

Conference Operator: Thank you very much, Jamie and Tony for being our speakers today. That comes to the end of our conference call. We appreciate everyone for participating. You may now disconnect your lines.

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