CITY OFFICE REIT, INC. 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 theCity 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 toCity Office REIT, Inc. , aMaryland corporation, together with our consolidated subsidiaries, includingCity Office REIT Operating Partnership L.P. , aMaryland limited partnership, of which we are the sole general partner and which we refer to in this section as ourOperating Partnership , except where it is clear from the context that the term only meansCity Office REIT, Inc.
Cautionary Statement Regarding Forward-Looking Statements
This Report, including "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," 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;
• increased interest rates, any resulting increase in financing or
operating costs and the impact of inflation;
• changes in local, regional, national and international economicconditions, including as a result of the ongoing coronavirus disease
("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;
• 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;
• our failure to successfully operate acquired properties and operations;
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• changes in our business, financing or investment strategy or the markets
in which we operate;
• our failure to generate sufficient cash flows to service our outstanding
indebtedness;
• environmental uncertainties and risks related to adverse weather
conditions and natural disasters;
• our failure to maintain our qualification as a REIT for U.S. federal
income tax purposes;
• government approvals, actions and initiatives, including the need for
compliance with environmental requirements, vaccine mandates 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
including but not limited to those described in our Annual Report on Form
10-K
for the year ended
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, 2021 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 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 ofSeptember 30, 2022 , we owned 25 properties comprised of 60 office buildings with a total of approximately 6.0 million square feet of net rentable area ("NRA"). As ofSeptember 30, 2022 , our properties were approximately 85.8% leased. 18
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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 inCanyon Park , Superior Pointe, The Terraces and 2525 McKinnon properties have triple net leases. Certain tenants at AmberGlen, Block 23, Bloc 83,Florida Research Park ,Circle Point , The Quad,Cascade Station and Denver Tech 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
Economic Environment and Inflation
Over the last quarter, the economic conditions in theU.S. and globally have deteriorated, primarily due to rising inflation. As inflation continued to reach new highs, it set off a chain reaction of events, beginning with theFederal Reserve taking and signaling severe tightening measures, interest rates rising across the yield curve, volatility and losses in the public equity and debt markets, and now increasing concerns that theU.S. economy may experience a recession. This evolving operating environment impacts our operating activities as:
• business leaders may generally become more reticent to make large capital
allocation decisions, such as entry into a new lease, given the uncertain
economic environment;
• our capital costs have increased due to higher interest rates and credit
spreads, and private market debt financing is significantly more
challenging to arrange; and
• retaining and attracting new tenants has become increasingly challenging
due to potential business layoffs, downsizing and industry slowdowns.
Despite the challenging economic environment, there is increasing evidence that many businesses have or will tighten up in-person work policies as economic conditions worsen. Many of these companies increased their workforce during the pandemic without increasing their available space. We expect these factors to help offset, at least partially, the recessionary headwinds to space demand.
COVID-19
Our business has been and is continuing to be impacted by the COVID-19 pandemic. In addition, our business has been and is continuing to be impacted by tenant uncertainty regarding office space needs given the evolving remote working trends as a result of the COVID-19 pandemic. Throughout the COVID-19 pandemic, all of our buildings have remained open and continue to operate. We have adopted 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 third quarter 2022 was significantly lower than pre-pandemic usage. 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 endedSeptember 30, 2022 , as a result of COVID-19 or governmental or tenant actions in response thereto, 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. 19
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Leasing activity has been impacted by the COVID-19 pandemic. We have experienced and we expect that we will continue to experience slower new leasing and there remains uncertainty over existing tenants' long-term space requirements. Overall, this could reduce our anticipated rental revenues. In addition, certain tenants in our markets have and may explore opportunities to sublease all or a portion of their leased square footage to other tenants or third parties. While subleasing generally does not impact the ability to collect payment from the original lessee and will not result in any decrease in the rental revenues expected to be received from the primary tenant, this trend could reduce our ability to lease incremental square footage to new tenants, could increase the square footage of our properties that "goes dark," could reduce anticipated rental revenue should tenants determine their long-term needs for square footage are lower than originally anticipated and could impact the pricing and competitiveness for leasing office space in our markets.
We will continue to actively evaluate business operations and strategies to optimally position ourselves given current economic and industry conditions.
Business and Strategy
We focus on owning and acquiring office properties in our footprint of growth markets predominantly in theSun Belt . Our markets generally possess growing populations with above-average employment growth forecasts, a large number of government offices, large international, national and regional employers across diversified industries, generally low-cost centers for business operations and a high quality of life. We believe these characteristics have made our markets desirable, as evidenced by domestic net migration generally towards our geographic footprint. We utilize our management's market-specific knowledge and relationships as well as the expertise of local real estate property and leasing managers to identify acquisition opportunities that we believe will offer cash flow stability and long-term value appreciation.
Rental Revenue and Tenant Recoveries
The amount of net rental revenue generated by our properties will depend principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space that becomes available from lease terminations. The amount of rental revenue generated also depends on our ability to maintain or increase rental rates at our properties. Negative trends in one or more of these factors could 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 rising interest rates and the increasing likelihood of aU.S. recession, that impair our ability to renew or re-let space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. In addition, growth in rental revenue will also partially depend on our ability to acquire additional properties that meet our investment criteria. 20
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Our Properties
As ofSeptember 30, 2022 , we owned 25 properties comprised of 60 office buildings with a total of approximately 6.0 million square feet of NRA in the metropolitan areas ofDallas ,Denver ,Orlando ,Phoenix ,Portland ,Raleigh ,San Diego ,Seattle andTampa . The following table presents an overview of our portfolio as ofSeptember 30, 2022 . Annualized Annualized Gross Base Rent NRA Annualized Base Rent per Square (2) Metropolitan Economic (000s Square In Place Rent per Square Foot Area Property Interest Feet) Occupancy Foot (1) ($000s)Phoenix, AZ (25.3% of NRA) Block 23 100.0 % 307 94.0 % $ 29.63 $ 31.88$ 8,552 Pima Center 100.0 % 272 43.7 % $ 27.99 $ 27.99$ 3,324 SanTan 100.0 % 267 46.3 % $ 31.60 $ 31.60$ 3,899 5090 N. 40 th St 100.0 % 176 96.1 % $ 31.93 $ 31.93$ 5,386 Camelback Square 100.0 % 172 77.9 % $ 33.87 $ 33.87$ 4,533 The Quad 100.0 % 163 100.0 % $ 31.45 $ 31.76$ 5,126 Papago Tech 100.0 % 163 86.1 % $ 23.57 $ 23.57$ 3,302 Tampa, FL (17.5%) Park Tower 94.8 % 479 88.6 % $ 27.45 $ 27.45$ 11,643 City Center 95.0 % 245 89.4 % $ 27.24 $ 27.24$ 5,956 Intellicenter 100.0 % 204 100.0 % $ 25.64 $ 25.64$ 5,219 Carillon Point 100.0 % 124 100.0 % $ 30.07 $ 30.07$ 3,734 Denver, CO (13.4%) Denver Tech 100.0 % 381 93.2 % $ 24.10 $ 28.21$ 8,465 Circle Point 100.0 % 272 82.6 % $ 19.51 $ 33.38$ 4,383 Superior Pointe 100.0 % 152 93.2 % $ 18.78 $ 31.78$ 2,667 Orlando, FL (12.0%) Florida Research Park 96.5 % 393 82.2 % $ 25.56 $ 27.48$ 8,184 Central Fairwinds 97.0 % 168 94.6 % $ 27.57 $ 27.57$ 4,387 Greenwood Blvd 100.0 % 155 100.0 % $ 24.25 $ 24.25$ 3,760 Dallas, TX (9.8%) 190 Office Center 100.0 % 303 75.5 % $ 27.11 $ 27.11$ 6,210 The Terraces 100.0 % 173 99.0 % $ 38.45 $ 58.45$ 6,569 2525 McKinnon 100.0 % 111 94.8 % $ 29.98 $ 48.98$ 3,165 Raleigh, NC (8.3%) Bloc 83 100.0 % 495 79.8 % $ 37.32 $ 37.41$ 14,752 Portland, OR (5.5%) AmberGlen 76.0 % 203 98.4 % $ 23.55 $ 26.45$ 4,695 Cascade Station 100.0 % 128 100.0 % $ 28.82 $ 30.73$ 3,691 San Diego, CA (4.7%) Mission City 100.0 % 281 86.8 % $ 38.40 $ 38.40$ 9,374 Seattle, WA (3.5%) Canyon Park 100.0 % 207 100.0 % $ 23.17 $ 27.17$ 4,791 Total / Weighted Average - September 30, 2022 5,994 85.8 % $ 28.40 $ 31.29$ 145,767
(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
2022 by (ii) 12.
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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. While we generally expect the trend of population and economic growth outperformance in our cities to continue, there is no way for us to predict whether these trends will continue, especially in light of inflation and rising interest rates as well as the potential changes in tax policy, fiscal policy and monetary policy. In addition, it is uncertain and impossible to estimate the potential impact that the COVID-19 pandemic will have on the short- and long-term demand for office space in our markets.
Critical Accounting Policies and Estimates
The interim condensed consolidated financial statements follow the same policies and procedures as outlined in the audited consolidated financial statements for the year endedDecember 31, 2021 included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 except for the adoption of Accounting Standards Update ("ASU") 2021-05, Leases (Topic 842) as outlined in Note 2 of the condensed consolidated financial statements. Results of Operations
Comparison of Three Months Ended
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$0.6 million , or 1%, to$45.5 million for the three months endedSeptember 30, 2022 compared to$44.9 million for the three months endedSeptember 30, 2021 . Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 inDecember 2021 contributed increases of$2.7 million ,$2.7 million and$4.8 million , respectively. Offsetting these increases, the disposition of Sorrento Mesa inDecember 2021 andLake Vista Pointe inJune 2022 decreased revenue by$3.5 million and$1.1 million , respectively. Revenue also decreased atPark Tower by$5.0 million due to a termination fee recognized in the prior period associated with an early tenant departure. 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$1.2 million , or 3%, to$36.5 million for the three months endedSeptember 30, 2022 , from$37.7 million for the three months endedSeptember 30, 2021 . General and administrative expenses decreased by$4.4 million over the prior period primarily due to a one-time$5.0 million bonus accrual incurred as a result of the Sorrento Mesa sale transaction announced during the third quarter of 2021. Further, the disposition of Sorrento Mesa and Lake Vista Pointe decreased total operating expenses by$2.1 million and$0.5 million , respectively. Offsetting these decreases, the acquisitions of Block 23, The Terraces and Bloc 83 inDecember 2021 contributed increases of$1.7 million ,$1.8 million and$2.9 million , respectively. The remaining properties' expenses decreased a combined$0.6 million 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$2.2 million , or 15%, to$17.4 million for the three months endedSeptember 30, 2022 , from$15.2 million for the three months endedSeptember 30, 2021 . Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 inDecember 2021 contributed increases of$0.7 million ,$0.8 million and$1.2 million , respectively. An increase of$0.2 million was attributable to theIngenuity Drive property within theFlorida Research Park portfolio as that property was converted from a single tenant property where the tenant paid for its own operating expenses into a multi-tenant property where expenses are paid by the landlord and reimbursements are charged to the tenants. Offsetting these increases, the disposition of Sorrento Mesa and Lake Vista Pointe decreased property operating expenses by$0.8 million and$0.3 million , respectively. The remaining properties' expenses increased a combined$0.4 million . 22
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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 decreased$4.4 million , or 56%, to$3.5 million for the three months endedSeptember 30, 2022 , from$7.9 million for the three months endedSeptember 30, 2021 . In the prior period, general and administrative expenses increased due to a one-time$5.0 million bonus accrual incurred as a result of the Sorrento Mesa sale transaction announced during the third quarter of 2021. Offsetting this decrease were higher stock-based compensation expense and higher professional fees. Depreciation and Amortization. Depreciation and amortization increased$1.0 million , or 6%, to$15.6 million for the three months endedSeptember 30, 2022 , from$14.6 million reported for the same period in 2021. Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 inDecember 2021 contributed increases of$1.0 million ,$0.9 million and$1.8 million , respectively. Offsetting these increases, the disposition of Sorrento Mesa and Lake Vista Pointe decreased depreciation and amortization expense by$1.3 million and$0.2 million , respectively. Also contributing to the decrease, depreciation and amortization forPark Tower decreased by$0.5 million as a result of the accelerated depreciation for an early tenant departure in the prior period. The remaining properties' depreciation expenses decreased a combined$0.7 million .
Other Expense (Income)
Interest Expense. Interest expense increased$1.0 million , or 16%, to$6.9 million for the three months endedSeptember 30, 2022 , from$5.9 million for the three months endedSeptember 30, 2021 . The increase was primarily attributable to the increase in the amount drawn and interest rates on our floating rate debt.
Comparison of Nine Months Ended
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$11.5 million , or 9%, to$135.9 million for the nine months endedSeptember 30, 2022 compared to$124.4 million for the nine months endedSeptember 30, 2021 . Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 inDecember 2021 contributed increases of$7.6 million ,$8.1 million and$12.2 million , respectively. Also contributing to this increase was Mission City which increased$0.9 million over the prior year due to higher occupancy. Offsetting these increases, the disposition ofCherry Creek inFebruary 2021 , Sorrento Mesa inDecember 2021 and Lake Vista Pointe inJune 2022 decreased revenue by$0.8 million ,$9.4 million and$1.4 million , respectively. Revenue also decreased atPark Tower by$6.0 million due to a termination fee recognized in the prior year associated with an early tenant departure and the associated downtime in which a replacement tenant did not take occupancy until the middle of the second quarter of 2022. The remaining properties' rental and other revenues increased a combined$0.3 million 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$7.1 million , or 7%, to$108.4 million for the nine months endedSeptember 30, 2022 , from$101.3 million for the nine months endedSeptember 30, 2021 . Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 inDecember 2021 contributed increases of$4.8 million ,$5.2 million and$7.9 million , respectively. Offsetting these increases, the disposition ofCherry Creek , Sorrento Mesa and Lake Vista Pointe decreased total operating expenses by$0.3 million ,$5.3 million and$1.0 million , respectively. General and administrative expenses decreased by$3.2 million over the prior period primarily due to a one-time$5.0 million bonus accrual incurred as a result of the Sorrento Mesa sale transaction announced during the third quarter of 2021. Also contributing to the decrease, depreciation and amortization for Pima Center decreased by$1.1 million from the prior period as the amortization expense associated with acquired lease intangible assets has now been fully amortized. The remaining properties' expenses increased a combined$0.1 million . 23
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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$7.2 million , or 17%, to$50.7 million for the nine months endedSeptember 30, 2022 , from$43.5 million for the nine months endedSeptember 30, 2021 . Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 inDecember 2021 contributed increases of$2.0 million ,$2.5 million and$2.7 million , respectively. An increase of$0.7 million was attributable to theIngenuity Drive property within theFlorida Research Park portfolio as that property was converted from a single tenant property where the tenant paid for its own operating expenses into a multi-tenant property where expenses are paid by the landlord and reimbursements are charged to the tenants. An increase of$0.5 million was attributable toPark Tower due to higher non-recoverable expenses and utilities. Offsetting these increases, the disposition ofCherry Creek , Sorrento Mesa and Lake Vista Pointe decreased property operating expenses by$0.3 million ,$1.9 million and$0.5 million , respectively. The remaining properties' expenses increased a combined$1.5 million due to a combination of factors including higher utilization at our properties. General and Administrative. General and administrative expenses are comprised of public company reporting costs and the compensation of our management team and Board of Directors, as well as non-cash stock-based compensation expenses. General and administrative expenses decreased$3.2 million , or 23%, to$10.6 million for the nine months endedSeptember 30, 2022 , from$13.8 million reported for the same period in 2021. In the prior period, general and administrative expenses increased due to a one-time$5.0 million bonus accrual incurred as a result of the Sorrento Mesa sale transaction announced during the third quarter of 2021. Offsetting this decrease were higher stock-based compensation expense and higher professional fees. Depreciation and Amortization. Depreciation and amortization increased$3.1 million , or 7%, to$47.1 million for the nine months endedSeptember 30, 2022 , from$44.0 million reported for the same period in 2021. Of this increase, the acquisitions of Block 23, The Terraces and Bloc 83 inDecember 2021 contributed increases of$2.8 million ,$2.8 million and$5.2 million , respectively. Offsetting these increases, the disposition of Sorrento Mesa and Lake Vista Pointe decreased depreciation and amortization expense by$3.4 million and$0.6 million , respectively. Also contributing to the decrease, depreciation and amortization for Pima Center decreased by$1.1 million from the prior period as the amortization expense associated with acquired lease intangible assets has now been fully amortized. The remaining properties' depreciation and amortization expense decreased a combined$2.6 million compared to the prior year, mainly due to accelerated amortization of tenant-related assets recorded in the prior year at SanTan,Park Tower and Mission City associated with early lease terminations at those properties. Other Expense (Income) Interest Expense. Interest expense increased$0.8 million , or 4%, to$19.2 million for the nine months endedSeptember 30, 2022 , from$18.4 million for the nine months endedSeptember 30, 2021 . The increase was primarily attributable to the increase in the amount drawn and interest rates on our floating rate debt.
During the first quarter of 2022, the sole tenant at the Lake Vista Pointe property exercised its lease option to purchase the building and we signed a purchase and sale agreement with the tenant. At the time the tenant exercised the option, we reassessed the lease classification of the lease, in accordance with ASC 842 - Leases, and determined that the lease should be reclassified from an operating lease to a sales-type lease. This reclassification resulted in a gain on sale of$21.7 million net of disposal related costs. TheLake Vista Pointe property was sold inJune 2022 . In the prior year, we recorded a net gain on the sale of real estate property of$47.4 million for the nine months endedSeptember 30, 2021 related to the sale of ourCherry Creek property inFebruary 2021 . 24
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Cash Flows
Comparison of Nine Months Ended
Cash, cash equivalents and restricted cash were
Cash flow from operating activities. Net cash provided by operating activities increased by$31.5 million to$97.2 million for the nine months endedSeptember 30, 2022 compared to$65.7 million for the same period in 2021. The increase in cash provided by operating activities was primarily due to receipts received from the sales-type lease at the Lake Vista Pointe property, which was sold inJune 2022 . Cash flow to investing activities. Net cash used in investing activities increased by$95.8 million to$36.2 million for the nine months endedSeptember 30, 2022 compared to$59.6 million provided by investing activities for the same period in 2021. The increase in cash used in investing activities was primarily due to a decrease in proceeds from sale of real estate for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The higher proceeds from sale of real estate in 2021 was attributable to the sale of theCherry Creek property and the deposits received for the sale of the Sorrento Mesa portfolio in 2021. This decrease was partially offset by higher acquisition of real estate in 2021 compared to 2022.
Cash flow to financing activities.
Net cash used in financing activities decreased by
Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources
We had approximately
On March 15, 2018, the Company entered into a credit agreement for the Unsecured Credit Facility that provided for commitments of up to$250 million , which included an accordion feature that allowed the Company to borrow up to$500 million , subject to customary terms and conditions. OnNovember 16, 2021 , the Company entered into an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement") that provides for commitments of up to$300 million on the Unsecured Credit Facility. Our Unsecured Credit Facility matures inNovember 2025 and may be extended 12 months 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 125 to 225 basis points depending upon the Company's consolidated leverage ratio. Combined with the Term Loan, the total authorized borrowings increased from$300 million to$350 million . As ofSeptember 30, 2022 , we had approximately$185.0 million outstanding under our Unsecured Credit Facility and a$4.2 million letter of credit to satisfy escrow requirements for a mortgage lender. OnSeptember 27, 2019 , the Company entered into the five-year$50 million 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 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. 25
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On
equity distribution agreements (collectively, the "Agreements") with each ofKeyBanc Capital Markets Inc. ,Raymond James & Associates, Inc. ,BMO Capital Markets Corp. ,RBC Capital Markets, LLC ,B. Riley FBR, Inc. ,D.A. Davidson & Co. andJanney Montgomery Scott LLC (the "Sales Agents") pursuant to which the Company may issue and sell from time to time up to 15,000,000 shares of common stock and up to 1,000,000 shares of Series A Preferred Stock through the Sales Agents, acting as agents or principals (the "ATM Program"). OnMay 7, 2021 the Company delivered toD.A. Davidson & Co. a notice of termination of the Agreement, effectiveMay 7, 2021 . The Company did not issue any shares of common stock or Series A Preferred Stock under the ATM Program during the nine months endedSeptember 30, 2022 . Our short-term liquidity requirements primarily consist of operating expenses and other expenditures associated with our properties, distributions to our limited partners and distributions to our stockholders required to qualify for REIT status, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations and reserves established from existing cash. We have further sources such as proceeds from our public offerings, including under our ATM Program, and borrowings under our mortgage loans and our Unsecured Credit Facility. Our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at maturity, property acquisitions and non-recurring capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness and the issuance of equity and debt securities. We also may fund property acquisitions and non-recurring capital improvements using our Unsecured Credit Facility pending longer term financing. We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity securities. However, we cannot assure you that this is or will continue to be the case. Our ability to incur additional debt is dependent on a number of factors, including our degree of leverage, interest rates, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets is dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us.
Contractual Obligations and Other Long-Term Liabilities
The following table provides information with respect to our commitments as ofSeptember 30, 2022 , including any guaranteed or minimum commitments under contractual obligations. The table does not reflect available debt extension options. Payments Due by Period (in thousands) More than Contractual Obligations Total 2022 2023-2024 2025-2026 5 years Principal payments on mortgage loans$ 680,089 $ 1,623 $ 156,630 $ 281,533 $ 240,303 Interest payments (1) 98,121 6,942 52,207 31,161 7,811 Tenant-related commitments 18,026 17,138 888 - - Lease obligations 37,324 92 1,625 1,510 34,097 Total$ 833,560 $ 25,795 $ 211,350 $ 314,204 $ 282,211
(1) Contracted interest on the floating rate borrowings under our Unsecured
Credit Facility was calculated based on the balance and interest rate at
on the Interest Rate Swap rate fixing the LIBOR component of the borrowing
rate to approximately 1.27%.
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. However, a
longer period of inflation could affect our cash flows or earnings, or impact
our borrowings, as discussed elsewhere in this Report.
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