SAN DIEGO PORTFOLIO ACQUISITION S E P T EMB ER 2 0 1 7 San Diego, - - PowerPoint PPT Presentation

S E P T EMB ER 2 0 1 7

SAN DIEGO PORTFOLIO ACQUISITION

San Diego, CA

FORWARD-LOOKING STATEMENTS

Certain statements contained in this presentation, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of the federal securities laws and as such are based upon City Office REIT, Inc. (“City Office” or the “Company”) and its current beliefs as to the

• utcome and timing of future events. There can be no assurance that actual future developments affecting the Company

will be those anticipated by the Company. Examples of forward-looking statements include projected capital resources, projected profitability and portfolio performance, estimates of market rental rates, projected capital improvements, expected sources of financing, expectations as to the timing of closing of acquisitions, dispositions, or other transactions, the expected operating performance of anticipated near-term acquisitions and descriptions relating to these expectations, including without limitation, the anticipated net operating income yield and capitalization rates. Forward-looking statements presented in this presentation are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking

• statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Forward-

looking statements involve risks and uncertainties (some of which are beyond the Company’s control) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties: changes in the real estate industry and in performance of the financial markets; competition in the leasing market; the Company’s ability to forecast accurately the barriers to entry and competition in the markets in which it operates; the Company’s ability to assess risks associated with entering into new markets; the completion of the Qualcomm Stadium urban infill site redevelopment; the demand for and market acceptance of our properties for rental purposes; the amount and growth of our expenses; tenant financial difficulties and general economic conditions, including interest rates, as well as economic conditions in our geographic markets; defaults

• r non-renewal of leases; risks associated with joint venture partners; the risks associated with the ownership and development
• f real property, including risks related to natural disasters; risks associated with property acquisitions, the failure to acquire
• r sell properties as and when anticipated; the outcome of claims and litigation involving or affecting the Company; our

failure to maintain our status as real estate investment trust, or REIT; and other risks and uncertainties detailed in the Company’s news releases and filings with the Securities and Exchange Commission, including but not limited to the Company’s reports on Form 10-K, Form 10-Q and Form 8-K in the Company’s SEC filings. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, the Company’s business, financial condition, liquidity, cash flows and results could differ materially from those expressed in any forward- looking statement. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future

• performance. Any forward-looking statements speak only as of the date on which it is made. New risks and uncertainties arise
• ver time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us.

We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. Use caution in relying on past forward-looking statements, which were based on results and trends at the time they were made, to anticipate future results or trends.

C I T Y O F F I C E R E I T ( “ C I O ” ) H A S A C Q U I R E D A $ 1 7 4 . 5 M I L L I O N , 6 6 9 , 6 5 3 S F T E N - B U I L D I N G P O R T F O L I O W E L L - L O C A T E D I N S A N D I E G O , C A . C I O B O U G H T D I R E C T L Y F R O M S E L L E R I N A C O N F I D E N T I A L , O F F M A R K E T T R A N S A C T I O N .

ACQUISITION HIGHLIGHTS

▪ T h i s p o r t f o l i o p r o v i d e s C I O w i t h i m m e d i a t e s c a l e a n d d i v e r s i f i c a t i o n i n S a n D i e g o , a h i g h l y d e s i r a b l e c o a s t a l m a r k e t w i t h h i g h b a r r i e r s t o e n t r y a n d s i g n i f i c a n t i n s t i t u t i o n a l i n v e s t m e n t d e m a n d ▪ A c q u i r e d a t v e r y s t r o n g m e t r i c s : ➢ A p p r o x i m a t e l y 7 . 4 % p r o f o r m a n e t o p e r a t i n g i n c o m e y i e l d , i n c l u s i v e o f e s t i m a t e d c l o s i n g c o s t s , r e s e r v e s f o r p l a n n e d c a p i t a l i m p r o v e m e n t s a n d t h e c o s t o f t h e l a n d p a r c e l ➢ $ 2 6 1 / S F a c q u i s i t i o n b a s i s v s . a p p r o x i m a t e l y $ 4 0 0 / S F r e p l a c e m e n t c o s t ▪ S u b s t a n t i a l i n c o m e g r o w t h o p p o r t u n i t i e s : ➢ R e m e a s u r e m e n t p o t e n t i a l , a s e x i s t i n g l e a s e s a r e ~ 3 7 , 0 0 0 S F b e l o w B O M A S F ( u p s i d e a s l e a s e s r o l l ) ➢ 8 8 % o c c u p a n c y , a b i l i t y t o d r i v e a d d e d i n c o m e t h r o u g h l e a s e - u p o f t h e v a c a n c y ➢ O n a v e r a g e , r e n t s a r e a p p r o x i m a t e l y 8 % b e l o w c u r r e n t m a r k e t r a t e s ➢ P o r t f o l i o i n c l u d e s a n e x c e p t i o n a l l y l o c a t e d 5 . 0 a c r e d e v e l o p m e n t l a n d p a r c e l

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ACQUISITION SUMMARY San Diego Portfolio

❖ The ten-building portfolio located in San Diego, CA (the “San Diego Portfolio”) is comprised of Mission City Corporate Center (“Mission City”) and the Sorrento Mesa portfolio (“Sorrento Mesa”) ❖ Mission City is a four-building, 285,095 SF, Class A office campus located in the Mission Valley submarket ❖ Sorrento Mesa is a six-building, 384,558 SF, Class B office and flex complex located in the Sorrento Mesa submarket ❖ Sorrento Mesa also contains a very well-located, 5.0 acre development land parcel

Aggregate Portfolio Metrics

Purchase price

$174.5 M / $261 PSF

Expected combined pro forma NOI yield Estimated replacement cost

~7.4% ~$400 PSF

Portfolio size

669,653 SF

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Mission City Sorrento Mesa

Occupancy at close

88%

ACQUISITION DETAIL Mission City

❖ Mission City is a four-building, 285,095 SF, Class A office campus located in the Mission Valley submarket ❖ Central location within the San Diego MSA, excellent freeway access, proximity to workforce and executive housing and strong corporate presence ❖ The complex is multi-tenanted to a diversified rent roll of tenants primarily in the financial, tech, healthcare, legal and insurance industries

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Key Metrics

Buildings Year built

Occupancy at close

88%

Property size

285,095 SF 1990-2007 4

Tenants

14

8.9% 4.5% 0.8% 9.8% 24.8% 23.4% 27.9% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Vacant 2017 2018 2019 2020 2021 2022+

Mission City Lease Expiration Schedule

as of August 31, 2017

ACQUISITION CHARACTERISTICS Mission City

Well-Located Real Estate:

➢

Exceptional location in the heart of Mission Valley, the epicenter of San Diego’s transformation into a modern “live, work, play” city

➢

Walkable amenities with a broad assortment of restaurants and shops; within a mile of one million SF of retail and restaurant amenities

➢

Excellent access to five major freeways and within walking distance from the San Diego Trolley, San Diego’s “light rail” transit system

➢

Immediately adjacent to Qualcomm Stadium (formerly home to the San Diego Chargers), a 232-acre urban infill site that is poised to be redeveloped as part of a master planned mixed-use community including office, retail and multifamily residential

Diverse Tenant Profile:

➢

88% occupied by tenants in the financial, tech, healthcare, legal and insurance industries; in-place rents approximate market rates

➢

Each building in the campus offers a different floorplate, appealing to a wide variety of users

Attractive Building Features:

➢

Class A buildings with updated common areas

➢

Attractively landscaped campus with excellent opportunity to upgrade and add leading amenity package

➢

Central covered parking structure with 3.4/1,000 parking ratio

➢

Energy Star certified

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ACQUISITION DETAIL Sorrento Mesa

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Key Metrics

Buildings Year built

Occupancy at close

88%

Property size

384,558 SF 1985-2001 6

Tenants

7

❖ Sorrento Mesa is a 384,558 SF, Class B office and flex complex located in the Sorrento Mesa submarket ❖ Comprised of six buildings occupied by life sciences, technology and defense industry tenants ❖ The complex is located on the north side of the Sorrento Mesa submarket, in immediate proximity to Qualcomm’s world headquarters

12.5% 0.0% 17.8% 0.0% 24.5% 6.6% 38.6% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Vacant 2017 2018 2019 2020 2021 2022+

Sorrento Mesa Lease Expiration Schedule as of

August 31, 2017

ACQUISITION CHARACTERISTICS Sorrento Mesa

Well-Located Real Estate:

➢

Excellent campus location in Sorrento Mesa, one of the region’s best-performing submarkets, particularly in the life sciences, technology and biotech sectors. Historically supply constrained, vacancy for comparable product in Sorrento Mesa has not exceeded 9.1% over the last decade, and average rental rates have risen 20%+ since 2012

➢

Comparable product in the Sorrento Mesa submarket is experiencing 92.3% occupancy as of 2Q 2017

➢

Desirable location with a high concentration of major corporate tenants (see map below). Close proximity to the headquarters of the submarket’s largest corporate user, Qualcomm, a publicly traded company (NASDAQ: QCOM) with a $75 billion market cap and an A1 rating from Moody’s

Value-Add Opportunities:

➢

Opportunity to increase rentable area ~37,000 SF per completed BOMA remeasurement

➢

In-place rental rates are ~15%+ below market

➢

Value-add opportunities to reposition assets, drive leasing activity and enhance in-place rental rates

➢

Attractive 5.0 acre development land parcel

Building Characteristics:

➢

Buildings designed for office/R&D/lab/flex use

➢

Life sciences buildings are equipped with advanced building systems that are highly transferrable

➢

Efficient floor plates, 20’+ clear heights, heavy load capacity and heavy duty HVAC and electrical infrastructure

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Strong San Diego Market Fundamentals:

➢

Has been ranked by Forbes as the #1 best place to launch a start-up and #2 most innovative city in the world

➢

Highly educated workforce with six major universities; produce more than 72,000 degree holders annually, the highest in the US

➢

High quality of life; millennials attracted to live, work, play environment

➢

Largest concentration of military assets in the US, responsible for over 200,000 jobs

➢

Unemployment rate of 3.6%, lower than the national average of 4.3% and CA at 4.8%

➢

One of the most physically constrained markets in the US, only 600,000 SF of ground up office development under construction, which represents 0.7% of the total market

➢

8.4 million SF of net absorption since 2009

MARKET STATISTICS – SAN DIEGO, CA

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9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5%

$20.00 $22.00 $24.00 $26.00 $28.00 $30.00 $32.00 $34.00 2013 2014 2015 2016 2017 YTD

San Diego - Class "A & B" Direct Office Rental Rates vs Vacancy Rates

Rental Rate (Gross) Vacancy Rate

C I T Y OFFICE REIT, I N C . E: investorrelations@cityofficereit.com | T: 604 806 3366 Suite 2990 500 North Akard Street Dallas , TX 75201 Suite 2010 1075 West Georgia St. Vancouver, BC V6E 3C9