City Office REIT Navigates Challenges with Strategic Momentum in Sun Belt Markets
17min read City Office REIT, Inc. (NYSE: CIO) has delivered a mixed but cautiously optimistic Q1 2025 earnings report, balancing modest revenue declines with encouraging signs of operational resilience in key Sun Belt markets. While the company faces near-term headwinds, including debt refinancing pressures and temporary occupancy dips, its strategic focus on high-growth regions and a transformative redevelopment project in Florida positions it as a potential beneficiary of shifting office demand trends.
Financial Performance: Core Metrics Hold Steady Amid Volatility
City Office reported Q1 2025 rental and other revenues of $42.3 million, down slightly from $44.5 million in Q1 2024, reflecting ongoing challenges in a softening office market. The GAAP net loss of $3.5 million (or $0.09 per share) underscores the pressure of elevated interest costs and operational expenses. However, non-GAAP metrics paint a more favorable picture: Core FFO rose to $12.3 million ($0.30 per share), up $0.6 million from the prior quarter, while AFFO of $6.5 million ($0.16 per share) remained stable.
The Same Store Cash NOI, a critical gauge of portfolio performance, increased by 4.4% year-over-year, driven by higher rental rates and occupancy improvements in Sun Belt markets like Raleigh, where leases are being re-let at 8.5% premium spreads over prior terms. This momentum suggests that the company’s geographic focus—85% of its portfolio is in Sun Belt cities—is paying off as demand for office space stabilizes in these growth-oriented regions.
Leasing Momentum and Portfolio Strength
City Office’s leasing activity in Q1 highlights its ability to capitalize on shifting tenant preferences. The REIT executed 144,000 sq. ft. of new and renewal leases, with new leases averaging $29.97/sq. ft. (up 5% from Q4 2024) and renewal leases fetching $33.87/sq. ft.—a testament to its ability to command premium pricing in high-demand markets. The weighted average lease term of 5.9 years for new leases and 5.1 years for renewals further signals tenant commitment to long-term occupancy.
Occupancy metrics remain a bright spot: 84.9% in-place occupancy as of March 31, 2025, is bolstered by 87.6% including signed leases, with 103,000 sq. ft. of pending occupancies set to close in Q2 and beyond. CEO James Farrar emphasized this progress, stating, “Improving leasing activity in Sun Belt markets underscores the resilience of our portfolio.”
Strategic Development: The St. Petersburg Project
The most significant development in Q1 is the partnership with Property Markets Group (PMG) to redevelop the City Center property in St. Petersburg, FL, into a 49-story mixed-use tower. This $372 million project—funded through a 50-50 joint venture with PMG’s $17 million equity contribution—aims to modernize the property by adding 70,000 sq. ft. of office space, 15,000 sq. ft. of retail, and 432 luxury condominium units branded as Waldorf Astoria Residences.
While the project’s completion timeline stretches to 4 years, its potential benefits are compelling. The luxury residential component taps into growing demand for high-end housing in Sun Belt cities, while the modern office space targets tech and knowledge-based firms. However, execution risks remain: presales, financing, and regulatory approvals must be secured, and construction could disrupt parking access in the near term.
Debt Management and Liquidity: Navigating Near-Term Risks
City Office’s balance sheet warrants careful scrutiny. Total debt of $648.1 million as of March 31, 2025, carries a weighted average interest rate of 5.1%, with 82.3% in fixed-rate or hedged instruments—a prudent move amid uncertain rate environments. However, the weighted average maturity of 1.6 years highlights refinancing risk, as two debt maturities in 2025 require extension or refinancing. CFO Anthony Maretic noted constructive lender engagement but emphasized the need to “prioritize liquidity preservation.”
Liquidity remains adequate, with $22 million in unrestricted cash and $42 million undrawn on a $200 million credit facility. The Net Debt to EBITDA ratio of 6.7x is moderate for the sector but underscores the importance of successful debt management to avoid covenant breaches.
Dividend Sustainability and Outlook
City Office maintained its dividend of $0.10 per share, supported by an AFFO payout ratio of 64%—comfortably within sustainable levels. The company reaffirmed its full-year occupancy target of 85–87%, relying on pending leases and renewal activity. However, near-term occupancy volatility is expected, particularly at properties like Greenwood Boulevard (Phoenix) and Amber (Portland), where tenant transitions could temporarily reduce metrics before recoveries in Q4.
Conclusion: A Play on Sun Belt Resilience, with Execution Risks
City Office REIT’s Q1 results suggest a company navigating choppy waters but positioning itself for long-term growth. Its 4.4% Same Store NOI growth, strong leasing spreads, and strategic focus on Sun Belt markets provide a solid foundation. The St. Petersburg redevelopment, while risky, represents a transformative opportunity to enhance asset values and cash flows in a high-demand location.
However, risks remain: refinancing near-term debt, managing occupancy volatility from tenant transitions, and macroeconomic headwinds like inflation and work-from-home trends could test its resilience. Investors should monitor refinancing progress and occupancy recovery closely. With its 87.6% forward-looking occupancy and disciplined portfolio strategy, City Office appears well-positioned to capitalize on a rebound in office demand—if it can execute on its plans.
In short, CIO is a compelling story for investors willing to bet on Sun Belt office markets and redevelopment upside, provided they factor in the execution risks inherent in its ambitious project pipeline.
