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Summary

  • CIO, a REIT newly organized to acquire office properties in specific markets in the US, plans to raise $100.0 million in its upcoming IPO.
  • CIO offer 6.7 million shares at an expected price range of $14-$16 per share, aiming for a market value of $190 million.
  • Given CIO's dependence on the continued growth of the economy and top tenants (worth 60% of revenue), we are uncertain of CIO's future success and suggest investors take caution.

City Office REIT Inc. (NYSE:CIO), a REIT newly organized to acquire office properties in specific markets in the US, plans to raise $100.0 million in its upcoming IPO.

The Vancouver, Canada-based firm will offer 6.7 million shares at an expected price range of $14-$16 per share. If the IPO can reach the midpoint of that range at $15.00 per share, CIO will command a market value of $190 million.

CIO filed on January 7, 2014.

Lead Underwriters: Janney Montgomery Scott LLC, Oppenheimer and Co. Inc., Wunderlich Securities Inc.

Underwriters: BB&T Capital Markets, Boenning and Scattergood Inc., Compass Point Research & Trading LLC, DA Davidson and Co., Feltl and Company Inc., Ladenburg Thalmann and Co. Inc.

Geographically Dispersed, Niche Size Properties

CIO is a newly organized REIT engaged in the acquisition, ownership, and operation of office properties in target markets in the Southern and Western US. The firm's target markets usually see little participation from large institutional investors, and are selected for their economic and population growth, strong employment numbers, numerous large employers across various industries, and low-cost centers for business.

As of the completion of this IPO, CIO will own six office complexes for a total of 1.85 million square feet of net rentable area. These complexes are located in Boise, Denver, Portland, Tampa, Allentown, and Orlando. CIO intends to target properties valued at between $20 million and $50 million in the future - large enough to escape the reach of most local buyers, but small enough to avoid most competition from other REITs.

Valuation

CIO offers the following figures in its S-11 balance sheet for the year ended December 31, 2013:

Revenue: $20,490,578.00

Net Loss: ($4,177,293.00)

Total Assets: $143,639,341.00

Total Liabilities: $115,931,226.00

Stockholders' Equity: $26,624,375.00

Seeking to Avoid Competition

In general, the market for high-end office spaces with stable tenant profiles is extremely competitive, and CIO may face competition from real estate investors, including other REITs, investment banking firms, life insurance companies, and various corporations.

CIO has sought to mitigate this competition to some extent by selecting target markets with relatively low participation on the part of large institutional investors.

Management Highlights

CEO James Farrar joined Second City, an affiliate of CIO's external manager, in October 2009 as a managing director. He previously served as the vice president of Ken Fowler Enterprises Limited and as an investment professional with TD Capital.

Mr. Farrar holds a Bachelor's degree in business administration from Wilfrid Laurier University, and is a chartered accountant, a chartered business valuator, and a CFA charterholder.

Investors Should Be Wary of This IPO

CIO's efforts to identify expanding markets with little participation from other institutional investors may be able to open up opportunities, but the firm remains dependent on the continued growth of the economy in general and the growth of office employment in particular.

CIO also generates some 60% of its revenue from its top ten tenants, meaning that the firm is vulnerable to the loss of any of those tenants. Many of the firm's tenants are government agencies, which may have declining use for office space as a result of budget trims.

Given these dependent factors, as well as the lack of major lead underwriters, we suggest investors take caution before buying into this IPO.

Source: City Office REIT IPO Might Not Be The Best Use Of Portfolio Space